Any major event or upheaval that affects the economy, the environment, technology, health or law somehow touches insurance. War is no exception. The repercussions of Russia’s unprovoked military invasion of Ukraine are already being felt in numerous corners of the global insurance industry. Two areas likely to impact Americans’ bank accounts are higher automobile insurance premiums resulting from a crimped supply of a rare mineral and the perpetuation of general inflation.

First, let’s briefly review insurance exposure and risk related to this conflict. Direct insurance losses from Russia’s invasion of Ukraine are not expected to be exceptionally large. Investment bank Berenberg analysts have reported that the insurance sector has “negligible” exposure to Russia. War is excluded as a cause of loss in property policies. Losses from a possible Russian cyberattack against U.S. targets may, however, be covered by cyber insurance, as was demonstrated in a recent court decision on Russia’s 2017 NotPetya attack on pharmaceutical maker Merck, which led to a $1.4 billion payout. Ocean marine policies have a “five powers war and nuclear” exclusion, which excludes coverage for war losses in conflicts between any of the following: the United States, the United Kingdom, the Russian Federation, France or China. Berenberg did single out some western insurers with Russian exposure. Among these are German insurer Allianz, Italy’s Generali and French trade credit specialist insurer Coface. Berenberg noted though that “even there, the exposures are small.”

Trade credit insurance, which is purchased by exporters to cover potential losses if buyers fail to pay their invoices, occupies a tiny niche in the insurance industry, with only $1.8 billion in net premium written in the United States in 2020—a small fraction of the industry’s $729 billion in all-lines premium. With the approximately 60 global trade credit insurers refusing to or proscribed from doing business with Russian exporters, Russian trade involving goods even beyond those specifically sanctioned will dry up.

As we noted in our recent article on the critical role played by insurers in sustaining the economy, shippers do not send out ships and airlines do not fly their planes without insurance because they rely on insurers’ large capital pools for financial protection should they experience a catastrophic event. Lloyd’s, the storied London-based global insurance market, and the U.K.-based non-Lloyd’s company market are major sources of coverage for marine transport and aviation insurance. The U.K. Finance Ministry has announced a ban on providing insurance for Russian aviation and satellite insurance.

Inflation and Oil Supply

Russia’s war on Ukraine is poised to tip the transitory versus long-term inflation debate further to the long-term side. In addition to the rare mineral palladium, Russia is a major source of wheat and potash, which is used in agricultural fertilizers. Russia is also a significant supplier of oil and gas to Europe. Should Russia shut off oil and gas supplies to punish Europe, and with the price of oil already spiking to over $130/barrel on March 7, the highest in 14 years, knock-on inflationary impacts will be felt to some degree by all, even though the United States buys little oil or gas from Russia.

The Palladium Effect

Financial effects of Russia’s iniquitous invasion of Ukraine will be felt by car insurance buyers, which includes most Americans. Automobile catalytic converters include several grams of palladium, whose supply is dominated by Russian exports. Thefts of automobile catalytic converters has skyrocketed, with reported thefts up from 3,389 in 2019 to 14,433 in 2020, according to The National Insurance Crime Bureau. Data for 2021 is not yet available, but thefts may have more than tripled since then, as State Farm, the country’s largest automobile insurer, paid $21 million for such losses just in the first six months of 2021. Sanctions on Russia’s exports are likely to lead to yet more thefts as a sharp constriction in palladium supply stokes the cost.

In the past decade, the price of palladium has more than quadrupled, from $680/ounce to $2,800/ounce, or $85/gram, making it more valuable than gold, which trades at approximately $1,900/ounce. There are between 3 and 7 grams of palladium in catalytic converters, meaning that the palladium in a catalytic converter is worth between $255 and $595. Because Russia is responsible for over 40 percent of global palladium production, the interruption of these exports will stoke the value of the precious metal in catalytic converters, which will drive more catalytic converter theft. This, in turn, will push up automobile physical damage insurance claims, which will lead to higher automobile insurance premiums as insurers raise rates to cover higher costs.

The Russian Insurance Market and Crony Socialism

Like other industries, the Russian insurance market is highly concentrated and closely connected to the country’s ruling nomenklatura and its affiliated business oligarchs. For example, Russia’s largest insurer, Sogaz, founded in 1993 by natural gas company Gazprom, has a commanding near 25 percent market share of the country’s insurance premiums. Reuters reported that Sogaz’ CEO Yuri Kovalchuk—with an estimated net worth of $2.2 billion—and his wife control Russian investment firm Aquila Capital Group, which in turn controls over 32 percent of the shares of Sogaz. In 2014, the U.S. Treasury Department put Kovalchuk on the Specially Designated Nationals (SDNs) list. SDNs are individuals who are “materially assisting, sponsoring, or providing financial, material, or technological support for, or goods or services to or in support of, a senior official of the Government of the Russian Federation.” Bank Rossiya was also named for its control by Kovalchuk, who is the largest single shareholder of the bank and characterized as one of Vladimir Putin’s “cashiers.”

In recent days, the financial strength ratings of Sogaz, as well as three other large Russian insurers—Russian Reinsurance Company, Ingosstrakh Insurance Company PJSC and GIC Perestrakhovanie LLC—have been put under review by insurance company rating agency A.M. Best, citing “heightened geopolitical, economic and financial system risk in Russia.” Standard & Poor’s took a bolder step and downgraded Sogaz and Ingosstrakh.

The existence of a healthy insurance market is essential for keeping an economy afloat. The drying up of insurance and reinsurance capacity to cover Russian risks as the global insurance industry turns off the capacity spigot will contribute to the eventual collapse of the Russian economy if this continues. As the heart of the global (re)insurance industry in Europe and the United Kingdom beats no more for Russia, the failure to find critically needed insurance capacity will be another nail in the coffin of the Russian economy.

Image credit: Ruslan

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