Russian gas cut-off would be uninsured - Fitch

The insurance sector is not materially exposed to the business interruption (BI) losses that could arise due to a cut-off in Russian gas supplies to Europe, Fitch Ratings says.

BI insurance policies typically only cover losses resulting from physical damage to business premises or production facilities. They do not cover losses caused by a supplier’s failure to deliver raw materials or the energy needed for a business to operate.

Businesses suffering losses due to a Russian gas cut-off may be able to claim under political risk insurance policies. However, the rating agency does not expect such claims to be straightforward as the policy wording is likely to be restrictive and it could be difficult for claimants to successfully contest claims rejected on the grounds of wording.

More importantly for the insurance sector as a whole, Fitch does not believe there is significant use of political risk insurance that could apply in the specific case of a Russian gas cut-off.

European businesses could also be disrupted by government-led rationing of gas in anticipation of lower supplies from Russia, but losses resulting from this would not be covered by insurance. Instead, governments may provide some support to the businesses affected.

Indirect losses

A gas cut-off could indirectly lead to more insurance claims. Factory shutdowns could lead to more claims due to industrial machinery breakdowns. However, we would not expect claims indirectly linked to a gas cut-off to have a material impact on insurers’ profits.

The insurance sector, like the wider economy, could be affected by the negative macroeconomic impact of a gas cut-off. Slower economic growth or a fall in GDP and even higher inflation would put pressure on households’ disposable income, leading to lower demand for insurance products.

Some Central and Eastern European economies are among the more vulnerable, although some western European countries, notably Germany, would also be significantly affected by a cut-off.

The limited scope of BI insurance was highlighted in 2020-2021, when many businesses were disrupted by pandemic-related restrictions. The resulting losses were typically not covered by BI policies as the contract wording was designed to limit cover to BI losses due to property damage, and often specifically excluded BI losses due to infectious diseases.

However, the precise wording can be crucial, and loose wording can expose insurers to making unexpected pay-outs if courts rule in favour of claimants.