The Russian National Reinsurance Company (RNRC): Systemic risk to Putin’s Russia or driver of its war economy

State involvement in the reinsurance sector is far from unprecedented. However, a growing trend in the face of Western sanctions is that the state is more than a backstop; it is the entire reinsurance industry. In 2016, in response to Western sanctions following the 2014 annexation of Crimea and military intervention in the Donbas, the state-owned Russian National Reinsurance Company (RNRC) was formed. While originally operating in a specialist role of providing reinsurance to entities and individuals who couldn’t find cover due to Western sanctions, the RNRC’s role was transformed in 2022 following Russia's full-scale invasion of Ukraine. As access to Western capital and reinsurance markets dried up overnight, the RNRC became the sole viable provider of reinsurance in Russia and gained a functional monopoly.

This dominance was further consolidated by legislation in 2022 prohibiting Russian insurance firms from entering reinsurance contracts with firms or brokers from unfriendly states. Essentially, this made the Russian state a backstop for the entire Russian insurance market via the RNRC. While we can look to examples of state intervention in reinsurance markets for hard-to (re)insure or particularly large risks, e.g., Pool Re in the UK, the scale of what is required in Russia is staggering.

However, the RNRC’s monopolisation of the Russian domestic reinsurance market is a rational extension of what has long been seen elsewhere, namely, the state providing coverage for risks that cannot be met elsewhere. Indeed, this model of state reinsurance of an entire domestic market, as embodied by the RNRC post-2022, is far from unique to Russia. Iran established a similar state reinsurance system in the face of Western sanctions in the 2010s. Similarly, the dominance of Belarus Re in its fellow post-Soviet neighbour appears to be comparable to the RNRC, albeit operating in a far smaller economy.

Systemic Risk?

Theoretically, the risks of such a model, which consolidates risk in Russia’s insurance system to a single company backed by the Russian state, are substantial. James Farrington, a consultant with Axco, noted that if the RNRC were to fail, ‘it would have a significant chilling [effect or result in paralysis] in the wider [Russian economy] as primary carriers would [realistically] be unable to underwrite risks and there would be a general lack of confidence in the insurance system’. Assessing the prospect of the RNRC collapsing is hindered by the limited information available on Russian financial stability since 2022. Despite this, it can be assumed that short of the exhaustion of its fiscal reserves, Moscow will carry on propping up Russia’s insurance system indefinitely, given that the RNRC appears too big to fail in terms of the Russian economy.

Despite our assumption that the Russian state would have to face fiscal collapse for the RNRC to fail, two potential risk scenarios should be noted. Firstly, the Central Bank of Russia’s (CBR) commitments elsewhere in the Russian economy mean that it cannot be ruled out that in the event of fiscal stress, the CBR would deprioritise the RNRC.

Alternatively, the RNRC could be threatened by a systemic loss hitting the Russian insurance market. Loss events that have taken place since 2022 have been mainly containable. Economic damage from the IS-KP attack on Moscow in March 2024 was estimated to be around RUB 10bn (USD 108mn), with the likely amount of insured losses to be significantly lower. Flooding seen across Central Russia in 2024 also likely presented a significant but containable cost to the RNRC. A greater risk in the medium term is Ukrainian missile and drone strikes in western Russia. This has reportedly resulted in property, terrorism and sabotage insurance rates rising significantly for firms operating in border regions with Ukraine. This trend is likely to continue given Kyiv views its strike campaign as a means to increase the costs of the conflict on Russia’s home front to achieve a favourable resolution of the conflict. However, while the prospect of a systemic loss event remains a risk, the RNRC model of state reinsurance is likely sustainable as long as the wider Russian state remains fiscally stable.

Revenue Generator?

Theoretically, a major constraint on the RNRC’s operations is its low capitalisation relative to responsibilities. In 2022, the CBR moved to increase the capitalisation of the RNRC to RUB 300bn (compared to previous levels of RUB 71bn), as well as RUB 750bn in terms of guaranteed capital. While this marked a significant increase, such levels were dwarfed by comparable reinsurance firms found elsewhere in the world. Reporting at that time focused on the unsustainability of such a system, noting that the RNRC’s capital was likely to be quickly exhausted. By this reading, the Russian state’s role in propping up the insurance sector acts as another strain on Russian finances, which are already pressured by the demands of war, lower hydrocarbon revenues, and other sanctions.

