Implications for credit insurance from Russian invasion of Ukraine

Implications for credit insurance from Russian invasion of Ukraine1

By John Owen, Head of Marine & Political Risk at Axis Capital

The resilience of the trade credit insurance market and its ability to withstand global economic shocks will be once again tested by the Russian invasion of Ukraine. Amid the devastating impact on the people of Ukraine, the country and its economy, in the interconnected world we live, the global economy has continued to function albeit under considerable additional strain.

Current state

Insurers at the ICISA AGM in June cited a relatively benign claims environment so far this year, despite the economic and political fallout from the invasion. It was suggested that claims in these two countries accounted for up to 10% of current losses in the whole-turnover

space, as evidently the vast majority of domestic local currency debts are still being paid.

Given the short-tail nature of this segment of the industry, it would seem well-placed to weather the storm. Perhaps the biggest headache for management arises not from increased insolvencies but from new Russian laws that are preventing normal operations in the country. Nowadays, perfectly justifiable changes in risk appetite could have serious implications for local employees, including the threat of prison, if they are deemed to be acting against the interests of Russia. This is a situation that the industry has never faced before.

The single risk/structured trade credit segment faces more uncertainty as it has exposure in both countries that will remain live over the medium to long term. Western sanctions had an immediate impact on Russian companies’ ability to borrow new funds, but, so far, the sanctions have been prospective and not retrospective. And whilst it is taking time for western banks and insureds to liaise with sanctions authorities, those same authorities are slowly providing their approvals for interest and principal repayments by Russian borrowers to be released to Western lenders. Again, in this space, it was suggested that, to date, the actual number of claims notifications has been modest. Debts are still generally being honoured, and while the impact of the war on most Russian exporting businesses has been severe, the very high commodity prices today, in part inflated by the war, are helping to cushion the full effects of western sanctions.

Potential future geopolitical consequences

While the immediate impact of the invasion has been modest, underwriters recognise that we remain in a fastevolving geopolitical landscape. It is possible that Russia will impose its own sanctions that prevent Russian companies from repaying loans taken out prior to the invasion. Of equal concern are the indirect consequences and potential claims flashpoints that could arise in the next few months as food and energy prices spiral.

Many countries that rely on Russian oil and all countries that rely on Ukrainian wheat will be under pressure to find new sources, and for many already impoverished countries this will add to their considerable financial and political strain. Civil unrest in a raft of emerging markets is a real possibility as winter approaches, as are sovereign credit downgrades, particularly from oil importing countries.

Apart from the heightened risk of claims in the credit sector, the Russian invasion of Ukraine has brought into focus the correlation between credit insurance and other lines of business in a full blown ‘war’ situation. This differs to the dynamic we have seen when localised political violence has broken out over the past few years in multiple countries including the US, South Africa and Chile. Credit insurance, being a true specialty class, has been seen as an attractive and largely non-correlating line of business, especially by multi-line (re)insurers.

With the changing world order, particularly the rise of China, leading to new potential flashpoints (e.g. Taiwan), (re) insurance management will rightly want to better understand how credit may be correlated with other lines of business. The Russian invasion will be a useful case study, as it has brought into focus that credit can be exposed to the same events as various diverse lines, such as aviation war, marine war, cargo and political violence.

There will also be greater scrutiny of policy wordings across lines of business. The political risks market, closely associated with the structured trade credit market, will likely have its wordings tested in the next few months as a result of claims brought by western companies that have either abandoned assets in Russia or had assets destroyed in Ukraine. With confiscation

policies sometimes covering ‘destruction’, there will be potential overlap with political violence wordings.

While several issues are noted above, how the credit insurance market ultimately fares in this period of instability will depend on its ability to demonstrate true value in protecting the flow of trade and ultimately economies in Europe and around the world.