How boycotts of Russian oil will spur insurance demand in Canada

Russia’s invasion of Ukraine will keep Canadian insurers busy, predicts an economist with insurance ratings agency AM Best.

The war will impact Canada’s economy, as crude oil, natural gas and coal – the country’s top three exports – experience new demand from importers seeking alternatives to Russian energy products, says Graziano Brady, an economist with AM Best.

“Insurers focused on Canadian commodity exports are likely to see increased demand, as higher commodity prices induce greater production and the need for insurance,” he said. “But they may also face more competition as global insurers are forced to shift their business geographically away from Russia and into alternative markets.”

In addition to energy prices, food costs are rising, positioning Canada – the Number 2 global wheat exporter behind Russia – to benefit from supply constraints. But beyond commodity sector growth, Brady said the war will hit Canada’s broader economy and that higher inflation is likely.

Goods transportation disruptions are causing knock-on impacts as “global insurers are quoting exorbitant premiums for war-related insurance cover to freight passing through the Baltic or Black Sea, discouraging shipowners from making bookings,” he said.

Economic and political effects of the invasion will feed through Canada’s insurance market and directly effect insurers with investments, subsidiaries, reinsurance deals and other business links with Russia.

Western sanctions, including freezing of Russian central bank assets, banning of several Russian banks from the SWIFT intrabank system, Russian-imposed capital controls, “and the reputational risk from conducting business in Russia will damage insurers with such exposures, who may find it increasingly difficult to recover their exposures,” Brady said.

He speculated insurance-sector specific sanctions, may follow.

“The U.K. has barred Russian companies from the aviation and space insurance market in London,” Brady said, “a move that may serve as a template for Canada to follow with similar insurance-market bans.”

What’s more, higher inflation spurred by the crisis will increase claims inflation, requiring higher pay-outs from insurers, he said.

And, “lower bond yields resulting from investors’ flight to safety will prop up the value of insurer’s fixed-income investments,” he said, “but long-term investment performance will suffer if the low-interest-rate environment endures.”

Although disruption from the Ukraine crisis is a negative for overall global growth, Brady said, “it is unclear just how much the economic opportunities for Canadian exports will offset the negative impact.”

Feature image by iStock.com/CatLane