Despite this, while the RNRC may have continued to be propped up by the CBR, there has been no further indication of increases in its capitalisation, indicating that the RNRC has not required further liquidity since 2022. Part of the reason is likely the relative size of the Russian insurance market. In 2020, Russia’s general insurance market was estimated to hold premiums at RUB 1.6trn (USD 17.8bn - Axco Insurance Information Services), the 21^st largest in the world. While dwarfed by the size of Western reinsurance and insurance firms in terms of capital, the CBR’s present level of liquidity may have proven sustainable relative to the size of Russia’s insurance sector.

The likely explanation for the lack of further increases to the RNRC’s capitalisation and why Moscow’s model of state reinsurance has proven viable is the RNRC’s system of compulsory cessations. This entails that all insurance and reinsurance contracts agreed in the Russian market require a 50% cessation to the RNRC (10% prior to 2022).

Reporting indicates that the establishment of the RNRC was opposed by the Russian insurance sector in the mid-2010s, primarily because of this requirement. Consequently, while the Russian state has theoretically exposed itself to sizable systemic risks by backstopping the Russian economy, it has also likely increased its revenue from the sector (given its monopoly post-2022) with this system of compulsory cessation acting as de facto taxation. Conversely, the RNRC’s increased scope may be a net positive for the Russian state’s fiscal stability. This counters the conventional view that states, in taking on a backstop role in the reinsurance sector, would be forced to balance fiscal pressures when taking on risks in the economy.

A Russian Model?

Looking forward, the RNRC demonstrates that states with sufficient fiscal firepower facing geopolitical constraints (including in the West) can swiftly reformat their domestic insurance sector and even raise revenue to meet near-term policy goals.

Much like the CBR, the RNRC is a tool of geo-economic warfare, enabling Moscow to pursue politico-strategic goals via economic means. Due to its priorities differing from those of a conventional firm in the reinsurance space, it is willing to take on greater risks than would be considered acceptable by the private sector. This can be seen in the RNRC’s actions internationally, with it having a pivotal role in enabling the activities of Russia’s so-called “shadow fleet”, which aims to bypass the Western oil price cap on Russia (whereby Western Insurers cannot provide cover for ships transporting Russian oil above USD 60 per barrel).

Such a system, however, comes with challenges. A firm operating in the insurance sector that prioritises geopolitical imperatives would likely be at more risk of poor decision-making by conventional metrics. A further key risk concerns the reliance on state-backed reinsurance, depressing foreign investment into Russia.

In short, given heightened political risks (e.g. expropriation), being reliant on a reinsurance contract effectively guaranteed by the Russian state might do little to act as a viable guarantee. This is compounded by the unwillingness of insurers in “friendly” states (India, China, or central Asian states etc.) to reinsure in the Russian market. The prohibitively high levels of compulsory cessation required by the RNRC will also likely prove a severe constraint on the growth of the Russian insurance market.

Despite this, the RNRC’s emergence to monopolise the Russian domestic market is a significant development countering the trend for liberalisation of the reinsurance sector (which has largely proven the global trajectory of travel). Moscow was behind the establishment of a similar model in the Eurasian Reinsurance Company (ERC) in October 2022, which sought to facilitate trade in the Russian-dominated Eurasian Economic Union (EEU) by reinsuring export credits and investments against business and political risks. This entity, funded by financial contributions from EEU states totalling RUB 15bn (USD 213mn), will likely require significantly greater financial support to prove an effective alternative in the bloc. Despite this, it provides a further case study of Moscow attempting to utilise state resources to establish a system of international insurance not dependent on the West.

Given the tendency of Western governments to use insurance to enforce sanctions against geopolitical rivals, it could be assumed that the RNRC may present a case study for fellow states seeking to challenge the West. China, a state with a larger economy and financial reserves than Russia, would almost certainly be able to use state mechanisms to provide alternative sources of coverage for reinsurance in the face of any escalation of Western sanctions.