The insurance industry is facing a myriad of political risk and trade credit claims — and a potential multibillion-dollar bill — as a result of Russia's invasion of Ukraine.

The market's nominal headline exposure is in "single figure billions rather than millions of dollars" for Russia, although it is "impossible to comment reliably at this stage," said Bernie de Haldevang, head of credit, political risk and crisis management at Lloyd's insurer Canopius Group Ltd.

Claims could come from a variety of coverages, de Haldevang said, but four main areas will be affected: war cover, including physical damage and business interruption; "pure" political risk covers, such as confiscation, expropriation, nationalization and deprivation; performance, the risk of nondelivery of goods following payment in advance for future exports; and payment, the risk of a loan not being repaid, are the two other main areas.

A payment-related source of claims would be the failure to pay installments under aircraft leasing arrangements, to which the London market has exposure, de Haldevang said.

Another area of coverage that could be affected is currency inconvertibility, when a client may be unable to convert local currency into Western currency or transfer currency out of the country, Laura Burns, Willis Towers Watson PLC's political risk product leader for North America, said in an interview. Forced divestiture, in which a government requires investors to divest their investment in that country, also could result in claims.

Now that the U.S. and other Western countries have decided to freeze the assets of Russia and Russian companies, the door is open for similar moves against Western individuals and companies, Burns said. She referred to a Feb. 26 interview by former Russian President Dmitry Medvedev, now deputy chairman of the Russian Security Council.

"[Medvedev said] they would freeze the assets of Western individuals and companies and possibly nationalize the assets of foreign companies," Burns said. "So, it's conceivable that Western and American companies could find themselves in a situation whereby their assets or their subsidiaries are taken."

Medvedev went further in a post to Facebook on March 10, threatening businesses that have decided to leave Russia. He said the Russian government is working on measures that include nationalizing the property of those companies.

He also wrote that "foreign companies should understand that returning to our market will be difficult," which he said was the case in the wake of sanctions from Russia's annexation of Crimea in 2014.

Underwriters had been modeling a number of scenarios in anticipation of the crisis, but many had not anticipated one that involved a full-on Russian invasion, Burns said.

"The underwriters are very responsible in the sense that they are always monitoring their aggregation to every country, so, in that sense, they're well-positioned," Burns said. "[However,] I would imagine that this full-invasion scenario was one of the more unlikely scenarios they were probably modeling."

Even so, the market is well reserved overall for its political risk and trade credit exposures from the war, de Haldevang said. He noted, however, that some insurers would be more exposed than others depending on market share and focus.

"While clearly the potential exists for substantial losses, the market is sufficiently solvent to accept them," he said. "The credit and political risk market is only a small fraction of a diversified market and rarely correlates with the [property and casualty] market's core risk areas."

Exclusions could limit insurers' exposure to political risk and credit coverage. Three relevant exclusions apply, according to de Haldevang: the so-called five powers clause, which voids cover in the event of a war between any of China, France, Russia, the U.K. or the U.S.; a nuclear exclusion; and a war exclusion for political violence and terrorism covers where war cover was not agreed to or required.

Reinsurance may also come into play. Some of the political and sovereign risk losses "will likely ultimately be ceded to global reinsurers," according to a March 3 report by Moody's rating agency. However, it noted that the size of the political risk insurance market in Ukraine and Russia is difficult to determine but "likely very small."

On trade credit, Moody's said insurers generally have moderate exposure to central and eastern Europe, and war exclusions in some policies could further limit exposure. Moody's added that insurers could cut their exposure to Russia and Ukraine "quite rapidly" because of their ability to reduce coverage limits on buyers in countries or sectors they consider higher risk.

Insurers should also be prepared to consider the risk that could be generated by further military action by Russian President Vladimir Putin, which could include moves into Moldova, Georgia, Azerbaijan or Central Asia, Burns said.