11th May 2022
Our colleagues Nikhil Gandesha from Sionic and Natalie Larnder from our Legal Solutions team consider the impact of the sanctions against Russia on the insurance industry.
Economic sanctions on Russia have been enacted at speed covering financial institutions, entities and individuals, ports, vessels and goods that can be classified as ‘dual use’. What is unique about these sanctions is the speed at which they have been enacted, and the wide range of sanctioning entities involved. While it was widely expected that the US, UK and EU would act, South Korea, Singapore, Switzerland, Canada, Japan, Taiwan, Australia and New Zealand are all also incorporating some kind of sanctions against Russia.
The challenge now for financial institutions globally is to ensure that their sanctions and AML programmes are sufficiently robust, to ensure effective compliance in this rapidly evolving landscape. For the insurance industry this may cause loss of business and trigger loss claims. Some of the sanctions are directly aimed at blocking Russian entities and interests from accessing global insurance markets, and many other restrictions may affect insurers’ business.
The pace of change will be a challenge for the industry and will render companies unable to insure a sanctioned person or reinsure a sanctioned insurer, irrespective of the type of business. While keeping tabs on sanctions as business as usual will continue to be a challenge.
Premiums and the payment of claims through sanctioned banks, even if the business is otherwise allowable, will limit the ability to receive premiums and pay claims. The ban on access to the Swift payment network itself could trigger insurance claims. One affected area is trade credit insurance, which covers companies that have sold goods and services on credit for the risk of buyers not paying.
It is sometimes tempting to de-risk immediately, and in some cases that will be the most appropriate course of action. But at this stage the key is effective and accurate list management. It’s critical that firms understand the potential operational impact of maintaining potentially daily updates to numerous screening lists, whether that is to ensure the list provider is sending good quality data, ensuring lists are fit for purpose or taking a risk-based approach to list management to support effectiveness and efficiency of sanctions screening.
AML and Risk assessments
In the medium term, understanding the firm’s overall exposure to potential sanctions risk will be crucial, especially where firms have a multi-jurisdictional presence. Sanctions evasion relies on many traditional money laundering techniques, making it imperative to conduct an overall AML Risk Assessment with Russian sanctions as a trigger event. And that means looking at the key drivers of inherent risk through the lens of sanctions on Russia, then using that output to evaluate and act on the effectiveness of your controls and residual risk.
Acquired last year, and now forming part of our Consulting division, Sionic is a global consulting firm specialising in financial services. They have expertise across banking, asset and investment management, financial markets infrastructure, wealth management, insurance and reinsurance. Set up to offer a unique blend of subject matter expertise, senior industry experience and specialism in six core areas: business strategy, operational excellence and improvement, technology transformation and digitisation, international regulatory compliance, risk, finance and control, leadership, talent and cultural transformation and change. Sionic’s main offices are in New Jersey, Toronto and London and they have 340+ staff based across North America, Europe and Asia.
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