It has been warned that up to £200 million in reinsurance business may be lost by Western reinsurers if further sanctions against Russia limit the international trade of its market leader, Sogaz. If Sogaz was restrained from continuing its present practice of placing reinsurance internationally, this would impact Lloyd’s, Scor, Swiss Re, Hanover Re and Munich Re, amongst others.

Such news must be appreciated in the context of existing sanctions, diminishing oil prices and potential recession in Russia, all of which pose a significant threat to Russia’s insurance industry. Major reinsurers across the globe are located in jurisdictions which have imposed sanctions against Russia.

Sogaz holds an approximate 10% market share in Russia and purchases reinsurance from Lloyd’s and other Western market companies. Out of all of Russia’s insurers, Sogaz might be the worst affected by the sanctions – we note that two of its shareholders currently feature on the list of sanctioned companies.

Following targeted US sanctions last year, the former majority-owner, Bank Rossiya was reduced to a minority shareholder. In addition, 16% of shares previously owned by Abros were sold to Gazprom, the effect of which is that less than 50% of Sogaz is owned by sanctioned companies. It remains a possibility that Sogaz could fall within the purview of further sanctions yet to be imposed, leading to millions in lost reinsurance revenue for Western reinsurers.

An analyst at Equity Development, John Borgas, has stated, “Reinsurance in the Western market of Russian mega-risks is currently essential since the sum at risk for a few of them exceeds the total capital and reserves of the top 10 Russian-owned insurers”.

Borgas highlights that Western reinsurance is essential for risks such as Russian aviation, spacecraft, nuclear power and major oilfields. Western reinsurers made a profit of 11 billion rouble from Sogaz in 2013. If this business were lost, this might result in approximately a £30 million drop in profits of each of the major reinsurers that write the risks.

However, if an alternative Russian insurer, which was not subject to sanctions, were to write the primary risks rather than Sogaz, this business could be retained. It may be the suggestion of sanctioning Sogaz that has prompted the discussions recently initiated by the Central Bank of Russia about a state-owned reinsurer.

It seems likely that any further hostile international action from the Russian government will increase the prospect of additional sanctions.