How the war in Ukraine benefits Russian insurers and drives up insurance premiums everywhere

An EU/UK plan to ban their insurers from covering ships carrying Russian oil is causing tension with Washington. America argues that Europe’s dominance of global insurance will make it very difficult for Russia to export oil if this continues, which could drive oil prices much higher than they are already.

Yet that may not happen as Russia takes steps to solve the problem on its own. The national national reinsurance company, RNRC, would step in to take the place of Western insurance companies by insuring the fleets and their cargo. Russia will also now provide liability and environmental damage insurance in place of the Protection and Indemnity (P&I) clubs. If these changes are viable in the long term, it will mean that some of the business that was primarily aimed at European and UK insurance companies will now be kept in Russia.

This is just one of the many ways Western insurance is affected by the war in Ukraine. Insurers are already facing severe losses following sanctions passed in March banning the provision of various types of cover to Russia-related business. This has significant implications at all levels for business and society. So what happens and where does it go from here?

Insurance and geopolitics

The insurance sector dwarfs the GDP of every country in the world except China and the United States. It has been estimated at more than US$5 trillion (£4 trillion) in premiums paid in 2021 and is expected to rise by 10% in 2022.

We’re all used to thinking that insurance companies protect people and businesses from risk, but behind that lies another set of specialist companies called reinsurers. These players insure the risks of insurance companies against, for example, losses resulting from claims, i.e. they offer insurance taken out on insurance. In some cases, complex insurance and reinsurance networks exist to ensure that the risk is properly protected.

Main insurers and reinsurers by turnover

2021 data.
Gallagher Re Reinsurance Market Report for the year 2021; Reinsurance news

Before the invasion of Ukraine in February, there were instances where sanctions against Russia involved the insurance industry. When the United States pressured Germany to abandon its NordStream 2 pipeline project, insurance and reinsurance companies were among those that pulled out until the Biden administration eased. his approach.

This time around, it’s a whole different level. Claims have been made on policies related to aviation, marine, trade credit, cyber and political risk. This represents only a relatively modest exposure for the entire industry, but the potential long-term effects are another matter. Since Western sanctions were imposed in March, major players such as Lloyd’s of London, Swiss Re and SCOR and brokers such as Marsh, Aon and Willis Towers Watson have stopped taking new business with Russia. With a considerable amount of assurance previously provided to Russian sectors such as aviation and space in London and New York, for example, this is a major change.

We are now in a situation where the planes of the world no longer fly through Russia. It raises the prospect of years, if not decades, of claims by owners of up to 600 seized planes, many of which are leased.

Count the cost

It is not easy to estimate the overall blow to the Western insurance industry from the deterioration of relations with Russia. This is partly because much depends on the worsening of the current crisis and the possibility of finding a political or military solution.

In early April, a report by S&P Global predicted losses to specialized categories such as aviation, maritime and political risk would be in the range of US$16 billion to US$35 billion. Lloyd’s of London alone was reported in March as facing aviation and space payments of between US$1 billion and US$4 billion, or 1% of its premiums.

HQ sign for Lloyd's of London
The Lloyd’s insurance market is among those hard hit.
Simon Vayro

The industry could be hurt by claims payouts for a decade or even two, acting as a drag on insurers’ balance sheets in the meantime. Those who have not yet unloaded their Russian cases also run the risk of their policies being seized by the Russian government.

Meanwhile, premiums are rising more and more as insurers seek to make up for their losses, especially in all categories except life insurance. Global aviation insurance premiums have reportedly doubled as insurers seek to protect their profit margins. Bounties on tankers and other important cargoes in the Black Sea, such as agricultural and grain products, have also increased significantly. All of this will translate into higher prices for consumers and businesses, even outside of all the other current inflationary pressures.

Another area affected is cyber insurance, which protects against the risk of cyber attacks. With Russia linked to numerous cyberattacks, both in connection with Ukraine and other countries, the demand for cyberinsurance has increased, but it is becoming increasingly difficult to obtain and as a result prices are rising. arrow.

Russia is a potential winner in much of this. Assuming the sanctions continue, it is likely that Western insurers will increasingly be replaced by Russian insurers (and those from countries it deems friendly). For example, the RNRC already replaces Western reinsurers for other cargoes than oil. Russia could also follow the Iranian model, where various new reinsurance pools, companies, P&I clubs and coinsurance (multiple companies providing cover) guaranteed by the government have been created in response to the sanctions.

Russian sanctions and the forced exodus of Western companies from the Russian market give Russia the chance to have inherited in-house expertise and knowledge of the insurance and reinsurance industry that it does not have. paid. While Western insurance companies have to absorb the hit from the sanctions, it is not entirely clear that their Russian counterparts will suffer in the same way.

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