Heightened geopolitical tensions spilling over from the Russia-Ukraine crisis, high interest and inflation rates, and low commodity prices are placing pressure on Russia’s economy and its insurance industry’s prospective growth, according to an A.M. Best special report.
A.M. Best believes the sudden and material increase in interest rates could adversely affect insurers’ balance sheets, impacting the value of investments and surplus capital.
In the special report, titled, “Insurers’ Prospective Growth Dampened by Geopolitical Conditions,” A.M. Best notes that despite the current level of interest rates, A.M. Best-rated entities currently remain sufficiently capitalized to absorb the impact of a high interest-rate scenario.
These rated entities are currently able to absorb the impact of investment losses arising from the devaluation of their fixed-income portfolios due to their high risk-based capital and surplus base, the report said. For the wider Russian insurance market, companies are likely to experience losses, temporary or permanent, on their fixed-income portfolios as a result of the high interest rates, as investments tend to be concentrated in Russian bonds or other fixed-income securities.
Deniese Imoukhuede, associate director, analytics, said: “In general, Russian insurers tend to maintain low levels of capital relative to their underwriting exposures. Given their high underwriting leverage relative to capital, A.M. Best expects further pressures on balance sheet strength should interest rates increase further.”
The report also states that with the potential for further sanctions, uncertainty exists regarding the withdrawal of international reinsurance capacity that originates from Western markets, which supports underwriting in Russia.
Yvette Essen, director, industry research – Europe & Emerging Markets, added: “This particularly affects high-value risks associated with infrastructure projects, which are important for supporting Russia’s economic growth. The implications of a withdrawal of international capacity could contribute to the contraction of Russia’s insurance sector due to the absence of a suitable alternative to support the industry’s underwriting exposures.”
Source: A.M. Best Company
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