Analysis: As war breaks out, insurance premiums are rising everywhere to cover losses from sanctions
By Sam Beatson, University of Nottingham, Ahmed Barakat, University of Nottingham, elham Vosughi-Kia
The European Union and Britain plan to ban their insurers from insuring ships carrying Russian oil, which has led to tensions with Washington.The U.S. believes that European dominance of the global insurance industry will make it difficult for Russia to export oil, which could push oil prices higher than they are now.
However, this may not happen because Russia is taking action to overcome its own problems.The country's national reinsurer, RNRC, will reportedly replace Western insurers in insuring the fleet and its cargo.Russia will now also offer third-party liability and environmental damage insurance in place of the Protection and Indemnity (P&I) club.If the changes are feasible in the long term, it would mean that a large chunk of business that used to go mainly to European and British insurers will now remain in Russia.
This is just one of many ways in which the Western insurance industry has been affected by the war in Ukraine.Sanctions passed in March banning various types of insurance for Russia-related activities have already left insurers facing heavy losses.This has wide-ranging knock-on effects on business and society.So, what exactly happened? What's next?
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Insurance and Geopolitics
With the exception of China and the United States, the insurance industry in every country in the world dwarfs its GDP.Premiums paid in 2021 are estimated to exceed $5 trillion (£4 trillion) and will grow by 10% in 2022.
We are all used to thinking that insurance companies are there to protect individuals and companies from risk, but behind this is another group of specialized companies called reinsurance companies.These players insure insurance companies against risks, such as losses due to claims, in other words, they insure insurance companies.In some cases, complex insurance and reinsurance networks exist to ensure that risks are adequately protected.
Before the invasion of Ukraine in February this year, sanctions against Russia also covered the insurance industry.When the U.S. pressured Germany to drop the NordStream 2 pipeline project, both insurance and reinsurers pulled out until the Biden administration softened its stance.
This time, it's a completely different level.Claims involve aviation, maritime, trade credit, cyber and political risks.It's a relatively small risk to the industry as a whole, but the potential long-term impact is another story.
Major players such as Lloyd's of London, Swiss reandscore and brokers such as marsh and AonandWillis Towers watson have rejected Russia's new sanctions since Western sanctions were imposed in March. business.Russia, for example, previously provided considerable insurance coverage to industries such as aviation and aerospace in London and New York, a major shift.We are now in a situation where the world's planes no longer pass through Russia.That raises the prospect that as many as 600 seized planes (many of which are leased) could be claimed by their owners for years, if not decades.
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Computing costs
It is not easy to estimate the overall blow to the Western insurance industry from the deterioration of relations with Russia.This is not just because it depends largely on how far the current crisis has worsened and whether a political or military solution can be reached.
In early April, a report from S&P Global predicted losses in specialized categories such as aviation, maritime and political risk to be between $16 billion and $35 billion.In March, Lloyd's of London alone was reported to face payouts of between $1 billion and $4 billion in the aviation and aerospace sector, or 1% of its premiums.
The industry could be affected by claims payouts for up to 10 or even 20 years, dragging down insurers' balance sheets during that time.Those companies that have not yet offloaded their Russian operations are also at risk of having their policies in the hands of the Russian government.
At the same time, premiums are rising, especially in all categories other than life insurance, as insurers seek to cover their losses.Aviation insurance premiums are said to have doubled globally as insurers seek to protect their profit margins.Premiums for oil tankers and other important Black Sea cargoes such as agricultural and grain products also rose sharply.All of this will lead to higher prices for consumers and businesses, even without accounting for all other current inflationary pressures.
Another affected area is cyber insurance, which protects against the risk of cyber-attacks.Demand for cyber insurance has risen as Russia has been linked to numerous cyber attacks in Ukraine and other countries, but it has become more difficult to obtain cyber insurance, so prices keep climbing.
Russia is largely a potential winner.Assuming sanctions continue, Western insurers are likely to be increasingly replaced by Russia (and insurers from countries Russia considers friendly).For example, the RNRC has replaced Western reinsurers in other cargoes than oil.Russia could also follow the Iranian model by setting up various new government-guaranteed reinsurance pools, companies, P&I clubs and coinsurance (insurance provided by multiple companies) in Iran in response to sanctions.
The Russian sanctions and the forced withdrawal of Western companies from the Russian market have given Russia the privilege of having internally inherited expertise and knowledge in insurance and reinsurance that it does not have the burden of.While Western insurers need to absorb the impact of sanctions, it is not entirely clear whether Russian insurers will suffer the same blow.
Sam Bitson is Assistant Professor of Financial Risk and Banking at the University of Nottingham.Ahmed Barakatis, Assistant Professor of Finance at the University of Nottingham, and Elham Vosughi-Kiais, PhD candidate in Finance and Risk at the University of Nottingham Business School.This article was originally published by the Conversation.
