Ukrainian soldiers inspect a damaged military vehicle on Feb. 27. Russia's invasion of Ukraine has sent shock waves through the global insurance market, and analysts say international sanctions could impact both insurers and policyholders. (AP Photo/Marienko Andrew)
Market analyst AM Best put the credit ratings of four Russian insurance companies under review "with negative implications" this week in response to sanctions placed on Russia's financial system. Those carriers could suffer liquidity constraints, a decrease in the value of their investments, elevated claim costs and an inability to recover losses from their reinsurers, the analyst said in a series of statements.
Citing the sanctions, AM Best on Thursday withdrew the good credit rating of one of the insurers, Insurance Co. of Gaz Industry Sogaz, one of Russia's largest carriers.
"Sanctions also will affect the balance sheets of Russian insurers and their relationships with international partners," said Todor Kitin, a financial analyst with AM Best. "The valuation of investments would be affected by a prolonged equity market downturn, any increase in the Russian central bank's policy rate or a widening of credit spreads."
Sanctions on Russian insurers could lead to market share reallocations, and London Market insurers with energy and infrastructure risk could be threatened, AM Best said.
Patrick Tiernan, chief of markets for Lloyd's of London, told Law360 on Wednesday, "We are in regular communications with the U.K. government and international regulators, and are working closely with the Lloyd's market to uphold the implementation, at pace, of sanctions applied by governments around the world."
A report issued by AM Best last week noted that if inflation exceeds expectations, it could have an impact on the cost of servicing claims and the adequacy of reserves. Even before Russia launched its full-scale invasion of Ukraine last week, analysts said reinsurers were at particular risk of losing money to inflation on longer-term claims.
In an effort to stave off inflation, Russia's central bank raised interest rates this week to 20% from 9.5%, surpassing even its decision to raise interest rates to 17% following the country's annexation of the Crimean peninsula in 2014. In 2015, Russia still experienced inflation at a rate of 15.5%, according to the AM Best report.
The insurance brokerage USI reported that threats could also come in the form of possible expropriation of Western assets held in Russia, according to a client advisory issued this week. In the event of a cyberattack, policyholders would be well advised to have copies of their policies and business continuity plans in place, USI said.
Russia's invasion of Ukraine has increased the risk of cyberattacks across the globe, according to Fitch Ratings reports released this week, which is likely to cause spillover effects on unintended targets and put pressure on cyber insurers already inundated with claims. Those attacks would further test insurers' ability to mitigate risk through war or hostile acts exclusions, which are often found in "all-risk" policies meant to provide a broad array of coverage.
A New Jersey court's recent ruling that Merck & Co.'s property insurers can't rely on a war exclusion to avoid covering the pharmaceutical giant's $1.4 billion in losses from a 2017 malware hack may push insurers across the board to rethink their approach to cyberattack coverage. Insurer attorneys have argued that the drugmaker's losses shouldn't even be covered under a standalone cyber policy, let alone a property policy.
As ever, cyber claims are best reported as soon as possible, experts say. Policy language in cyber-specific policies should be reviewed for exclusions, including those for cyberattacks conducted by individuals or groups not tied to nation-states, USI said, although experts have said state-backing of attacks can be difficult to determine.
"Policyholders should be proactive about evaluating their risks, and it would be a mistake to not evaluate cyberattack risks," Colin T. Kemp, an attorney from Pillsbury Winthrop Shaw Pittman LLP, told Law360. "Even if one concludes their risk is low, they should take into account the fact that the consequences of such an attack can be catastrophic."
"I think all the global events of the day — whether COVID, the Jan. 6 incursion or Russia's invasion of Ukraine — will cause many in the industry to evaluate existing policy language, whether 'all-risk' policies, cyber policies or otherwise," Kemp added.
Maritime policies have also come under focus as Russian forces push up into Ukraine from the Crimean peninsula and nearby shipping centers. Shipowners should avoid the Black Sea altogether, or risk their vessels getting shot or bombarded, said Richard Adler, chief commercial officer for the marine brokerage Atlantic. He said Russia is now a no-go area.
"Shipowners could have their vessels confiscated in Russian ports if Russia decides to retaliate against the U.S. and EU sanctions," Adler told Law360. "If the conflict turns into a war between any of the five United Nations Security Council nations, all war insurance policies will be canceled by underwriters automatically or with a bit of luck after a short notice period."
Hull war risk insurance will typically cover liabilities caused by belligerent powers, Atlantic noted in a report issued Wednesday. That coverage will usually extend to the insured value of a vessel, at which point protection and indemnity club coverages would extend excess insurance up to $500 million for war liabilities, Atlantic said.
Russia's navy shelled ships flying Moldovan and Panamanian flags near the Black Sea port of Odesa last week, Atlantic said in the report, citing information from the Ukrainian government. Both ships were carrying grain, a key export for both Russia and Ukraine, according to Atlantic's report. The commodity accounted for $11.25 billion in exports for the two countries in 2019, according to the Observatory of Economic Complexity, which tracks trade information.
"What will probably drive whether insurers can continue to insure nongovernment-related or nonsanctioned Russian entities are the limitations that sanctions put on the flow of insurance premium or claims payouts," Adler said, noting energy and private infrastructure assets are heavily insured. "It might be legal to insure an 'innocent' Russian party, but it might become impossible for insurers to pay out claims to them, given that the Russian monetary system is on the verge of being cut off completely."
--Additional reporting by Josh Liberatore and Daphne Zhang. Editing by Aaron Pelc and Neil Cohen.
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