Russia-Ukraine loss uncertainty continues but changing risk perception already shifting market dynamics
For the second time in three years, the (re)insurance sector has had to contend with an unmodelled loss which is expected to cost billions of dollars but with little clarity over the final bill.
As was the case with reserving for Covid-19 claims during the first half of 2020, reserves booked for the Russia-Ukraine conflict during the first six months of 2022 are subject to a very high degree of uncertainty.
This is particularly the case for reserves linked to Russia-related aircraft lessor losses, which are expected to take several years to resolve.
Aviation is one of several specialty classes to have been impacted by the conflict. Several other classes, such as marine, political risk, political violence and trade credit, are also likely to incur substantial claims from the event.
As Howden noted in its latest reinsurance sector report, while claims from the war will be manageable for the overall (re)insurance sector, the concentration of losses among premium-light lines of business will lead to disproportionate pain for those classes.
Preliminary expectations for total industry losses from the event suggest a bill of between $10bn and $20bn, although Swiss Re has notably said it anticipates losses will be at the bottom end of that range.
With approximately $2.4bn of losses disclosed by companies during the first half of the year, alongside a £1.1bn loss at Lloyd’s which likely contains some overlap with the individual company disclosures, there remains a long way to go to reach even the bottom end of the expected industry loss range.
As Howden noted in its report, an expected wave of further loss announcements did not materialise in the second quarter due to ongoing hostilities, making access for adjusters difficult, and there remains little additional clarity as to how aviation losses will develop.
Many of the carriers that have disclosed losses to date have not included aviation in their provisions. The extent of these losses, alongside the duration of the conflict, will ultimately determine how close the ultimate loss bill gets to preliminary market estimates.
European reinsurance impact
Europe’s big four reinsurers accounted for more than one third of the $2.4bn of Russia-Ukraine reserves disclosed by companies during the first half of the year.
Hannover Re has reported the highest reserves to date for the conflict at €316mn, of which €186.2mn was recorded during the second quarter.
Around two thirds of Hannover Re’s losses relate to physical damage-related covers for marine, political violence and war on land risks. Trade credit and political risk represent more than a quarter of the reinsurer’s losses with aviation and other classes accounting for “significantly below 10 percent”.
Munich Re added €90mn of reserves related to the conflict in Q2, taking its total to €200mn – far below earlier projection from analysts that the reinsurer would book around €500mn of Russia-Ukraine reserves.
The size of Munich Re’s ultimate losses will be determined by where Russia-related aircraft lessor losses eventually land.
The reinsurer is exposed to the aircraft lessor losses through its majority backing of MGA Global Aerospace, which has the largest share of the slip on the all-risk cover for AerCap, the world’s largest aircraft lessor.
As The Insurer first reported, AerCap has submitted a $3.5bn claim on its ~$5bn all risks policy to recover losses related to its Russia-based aircraft.
However, Munich Re is understood to be confident that exclusions on all-risk policies will result in any Russia-related aircraft lessor losses falling on the aviation war market, which may help explain its lower-than-expected reserve additions during the second quarter.
Both Scor and Swiss Re did not add any additional Russia-Ukraine reserves during the second quarter, maintaining their respective Q1 provisions of €85mn and $283mn. Swiss Re’s estimate includes a $129mn impact in its Corporate Solutions segment.
London-listed carriers’ impacts “manageable”
Among London-listed insurance carriers, Hiscox saw only a modest $8mn increase in its loss reserves, taking total provisions to $48mn at the half-year point, of which $34mn was booked through its London Market unit.
Conduit Re also saw no change to its previously disclosed $24.6mn estimate, which includes exposures across its property and specialty books through war on land, marine war and aviation covers.
Beazley saw no change to its Q1 provisions of $50mn for the conflict, a figure which does not include claims for aircraft stranded in Russia as no losses have been incurred. However, the carrier has guided that it does not expect any material impacts should these claims arise, given the relatively small size of its aviation book.
Lancashire recorded reserves of $22mn for its Ukraine exposures during H1, towards the bottom end of its previous $20mn to $30mn guidance.
The big uncertainty for Lancashire is around its exposure to Russian aviation losses. Management has not yet been able to put a number on its exposure – describing the situation as “complex and fluid” – but KBW has suggested the carrier may incur a further ~$80mn depending on how the Russia loss plays out.
For the majority of North American carriers, loss disclosures related to the conflict have to date not been outsized.
Several Bermudian reinsurers have reported double-digit million-dollar reserves for the event, including Everest Re ($45mn), Axis Capital ($30mn) and RenaissanceRe ($24.9mn).
Chubb’s Evan Greenberg said losses in H1 were “not large enough to call out – just a de minimis amount”. While he acknowledged Chubb will have more exposure to come, he said he was confident this would be contained within the group’s loss picks.
Changing perceptions of risk
While assessing the quantum of Russia-Ukraine losses remains challenging, increasing confidence is emerging around the likelihood of very significant reinsurance rate rises for several of the most exposed lines, including aviation, marine and other specialty classes.
In aviation, for example, the expectation is that market dislocation will likely occur regardless of the ultimate quantum of losses, as Lancashire’s chief underwriting officer Paul Gregory explained during the group’s Q2 earnings call.
“We are positive the market will change in Q4 – the level to which it will change we can’t say at the moment, but we do expect dislocation,” he explained.
“The reason we feel that it will change irrespective of what happens with Russia is that people’s perception of risk is different from before. And for me, perception of risk is generally what dislocates the market more than actual dollars of loss.”
Howden agreed with this sentiment in its latest reinsurance report, highlighting significant repricing of specialty treaties and a reassessment of composite covers ahead of 1 January, with expectations of continued rate hardening even if losses don’t occur during this year’s hurricane season.
With perceptions shifting across multiple business lines, rising confidence about the market opportunity in 2023 has helped fuel a swathe of pre-emptions at Lloyd’s seeking double-digit stamp capacity increases for next year.