Ukraine crisis adds to inflation risk for insurers

The economic consequences of Russia’s invasion of Ukraine create new risks for global insurers, according to Moody’s. The conflict, to varying degrees, affects them via four indirect channels: 

• A commodity price shock leading to higher inflation;
• Business disruption due to supply chain logjams;
• Liquidity tightening and market volatility, and
• Security and operational risks.

The impact of the crisis will also depend on its severity. In the rating agency’s baseline scenario, the G20 economies’ GDP growth slows to 3.6% in 2022, compared with its initial forecast of 4.3%. Its hypothetical downside scenario assumes a halt in European imports of Russian oil and gas, a liquidity squeeze, and a widespread recession.

The effect on insurers’ credit quality is low to moderate under this baseline scenario, but some sub-sectors are more vulnerable to the downside scenario.

High inflation will erode earnings

P&C insurers are most exposed to commodity-driven inflation. In our downside scenario, persistently high inflation would increase property & casualty (P&C) insurers’ claims, eroding their earnings.

Higher inflation also increases reserve deficiency risk, notably for casualty insurers and reinsurers.

Trade credit and aviation insurers are most exposed to business disruption risk. In its downside scenario, trade credit insurers, which cover sellers against the risk of nonpayment, would face falling revenues and higher claims as business disruption reduces trade flows.

Trade credit insurers have little direct exposure to central and eastern Europe, but reduced supplies of Russian and Ukrainian commodities could interrupt supply chains globally.

Aviation (re)insurers face claims of up to $11 billion from aircraft lessors whose airplanes have been impounded by Russian airlines.

Insurers also face earnings pressure from higher market volatility. In Moody’s downside scenario, volatility in credit spreads and equity prices would erode investment returns.

Asian insurers are exposed to foreign exchange risk because of their dollar investments, and European insurers’ solvency ratios are sensitive to market movements.

Cyberattacks are a key security risk. The Ukraine crisis increases the risk of cyberattacks for all financial institutions, with European and North American entities whose governments have sanctioned Russia among the potential targets.

Cyber insurance is still a niche product, but insurers may have indirect cyber exposure through their business interruption coverage.