For many people, globalisation used to mean seeing the same retail brands in shopping centres in the world’s capital cities. But it was always far more than that. The invasion of Ukraine may spell the beginning of the end for globalisation and that could impact insurers in Asia Pacific profoundly.
Globalisation was never really a concept that was much in evidence at the retail end of financial services – either in insurance or banking – although there are some insurers and reinsurers that boast global footprints at the corporate and wholesale end of the spectrum.
It seems possible that recent events following Russia President Vladimir Putin’s invasion of Ukraine might bring a serious review of any further moves towards globalisation in the insurance industry as businesses witnessed the rapidity with which Russia became isolated, ostracised and locked out of most world markets.
Exposure to Russian assets
It is estimated that non-Russian investors – many of them institutional - hold a total of about $170bn of Russian assets and are facing big losses on them as the market for them dries up.
According to the Russian central bank, foreign investors held a total of $57bn of Russian sovereign debt at the end of 2021 – $20bn of which was dollar denominated and $37bn rouble denominated.
Institutional insurance investors in Asia Pacific will have some exposure to this debt – which is likely to trade at a fraction of its face value following the invasion – although the exposure may be manageable.
In early March S&P said, “Many global and regional reinsurers have exposure to Russia, as well as some industrial line writers. As of now, S&P believes global reinsurers’ exposure is very limited, in most cases less than 1% of assets and existing liabilities, in some cases even less than 0.1%.”
From an underwriting perspective, S&P said, “Some primary insurers such as Allianz, Axa and Uniqa have operations in Russia. S&P believes that for most of these insurers, asset and insurance liability exposure is less than 2% of total adjusted capital or below 1% of total assets and liabilities, or both.”
As Russian banks face sanctions and removal from SWIFT - and as Mastercard, Visa and Paypal remove Russia from their payment networks - the nation is becoming largely decoupled from most other large financial markets.
The list of global brands that have ditched Russia is a long one.
The speed with which this has all happened could give institutional asset managers pause to reconsider their exposure to any nation with an elevated political risk rating. Many will have one set of investment strategies for emerging markets and another set for frontier markets. When a former emerging market reverts to being a frontier market after a war, asset reallocation would be the most probable outcome.
Recent events could also cause some national leaders to reconsider how exposed they would be if they found themselves at the wrong end of sanctions – and undertake emergency planning to ensure that they could ‘keep the lights on’ if they, too, were swiftly removed from global finance and commerce platforms.
Insulated and isolated
The recent moves against Russia in response to its behaviour in invading a neighbouring democracy coincide with China identifying ‘self-reliance’ as its top economic priority, according to the South China Morning post.
In recent weeks, State Council of the People’s Republic of China Premier Li Keqiang announced new incentives to encourage innovation, technology and to secure industrial supply chains to make the Chinese economy more robust.
The espoused goal seems to be aimed at building a nation that is entirely self-sufficient – and not reliant on other counties for capital, currency or commerce.
This is in keeping with the ‘prosperity for all’ mantra that China has been declaiming recently and leaves it unclear where foreign players – including foreign insurers and reinsurers - will fit in a fully self-reliant China.
The reality is that they might not fit at all - and this could have significant implications for all insurance, reinsurance and broking groups presently active in China and hoping to benefit from the nation’s continued growth. As the reality emerges of what ‘self-reliance’ means in practice, the China hopes of global reinsurers and insurers may come up for review.
According to a report from Reuters, following the invasion of Ukraine, the Chinese regulator asked state insurers to review their exposure to both Russia and Ukraine.
According to Reuters, “One of the regulatory authorities has asked a state-owned insurer to ‘urgently’ check and report projects ‘involved in dealings between Ukraine and Russia’.”
“It was not immediately clear what action Beijing will take after the insurance companies have performed the reviews,” Reuters said. “State insurers’ exposure to debts of Russian state-owned enterprises or sovereign debt, and sensitive industries such as oil and gas, coal mining or processing should also be reported,” according to the Reuters report.
Winners and losers
Which countries in Asia Pacific are best placed to benefit from China’s increasing self-reliance?
Simply in terms of scale, India would have to be top of the list – although its leadership’s decision to refuse to sanction Russia over the invasion of Ukraine is unlikely to count in its favour. Likewise, Pakistan’s tacit support for Russia following prime minister Imran Khan’s trip to Moscow after the start of the invasion could leave investors and suppliers with grave political risk doubts.
Most corporates these days – and particularly those that consider themselves to be ‘household names’ in the financial services arena – have pushed ESG concerns to the top of their agendas for reasons of pragmatism as well as good business sense. This means that every decision the CEO and the board take must be analysed through an ESG prism.
Ramping up investment or business in a market that was seen to vacillate over one of the biggest issues of the century could prove to be a ‘risk too far’ for many ESG-focused insurance and reinsurance groups – and so India and Pakistan might move down the pecking order in favour of other markets of scale such as the Philippines and Indonesia.
After the Ukraine invasion, the Philippines Department of Foreign Affairs issued a statement that said, “The Philippines votes Yes to the UNGA resolution and expresses explicit condemnation of the invasion of Ukraine … The principle of sovereignty and the sovereign equality of states is enshrined in the UN charter. All states enjoy the right to full sovereignty in all their areas of jurisdiction ... We especially condemn the use of separatism and secession as a weapon of diplomacy for inviting and inflicting terrible cruelties and indiscriminate killings far in excess of that of any other kind of conflict.”
Indonesia foreign minister Retno Marsudi made the nation’s stance clear when she said, “Indonesia’s foreign policy has always been consistent when it comes to the implementation of international law, and the United Nations Charter, including respect for territorial integrity and respect for sovereignty. This principle must be respected by all countries.”
Both Japan and South Korea have said they will join in international economic sanctions against Russia while Taiwan is also joining sanctions, including the SWIFT ban. A