How the invasion of Ukraine impacts the U.S. insurance industry
While direct exposure is limited, AM Best reports that U.S. insurers might face ‘significant’ indirect exposures.
While U.S. insurers only have less than $2 billion in bonds that are exposed as a result of the Russian invasion of Ukraine, AM Best reported the industry’s indirect exposures might be more substantial.
The largest exposure at any company, according to AM Best, is less than 2% of capital and surplus, with a majority of the bonds being rated investment grade NAIC-2.
“. . . Higher capital charges could result if the issues were to fall below investment grade for an extended period, depending on the duration of the conflict and other factors,” according to an AM Best report.
The rating agency noted that although U.S. insurance companies have little exposure to Russian companies in their direct stock portfolios, they do have exposure to companies that derive a share of earnings from Russia.
“Indirect investments through suppliers and customers of U.S. and European companies may still be impacted, similarly to the already substantial impact on commodity and energy markets,” Jason Hopper, associate director, industry research and analytics, AM Best, said in a release.
AM Best removes rating for SOGAZ
This review follows AM Best withdrawing the financial strength rating of “B++” and the long-term issuer credit rating of “bbb” for Insurance Company Gaz Industry SOGAZ, one of the largest insurance companies in Russia in terms of market share.
AM Best reported that at the time of the withdrawal, the ratings for SOGAZ were under review with negative implications. The ratings were pulled back for commercial reasons, including sanctions imposed on SOGAZ.
Founded in 1993, SOGAZ writes more than 100 P&C, health and life insurance programs, and pays out more than 290 million rubles (approximately $2.07 million) daily to cover insured events, the company reported.
Insights from FC&S
Further direct implications in the U.S. thus far include the inability to conduct financial transactions between the U.S. and Russia due to a freeze on Russian banks and financial institutions, the lack of Russian imports and exports, and companies being unable to continue business operations between the U.S. and Russia.
The standard insurance policies will not cover loss or damage arising out of any of these factors. For example, an upscale restaurant regularly offers imported Russian caviar and Russian vodka on their menu. Because they either cannot get the imported items or they selectively choose not to serve these items, these are not direct physical losses that would be covered under a standard open perils policy. If the items could not be imported, this could perhaps be covered if the restaurant has a political risks insurance policy. Simply choosing not to offer a product is a business decision, not a fortuitous loss.
It is possible that the restaurant may have reduced patronage due to their renowned Russian atmosphere and Russian food and drink selections, resulting in a loss of business income. This also would not be covered under the standard business interruption coverage, as there was no direct loss or damage to the restaurant or its products that caused the reduced patronage. Again, there may be some coverage under a political risks insurance policy.
It is not inconceivable that some businesses may be rioted against or vandalized should the business owner or their operations be of Russian nationality or show support to Russia in this conflict. Should that happen, there is coverage for riot and vandalism loss or damage under the ISO Commercial Property Special Causes of Loss form CP 10 30 10 12.
If a business operates with funds wired from Russia and is unable to continue operations or pay their employees due to the banking freeze, there would be no coverage for this business income loss under the standard ISO property policies, as the banking freeze is not a covered cause of loss, as governmental action is excluded. A political risks insurance policy or trade credit insurance may provide some coverage for this type of loss. Related: