Insurance sector rallies around Ukraine

Since the beginning of Russia’s invasion of Ukraine last month, the insurance industry has contributed to a slew of economic measures designed to punish the aggressor’s economy.

Economic sanctions began almost immediately after Russia invaded Ukraine on 24 February 2022. For example, four days after the onset of the invasion, the US, UK, European Union and Canada issued sanctions for Russia’s central bank and sovereign wealth funds in an attempt to stop Russian authorities supporting the country’s flagging currency.

On 3 March 2022, the UK government initiated a concerted reaction to the war by announcing its intention to create legislation which would prohibit UK-based insurance and reinsurance providers from dealing in financial transactions connected with Russian entities.

The planned legislation will specifically target the Russian space and aviation industries, which have been banned from accessing UK-based insurers or their capacity. In its statement, the government warned that more business sectors could be added to this list in future.

HM Treasury explained that the UK was a world leader in both aviation and space insurance via the Lloyd’s and London markets, therefore this move by the government should “further [isolate] Russia’s economy from the international financial system”.

Pressure ramps up

A selection of the UK’s largest brokers have also made the decision to suspend their business operations in Russia following the invasion.

On 10 March 2022, Aon announced that it had suspended all business operations in Russia and placed its employees operating in the country on paid leave.

Aon chief executive Greg Case explained: “The escalation of the conflict in Ukraine continues to cause the senseless loss of life to innocent civilians and the intentional destruction of schools, civilian property and infrastructure. It is why we have made the decision to suspend operational activity in Russia.”

On the same day, Marsh McLennan said that it had also decided to cease and exit all its businesses in Russia and would transfer ownership of its businesses in the country to local management.

Dan Glaser, president and chief executive at the broker, said: “We condemn the unprovoked attack by the Russian government against the people of Ukraine.

“Having watched with horror the tragic human toll in Ukraine, we feel compelled to take this action.”

Three days later, on 13 March 2022, Willis Towers Watson (WTW) followed Aon and Marsh by withdrawing from all its business in Russia. WTW also signalled its intention to transfer ownership of its businesses in the country to local management.

Additional moves

Payment operators Visa, American Express and Mastercard also suspended operations within Russia on 6 March 2022. This caused some insurers to worry whether exported goods might go unpaid for.

Furthermore, trade credit insurers pulled back from insuring goods or services exported to Russia at the beginning of March. This move was intended to heap additional pressure onto the Russian economy.

Allianz-owned credit reinsurance company Euler Hermes stated: “Given the current context and the strong uncertainty about what will happen next, we are adjusting our underwriting strategy to the gravity and the emergency of the situation.”

On 2 March 2022, credit rating agency AM Best placed the financial strength rating and long-term issuer credit rating of several Russian insurance companies under review.

Impacted Russian firms included GIC Perestrakhovanie LLC, Russian Reinsurance Company JSC, the insurance company of Gaz Industry Sogaz and Ingosstrakh Insurance Company PJSC.

While AM Best said these ratings would remain under review as a result of the conflict, the potential balance sheet and operational impact of its action on these firms include deterioration in the valuation and credit quality of investments, liquidity constraints, recovery issues from reinsurers and elevated claims costs.

Brace, brace

While much of the reaction to the ongoing conflict has involved measures intended to isolate the Russian economy, there have been warnings that these moves could harm the UK insurance sector in turn.

It remains unclear what damages from the war insurers may be liable for, but costs may run into the billions.

The main exposure to the conflict lies with Lloyd’s of London - investment bank Peel Hunt provided a “guesstimate” that Lloyd’s could face a “sizeable” loss from its $2bn (£1.5bn) share of the political risk insurance market.

Peel Hunt’s head of research Charles Hall told Insurance Times that the political risk insurance (PRI) underwriting class could see claims relating to expropriation, war, embargoes and border closures due to government intervention.

Furthermore, the aviation insurance market has emerged as one of the greatest risks to the London market in terms of insured losses.

A report from investment bank Berenberg, published last month, explained that over 500 leased jets worth nearly $10bn were reportedly stranded in Russia after president Vladimir Putin signed a law allowing Russian airlines to retain and operate these aircraft.

The new law, which was signed on 14 March 2022, raised questions over whether the stranded jets would become unrecoverable, with a Russian special government commission appointed to decide whether jets could be returned to their owners if lessors terminated their lease agreements.

The greater good

Despite disruption and an uncertain future concerning the costs of the conflict, organisations within the insurance sector have moved quickly to forward charitable donations to support the Ukrainian people.

Last month (March 2022), for example, rural insurer NFU Mutual donated £150,000 to the Disasters Emergency Committee’s Ukraine Appeal, to support communities affected by the invasion. The business also explained that it would divest from all Russian holdings “as soon as practically possible”.

Jim McLaren, chairman of the NFU Mutual Charitable Trust, said: “This devastating crisis has touched everyone and people are desperate to help.

“Many will be watching the terrible events unfold at home and want to do all they can to support the victims of the crisis. Some of our farming members will have worked alongside Ukrainian colleagues on British farms and are deeply concerned for their Ukrainian friends and their families.”

Specialist insurer Ecclesiastical’s charitable owner Benefact Trust has also released £1m of emergency funding for charities that provide support to those affected by the conflict in Ukraine.

It released £250,000 with immediate effect this month and has also pledged to donate another £750,000 over the coming months to support longer-term projects in Ukraine. The charities supported by Benefact Trust include Depaul International, World Vision and the British Red Cross.

Ecclesiastical managing director Richard Coleman said: “The conflict in Ukraine is having a devastating effect on innocent civilians. As a business committed to the greater good of society, both in the UK and abroad, I’m delighted our parent charity Benefact Trust is able to support these charities doing outstanding work in responding to this humanitarian disaster.”