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Lloyd’s of London and insurance broker Aon have released a new Futureset report that states the Russian invasion of Ukraine has fundamentally changed the insurance market as it has shaken up the wider world to such a great level.
The report, entitled “Ukraine: A conflict that changed the world – the (re)insurance industry response”, explored the re/insurance industry response in building resilience against the medium to long-term consequences of the conflict.
"With the conflict in Ukraine continuing, the insurance industry has
taken proactive steps to protect customers from the fallout."
It also highlighted the ongoing issues with digitisation and cyber risk and how insurers are struggling to understand how it affects their investments, and secondly, the correct levels of investment they need to put into them.
The insurance and wider financial services markets have already learnt some lessons from the Russia/Ukraine conflict, but the report specified that the ongoing domino effects into other areas as well as the unpreparedness in certain areas would see issues for some time.
“With the conflict in Ukraine continuing to inflict devastating consequences, the insurance industry has taken proactive steps to protect customers from the fallout,” it said. The scale of the challenge means there remains a need for innovation and investment, it continued.
One of the main ways that the market has been affected is by the damage to the European energy availability and security, the report said, which is heavily invested in by insurers and around which they have had to change investment plans.
This, the report said, highlighted volatility in the market, which could become more widely felt in the coming years as the conflict raged on. For investors, this could mean a change in strategies around renewables.
Because of the conflict, there has been a jump in the use of traditional and high-emitting energy sectors, it said, which could go against green and sustainable investments European insurers have invested in and make promises to work with.
This means the area is key for insurance investments and it could be financially painful - and reputationally challenging - if they have to change this strategy. Prior to the invasion, according to an Allianz report, renewable energy, such as solar, wind and geothermal power has gone from producing 20% of global energy consumption was renewable in 2017 - and was expected to increase to 25% by 2035 and 34% by 2050. This was likely to be higher in Europe.
“Even for those that don’t have restrictions in place, supporting coal projects,
and oil and gas exploration may create a negative reputational impact.”
The continuation of this turn to high emitting power sources, the report added, is possible as nations seek to replace Russian-sourced energy supplies over the short to medium term. “Key (re)insurance market implications [include] re-commissioning of coal plants, which may lead to an increase in demand for traditional brown energy coverage in the short term.”
Other effects include possible restrictions on capacity as many (re)insurers will have coal restrictions and exclusions in place. For some, this may involve blanket bans whilst for many the restrictions may relate to the proportion of the organisation’s revenue generated by coal. “Even for those that don’t have restrictions in place, supporting coal projects, and controversial oil and gas exploration (e.g., oil sands and arctic exploration) may create a negative reputational impact,” it warned.
This could create some awkward questions for insurers from ESG-minded shareholders, especially if companies had previously said they will pour money into renewables.
“We may also see re-commissioning or extensions to
the operational life of nuclear plants.”
“We may also see re-commissioning or extensions to the operational life of nuclear plants, an area where several barriers exist to limit insurance capacity expansion: largely stemming from the low frequency but high severity of claims, despite the strong safety and performance records of the nuclear industry,” the report said.
It continued, saying there is likely to be increased demand in the midstream and downstream energy sectors.
“Particularly for construction phase projects, to develop the infrastructure to support new supply routes,” it said. New supply routes may come from US shale, the Middle East and North Africa, historically embargoed nations such as Venezuela and Iran, or Liquified Natural Gas (LNG) from areas such as the US, Qatar and the UAE or Australia. “The complex cryogenic equipment involved across the LNG supply chain may result in large insured exposures and therefore a cautious approach is often taken by (re)insurer.”
The report said there is a compelling impetus for the insurance industry to give further action due to its status as an “industry that addresses customers’ short-term critical needs as well as equally important long-term objectives.”
It also highlighted the need for insurance to modernise and become better at working with unexpected actions in the market, such as cyber-attacks on areas it invests in, which has been highlighted in Europe in recent weeks. “While impossible to know exactly what issues will emerge, early examples include the growth of technology and infrastructure to support the increased demand for renewable energy,” it said.
The report reiterated that insurers’ long-term strategies would need to be monitored closely as the market remained volatile and key elements might need to be changed.
