The New Risk Landscape

Russia’s invasion of Ukraine has caused both catastrophic local harm and unpredictable shocks to regional and international systems. Price inflation and shortages for food and energy are two examples of exponential risks arising from the conflict.

FOOD SECURITY

Prior to the war in Ukraine, Covid-19 and low probability weather events had already caused food price inflation. The conflict has only pushed food prices up further, since Russia and Ukraine are among the largest producers of grains globally, which has added to global inflationary pressures in 2022. Previous increases in the FAO World Food Price Index have correlated with profound social unrest and political instability. ^{2, 3}

ENERGY SECURITY

Russia has drastically reduced gas flows into Europe, with some pipelines operating at 20% capacity.⁴ Although most countries are well placed to avoid significant energy rationing, individuals and companies alike would feel the inflationary and negative growth effects of a European gas supply shock. While there are limits, companies that are more diversified geographically or by product, or better able to quickly pass costs through to customers, are better able to preserve their credit quality.

Source
2 Prolonged high inflation would hurt debt affordability, raise social risk – MIS, April 25, 2022
3 MIS Global Trade Monitor – September 2022
4 MIS - Looming gas crisis intensifies credit pressures for Europe’s most exposed sovereigns – August 2022

Hurricane Ian in 2022 was one of the costliest catastrophe events in U.S. history with private market insured losses of up to $67 billion.⁵ Insurance policies in Florida increasingly include a high wind damage deductible and much of the flood damage was not insured at all due to the unprecedented inland reach of high water — so more of the repair costs than ever will fall on individual home and business owners.

Against the backdrop of Covid-19, construction costs have jumped since 2020 with the price of lumber up 240% and steel up 50%. And Assignment of Benefit (AOB) issues are pushing up insurance claim costs by up to 3x — and potentially even 100x if the claim goes straight to litigation. It all adds up to significant financial strain, as a single weather event collides with long-term inflationary trends.

Source
5 Inflationary Trends in Construction Costs and Nat Cat Losses in Recent Events: RMS Whitepaper – May 2022