Although insurance penetration in Ukraine and Russia is low, global insurers will face secondary impacts from greater financial market volatility and higher energy prices, Moody’s Investors Services said late last week.

In a research report released prior to yesterday’s news of a ban on all oil imports from Russia to the United States announced by U.S. President Joseph Biden, Moody’s said that high energy and commodity prices could drive claims inflation.

A prolonged conflict and higher commodity prices could lead to broader inflationary pressures, the report says, noting that if inflation spikes exceed premium price hikes, insurer profitability could suffer and loss reserves may develop adversely.

Referring specifically to property/casualty commercial insurers, the report notes that premiums are based on “economically sensitive inputs,” like payroll and revenue, suggesting that with higher commodity prices curbing economic growth, “commercial insurers could experience marginally reduced premiums and profitability.”

On the flip side, higher prices at the gas pump could “marginally reduce miles driven, which would reduce accident frequency” for personal auto insurers, analysts from Moody’s wrote in the report titled “Russian invasion of Ukraine will drive investment volatility, more claims inflation.”

Addressing the investment volatility mentioned in the report title, Moody’s says that insurance companies rated by the firm capitalized well enough to withstand the ups and down of financial markets. While the rated insurers have little or no direct investment exposure to Ukraine or Russia, they are impacted by “a flight to quality” in global financial markets that is pushing equity prices down and high-quality bond prices up, along with prices of safe-haven currencies and commodities.

As with their investments, global insurers, for the most part, don’t have much direct underwriting exposure in Central and Eastern Europe. Insurance penetration is low overall, with gross written premiums representing just over 1 percent of GDP is both Russia and Ukraine (according to Moody’s analysis based on figures from a Swiss Re sigma report). In addition, insurance markets are dominated by local insurers.

The largest Russian insurer is SOGAZ with a 24 percent market share, the report shows (based on information from Moody’s and KPMG).

Outside of Russia, Assicurazioni Generali S.p.A has a 38.5 percent ownership stake in the fourth-largest Russian insurer, Ingosstrakh, the report says, noting that Generali has announced that it will resign its positions from the Ingosstrakh board. AXA has a 38.4 percent stake in RESO, the fifth-largest Russian insurer, according to Moody’s.

Moody’s said that both the Generali and AXA stakes are small relative to the overall premiums and profits of the global insurers.

While the report says that most insurance contracts have war exclusions that could limit losses, it also says that insurers participating in specialty lines like political risk and trade credit could face moderate levels of losses.

According to Moody’s, political or sovereign risk insurance specifically “covers overseas assets against expropriation, political violence including war and terrorism, currency inconvertibility, contract frustration due to political events, border closures, nonpayment by foreign governments on cross-border loans or contracts, among other coverages, depending on the specifics of the policy.” These policies tend to be multiyear policies with noncancelable limits and worldwide coverage, the report says.

Trade credit insurance, also known as accounts receivable insurance, protects businesses from nonpayment of invoices—bad debt caused by a customer’s insolvency, payment default or inability to pay for international shipments, according to definitions on the websites of Euler Hermes (a division of Allianz), Coface and Atradius N.V., which are the three largest trade credit insurers in Europe, according to Moody’s.

War exclusions on some trade credit policies could limit exposure, Moody’s analysts said in the report, also noting that trade credit insurers generally have only moderate exposure to Central and Eastern Europe anyway.

Still, disruption to the broader European and global economies that develops as the conflict continues—and related sanctions—may lead to more corporate insolvencies and accompanying higher claim costs for credit insurers.

Like other commentators on the insurance market impact, the Moody’s report notes the heightened risk for cyber insurers, with the conflict increasing the prospect of cyber attacks on critical infrastructure. Among the risk warnings in the cyber section of the report, Moody’s notes that:

• Cyber attacks could have spillover effects, affecting companies in regions that were not intended targets.
• The language of war exclusions is inconsistent.
• Severe attacks could cause widespread—”uninsurable”—business interruptions.

The insurance industry does not have the capital to insure widespread systemic events, the report says.