Canada’s P&C industry grapples with Ukraine invasion’s implications

With Russia’s invasion of Ukraine still less than a week old, insurers and industry intermediaries in Canada are working to sort the implications of the crisis.

Firms are looking at policies that cover political, business, and other risks related to both the invasion itself and the stiff sanctions imposed on Russia by governments worldwide.

Gary Hirst, president and CEO of CHES Special Risk, noted political risk includes contract frustration, nationalization of a company or political risk that either disrupts an investment from developing, or prevents investors and shareholders from repatriating income.

“One would assume there will be a potential for financial loss in the political risk insurance market,” he said. “And that political risk could involve the investment being destroyed because of bombs or being disrupted – or the inability to gain access into Ukraine again should the situation worsen, or trade relations be completely cut off.”

Bernard McNulty, chief agent and head of claims in Canada at Allianz Global Corporate & Specialty, said that like many commercial insurers, his firm is working to adhere to economic sanctions against Russia.

“We do have marine exposure in the region that we are reviewing,” he said. “We do not underwrite political risk in Canada. Our European operations may have traditional property, casualty and cyber risk in that region.”

Hirst said imposition of sanctions on Russia by Canada and other nations will have insurance ramifications. For instance, Canadian airlines have been banned from flying over Russian territory. Given that Russia is the world’s largest country, diverting flights around it may result in longer flying times and higher fuel consumption.

“Is that going to increase the cost of flights and moving cargo?” he asked. “Does it mean the cost of fuel is going to go through the roof? Are the sanctions going to cause problems with fuel supply, natural gas supply?”

Canada’s Feb. 28 announcement that it’s banning crude oil imports from Russia could also push up costs.

While Canadian insurers and insureds generally aren’t highly exposed, Hirst said sanctions may hurt companies that can no longer sell goods to Russia or buy from Russian companies – or take possession of things they’ve already ordered.

“It may be that the Canadian corporations have to find new sources of material or stock to meet an order they’ve got and that could lead to increased pricing,” he said. “If several companies are affected by the sanctions, they may be competing to buy [substitute materials] and push up the price. Whether that’s an insured loss or not, I can’t speculate.”

In a Feb. 25 commentary, global credit rating agency AM Best, speculated another likely sanction will be adoption of export restrictions on items that source technology and software, which will dramatically impact Russia’s industrial base and its ability to innovate.

“Implementation of sanctions is a two-way street…and the pain for participating countries will not be felt equally,” AM Best said. “The U.K. and the E.U. rely on Russia for a significant portion of their gas consumption, and there is a very real concern that prices will skyrocket from already elevated levels.”

Whether sanction-related economic losses are covered could be an open question.

“It certainly causes a risk to the business but…I would suggest that they’re potentially uninsured…because a standard property risk wouldn’t cover damage because of something happening elsewhere,” Hirst said. “There could be an argument it is an act of government, which could trigger a business-interruption claim on a commercial policy. But it’s tenuous.”

He noted, though, that various insurers have paid claims related to government restrictions in response to COVID-19. So, it remains to be seen if sanctions against Russia will be viewed as a government action that results in a business loss.

“Some of the bigger P&C insurers have been paying claims because of acts of authority,” said Hirst.

 

Feature image courtesy of iStock.com/rusm