What is the impact of the war in Ukraine on Credit Insurance?
As the war in Ukraine goes on, the human and economic tolls continue to rise. With world leaders responding by imposing sanctions, the impact has been felt across the globe. What does this mean for the credit insurance industry?
Governments around the world have acted swiftly to the war in Ukraine with humanitarian and economic support, and robust sanctions against Russia. Not only are soaring oil prices hitting hard, but the world also faces a food crisis. How does this impact credit insurance in the short and long term?
A hurdle for economic recovery
The war in Ukraine has brought back uncertainty to financial markets, impacting significantly on the global economy. Markets fell sharply and the prices of oil, gas, metals, and food rose dramatically, sending global shockwaves and leaving many economies vulnerable to inflation and unrest.
Credit insurers made swift changes, facing rising claims from existing business. Most have withdrawn support for new business in Russia and Ukraine. Many are also looking further afield at how other countries might be affected in future and are reassessing risk accordingly.
Responding to rising energy costs
Cutting off the world’s second largest oil producer from global supply chains means that the price of oil is sitting at its highest in more than a decade. With oil prices central to growth and inflation, the global economy is feeling the impact, with surging energy and commodity prices, and further disruptions to supply chains.
Russia provides around 35% of Europe’s natural gas consumption, and there are not enough other sources to offset this amount.
This could trigger an increase in support for renewables, and a more urgent transition away from fossil fuels. Many European governments are already trying to reduce their dependence on Russian energy, and this may accelerate. Not only would this create more sustainable energy sources, but also a way to diversify future supply risks. For Export Credit Agencies (ECAs), it’s a critical time to provide support for renewables transitions.
Food security in jeopardy
A major agriculture supplier to the rest of the world, Ukraine faces a sharp reduction in harvest and exports this season. If Ukraine can’t harvest its wheat in July or export it due to damaged ports, critical supply is at risk.
40% of wheat and corn exports from Ukraine go to the Middle East and Africa, where there are existing severe hunger issues. Countries who already struggle to feed their populations will be the hardest hit, with the World Food Programme warning the war could cause a surge in hunger.
With wheat prices rising by over 40% since the start of 2022, there is a critical need for agricultural self-sufficiency. Several African nations are working proactively to improve food security, supporting the growth of micro businesses and SME’s. ECAs can play a vital role with domestic financing, and the food crisis gives them even more reason to do so.
Trade Credit in times of conflict
The war in Ukraine is not the first time we have seen the importance of ECAs during conflict, with examples through history. The first ECA, UK Export Finance was established to help companies to trade and grow in post WWI Britain.
During the Second World War, Credit insurer Société Française d'Assurance Crédit, created an export guarantee division, to support the survival of business activity in France. In 1946 once the war was over, this division was separated and is now known as Coface. The post WWII era saw many governments establishing ECAs, as political risk became an inherent part of international trade.
The impact of the war in Ukraine on global trade is complex. With private insurers viewing risks as too high, companies must rely more on their ECA. Credit Insurers must respond not only to acute issues but with an eye on the future and how they can support sustainability and self-sufficiency.
An interview with Marc Meyer, Tinubu's Senior Vice President and Subject Matter Expert in insurance.
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