AM Best believes that Russia’s invasion of Ukraine could have a “substantial impact” on the world’s insurance industry in the near to midterm, the rating agency said in a report published on Friday.

The report, “Significant Implications of Ukraine Invasion on Global Insurance Industry,” cited the fallout in the capital markets and potential for widespread cyber attacks, among other drivers.

“The economic effects of sanctions include a material increase in commodity prices, which could add to inflationary pressures, challenging efforts by the global central banks and the U.S. Federal Reserve to contain inflation,” the report said.

The report also highlights potentially “severe knock-on effects” to tourism and to economies of less resilient countries.

“Further sanctions may impact the ability of international insurers and reinsurers to underwrite Russian risks or make it more difficult for them to service claims on existing policies,” said Anna Sheremeteva, a financial analyst for AM Best. She added that London Market insurers and international reinsurers writing large energy and infrastructure risks would be most affected.

Another AM Best financial analyst, Todor Kitin, noted the balance sheet impacts of sanctions on Russian insurers. Among them, “higher-than-anticipated inflation would impact claims costs, with potential implications for the adequacy of reserves” of Russian insurers, he said.

Providing a bit of economic history, the report notes that during the invasion of Ukraine in 2014-2015, both the Russian and Ukrainian economies contracted, with inflation reaching double-digits for both countries. In 2015, Russia’s economy contracted by 2 percent, and inflation hit 15.5 percent; in Ukraine, GDP contracted 10 percent, and inflation hit 48.6 percent.

In the days before the invasion, 2022 GDP forecasts (from IHSMarkit) were revised down to 2.7 percent from 3.5 percent for Russia, and down to 1.9 percent from 4.6 percent for Ukraine, the report says.

The report also notes that a state-owned reinsurance company, Russian National Reinsurance Company, would need to replace reinsurance capacity withdrawal by international markets.

“An escalating global conflict may increase the risk of a systemic cyber attack and cause substantial economic and insured losses,” the report added.

In addition, “heightened risk perception could lead to higher prices in an already hardening cyber market,” the report said.

Source: AM Best