Fitch: market volatility main concern from Russia-Ukraine war

The current conflict in the Ukraine is more likely to affect the European insurance sector through second-order financial market volatility than through direct effects from sanctions on Russian entities or other measures restricting Russian business, Fitch Ratings says.

European insurers and reinsurers have little direct Russian exposure in their insurance books and investment portfolios, and negligible Belarusian and Ukrainian exposure, the agency noted.

However, it suggested that volatility in global financial markets caused by the conflict could affect their capital ratios. Moreover, the conflict raises the prospect of even higher inflation, which could lead to pressure on profitability, particularly for non-life insurance.

According to Fitch, several European composite insurers have small Russian subsidiaries or minority stakes in Russian insurers:

“However, we estimate that Russian insurance exposure accounts for less than 2% of the groups’ GWP, and that Russian investments account for less than 2% of their total investments.”

“Indirect underwriting exposure is harder to quantify, but we believe it could materially affect some companies’ earnings, although probably not their capital or ratings. We expect the conflict to lead to claims from trade credit, surety and political risk insurance, bought by corporate clients that do business in Russia, Belarus and Ukraine.”

“Individual claims could be large and subject to legal disputes, but most insurers’ aggregate losses should be modest relative to their overall revenue and capital. These business lines represent only 4%-5% of GWP globally, with the affected countries accounting for a small part of that.”

Fitch added that cyber-attacks on businesses and government agencies have increased since the invasion. This could lead to a rise in cyber insurance claims due to business interruption and data leakages:

“However, we believe negative rating actions tied to cyber underwriting losses are unlikely. Cyber insurance accounts for less than 5% of most insurers’ GWP, and the market is skewed to larger, well-capitalised insurers that cede much of the risk to reinsurers with the ability to withstand large catastrophe losses. Cyber-attacks linked to the conflict may test the effectiveness of war exclusion and hostile act exclusion language that many cyber insurance contracts contain.”

Fitch said that, given European insurers’ modest Russian exposure, it believes the greater risk to their credit profiles could come from financial market volatility and higher inflation. Volatile equity and credit markets are negative for capital ratios, with life insurers particularly affected given their high investment leverage (investments to equity). Most European insurers and reinsurers have strong capital relative to their ratings, but a sustained downturn in financial markets would erode their capital headroom and could put pressure on some ratings.

The war could exacerbate high inflation, it added, which is pushing up non-life insurance claims costs. High inflation is already leading to margin pressure in short-tail lines due to rising repair costs for buildings and vehicles. Insurers may be able to increase premiums accordingly, but if high inflation persists, reserve deficiencies could arise on long-tail lines.

Reinsurers would also be affected, particularly through general liability claims and excess-of-loss reinsurance treaties with fixed deductibles. The effects of high inflation could be mitigated by accompanying interest rate rises.

Fitch added that cyber-attacks on businesses and government agencies have increased since the invasion. This could lead to a rise in cyber insurance claims due to business interruption and data leakages.

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