According to Fitch Ratings, the Russia-Ukraine war is more likely to affect the European insurance sector through second-order financial market volatility than through direct effects from sanctions.

The rating agency released the statement about limited impact of sanctions on Russian entities or other measures restricting Russian business yesterday, highlighting instead, the volatility in global financial markets developing from the conflict, which could affect their European insurers’ capital ratios.

In addition, the conflict raises the prospect of even higher inflation, which may lead to pressures on profitability for non-life insurers.

Even though European insurers and reinsurers have strong capital relative to their ratings, “a sustained downturn in financial markets would erode their capital headroom and could put pressure on some ratings,” Fitch said, referring to impacts of volatile equity and credit markets.

As for inflation, and the prospect that the war could exacerbate high inflation, Fitch noted that rising repair costs for buildings and vehicles is already leading to margin pressure in short-tail lines. “Insurers may be able to increase premiums accordingly, but if high inflation persists, reserve deficiencies could arise on long-tail lines,” Fitch said, adding that reinsurers would also be affected, particularly through general liability claims and excess-of-loss reinsurance treaties with fixed deductibles.

Potentially mitigating the effects of high inflation would be accompanying interest rate hikes, Fitch said.

Direct Impact Limited

Fitch noted that European insurers and reinsurers have little direct Russian exposure in their insurance books and investment portfolios, and negligible Belarusian and Ukrainian exposure.

According to the Fitch statement, global insurers have limited their direct involvement in the Russian insurance market has been limited in recent years—particularly since Russia’s invasion of the Crimean Peninsula—and global reinsurers also withdrew much of their coverage.

By Fitch’s estimates, global reinsurers’ coverage of risks in Russia is now less that 2 percent of total gross written premiums, with exposure concentrated in specialty lines of energy, marine and aviation, typically written through Lloyd’s of London syndicates.

Lloyd’s has said that less than 1 percent of the business it transacts relates to Russia or Belarus.

Fitch also noted that standard lines reinsurance treaties typically contain war exclusions.

Commenting on European composite insurers that have small Russian subsidiaries or minority stakes in Russian insurers, Fitch put insurance exposure for these carriers at less than 2 percent of the groups’ gross premiums and Russian investments at less than 2 percent of their total investments.

“Indirect underwriting exposure is harder to quantify, but we believe it could materially affect some companies’ earnings, although probably not their capital or ratings,” Fitch said, pointing out that the conflict is expected to produce claims under trade credit, surety and political risk insurance contracts, bought by corporate clients that do business in Russia, Belarus and Ukraine.

These lines of business only account for roughly 4-5 percent of global gross premiums, with affected countries contributing a small part of that estimate, Fitch said.

While individual trade credit, surety or political risk claims may be large—”and subject to legal disputes”—Fitch believes most insurers’ aggregate losses should be modest relative to overall revenue and capital positions.