By Henry Uche [email protected]
Last week, experts in the insurance industry charged operators to be guided and gird their loins as Russian Ukraine war persists.
In this interview with Daily Sun, the Chief Risk Officer, Unitrust Insurance, Johnson Chibueze, alerted underwriters on the implications if they feel unperturbed by the ongoing war between Russia and Ukraine.
Excerpts.
General impacts of Russia-ukraine war
The Russia-Ukraine war expectedly has serious implications for the world economy both in the immediate and long term, and its impacts are already reverberating across the world. Russia is the 3rd largest oil producer in the world. It follows only the United States and Saudi Arabia and produces about 11.2million barrels of oil per day. Russia also supplies about 17 percent of the global gas needs mostly to Europe. These supplies are already greatly affected by this war. Ukraine on the other hand is the breadbasket of Europe and the 5th largest global corn supplier as well as the 9th largest wheat producer. The supplies of these products have been greatly affected by the war either because of supply chain disruptions or as a result of punitive sanctions against Russia.
Implications for Nigeria
For an import dependent country like Nigeria, the war is already taking its toll on different areas. The immediate effects have been the increase in the prices of goods and services around supply chains and foreign exchange. The prices of diesel and aviation fuel went up few days into the war. Nigeria being a crude oil producer could have benefited from the increase in oil prices but because it lacks adequate refining capacity, it may not enjoy the increase of oil in the international market as it has to import refined petroleum at the exorbitant prices and the brunt borne by the citizenry. Should the crisis in Ukraine persist, inflation will further increase which will further reduce the purchasing power of individuals. Russia is one of Nigeria’s top sources for its imported items, especially food items and according to the Nigeria Bureau of Statistics, Nigeria imported goods valued at over N800 billion (over $2billion as at Q3 2021, representing 3.7 percent of Nigeria’s total import in the same period. Nigeria also imports wheat from Russia. In-fact, in 2021, Nigeria imported wheat worth over N120 billion from Russia. Other imports from Russia include different types of seafoods such as mackerel, meat, herrings, blue whiting’s, all in frozen form. Nigeria also imported vaccines for human medicine from Russia in Q4 2020. Nigeria has also been involved in trade with Ukraine in the past, as it imported milk worth N721.45 million in Q1 2021. The war has affected the importation of these goods from Russia and Ukraine with attendant implications on availability and pricing.
Implications f o r the Insurance industry
The associated risks and implications of this war on insurance business is quite enormous. The insurance industry operates within the global economic environment and the Russia – Ukraine crisis being a global crisis affects them directly and indirectly. It is our hope that the crisis does not escalate to the point where nuclear warheads will be used as the effects will be too devasting for the world to recover from.
Effects on insurance consumers & underwriters
For insurance companies, as disruptions on supply chains continue to increase, it will lead to increase in the price of goods and services and a rise in inflation. This will affect consumers’ disposable income and their ability to purchase insurance. For an environment like Nigeria where insurance is not a top priority, it may affect premium income of underwriters. Also, if inflation exceeds expectation, it could impact on the cost of servicing claims and the adequacy of reserves. This could also put serious pressure on the profitability of companies.
Impacts on re-insurers
Re-insurers are also at the risk of losing money to inflation on longer term claims. Inflationary risk has and will continue to escalate as long as this war exists due to the trickle down effect of the negative financial impact.
Impacts on other sectors
The war could cost insurers billions of dollars in claims, with the aviation insurance sector alone facing potentially the biggest loss event in its history due to the hundreds of planes grounded in Russia. There are over 500 aircrafts stranded in Russia because of sanctions arising from the country’s invasion of Ukraine. The planes, valued at over $10billion, could lead to huge claims for the insurance industry and likely lead to litigation on whether the sanctions voided insurance coverage. Stranded planes, battered ships, bombed-out buildings and unrecoverable debts created by this war have left the global insurance industry braced for soaring payouts and protracted legal disputes.
Others
Marine insurance (Hull & Cargo) is another line of insurance that is greatly impacted in this war. For Marine Cargo, the policies do not cover damage or expense arising from war, insurrection, or any hostile act by or against a threatening power but the disruptions and lack of cargo movement will only serve to further hamper the supply chain which has already been impeded by COVID-19 related disruptions.
Insurers writing energy risk could be affected by the sanctions on Russia while the disruptions on global trade and shipping could put maritime policy holders under increased peril. Sanctions on Russian insurers could also lead to market share reallocations, and London Market insurers with energy and infrastructure risk could be threatened.
Travel insurance is also greatly affected by this crisis particularly for flights in and out of Eastern Europe and in-fact around the world. There are lots of flight cancellations as tour operators are shutting down trips and requesting for extensive coverage. There are also the flight risks as global airlines defer to longer routes to avoid conflict areas. This has affected business travel to the troubled locations and may not abate anytime soon. Nigeria Transport sector not exempted.
Cyber-attacks on businesses and government agencies have also increased following the Russian invasion of Ukraine with the risk of spill over cyber-attacks against nonprimary targets becoming much more widespread. Nigerian organisations must assess their vulnerability levels and improve their cyber security positions.
As earlier mentioned, the world is already witnessing the negative financial impact because of the war. This can be seen in stock market volatility, oil and commodity price increases, exorbitant merchant cargo and shipping costs, aviation interruptions, disruptions in the banking and investment sectors and loss of Russian imports/exports. Any country or entity that does business with Russia will be affected financially, and in most aspects insurance coverage will not be a viable resource due to standard policy exclusions for war and military action, nuclear hazard, governmental action, and acts. Although War Risk is not an insurable risk under traditional insurance, war risk insurance has been around since 1914, when the War Risk Insurance Act was passed by the United States Congress to ensure its availability for shipping vessels and individuals during WWI. In general, war risk insurance provides coverage on losses resulting from events such as war, invasions, insurrections, riots, strikes and terrorism. It is for this that Many reinsurers submitted 48 hours notifications on cancellation of war risk insurance for Ukraine, two weeks before the invasion.
Way forward
The impact of this war on insurance may still not be fully quantified even long after the war is over. Insurers must go back to the drawing board and re-tool
their strategies whilst positioning for eventualities. For individuals, this war may still spring up surprises as such, you must be sensitive and monitor events as they unfold. Don’t think the crisis is in faraway Europe and feel unperturbed. Its effects are very close and near you. Make plans and build reserves in food and other essentials as their prices may further go up. Also, seek to spread your investment in financial assets as the naira may further depreciate if the crisis continues.