The insurance market continues to struggle with Ukraine risk coverage

This article originally appeared in Insurance Day, May 2024.

The ongoing armed conflict in Ukraine has significantly disrupted the insurance sector, resulting in substantial cross-class losses.

This disturbance is acutely felt in the London insurance market, particularly affecting specialty lines such as aviation, marine, trade credit and political risk. Aviation and credit insurance losses predominantly arise from sanctions against Russia and reciprocal measures, while damage to commercial property and infrastructure in Ukraine has led to claims under war or political violence coverage.

Additionally, the conflict has escalated cyber risks, with attacks targeting Ukraine, Russia and other nations, potentially leading to further claims, depending on the specific coverage terms and exclusions.

Despite the magnitude of these challenges, initial industry estimates suggest an overall loss of close to $20.6bn. While significant, this figure is manageable within the global insurance market, akin to losses typically seen in medium-sized natural catastrophes.

It is important to bear in mind the historically low penetration of insurance for residential property and small to medium-sized enterprise assets in Ukraine, which is likely to mean limited claims from these sectors. More importantly, this is because of the common exclusion of war-related damages in standard property insurance policies, a practice dating back to 1936 when war risks on land were deemed “uninsurable” at a meeting at Lloyd’s. This decision was rapidly adopted across the London market and internationally, cementing the war exclusion clause as a standard feature in non-marine policies.

Dynamic concept

Yet the concept of insurability is inherently dynamic. In time, the industry has expanded its coverage capabilities in response to new risks and market demands. However, war risks still pose systemic threats so substantial they often necessitate government involvement when traditional insurance mechanisms fall short. Typically, this involves layered public-private partnerships, with the government acting as the insurer of last resort.

In response to the present crisis, Marsh McLennan has advocated for governmental intervention to establish a state-funded insurance backstop for war risks, aiding in Ukraine’s reconstruction and encouraging the private market’s return. At the 2023 Ukraine Recovery Conference in London, Britain’s prime minister, Rishi Sunak, announced a comprehensive financial package to support this initiative, including the creation of the London Conference Framework for War Risk Insurance, backed by the G7. This framework aims to derisk investments and foster co-operation with commercial insurers to facilitate the rebuilding of Ukraine.

Furthermore, Marsh McLennan has collaborated with the Ukrainian government to launch a data platform that consolidates war-related data. This initiative aims to provide detailed insights for insurers, governments and investors, aiding them in navigating the complexities of war risk and post-conflict investment.

Lack of reinsurance

Despite these developments, the commercial insurance market continues to struggle with providing adequate coverage for Ukrainian risks, particularly as a result of the lack of reinsurance options. Recent discussions by the Lloyd’s Market Association have highlighted the ongoing market challenges and the hesitancy among capital providers and reinsurers to engage with Ukrainian risks, contrasting sharply with some coverage extensions for Israeli exposures.

Amid these complexities, the Financial Stability Council of Ukraine, supported by the World Bank, has adopted plans to implement compulsory war risk insurance, which was first announced by Katerina Rozhkova, first deputy head of the National Bank of Ukraine. At the Finance for Business during War conference in Kyiv, organised by the European Business Association, Rozhkova said the scheme envisages compulsory insurance for specific properties against destruction or damage caused by military actions. The programme is set to involve contributions from both national entities, represented by Ukrainian insurers and a state-backed agency, as well as international reinsurers.

This ambitious initiative will require the enactment of special legislation and efforts to draft the bill will be a global effort engaging the World Bank, the European Commission, the European Bank for Reconstruction and Development and other global partners including reinsurance brokers. Draft legislation is expected by June and the programme is designed to remain operative beyond the cessation of hostilities, reflecting the enduring nature of national security risks.

In light of these initiatives, there is a pressing need for direct dialogue between Ukrainian governmental bodies and the global insurance market to ensure these new frameworks and programmes effectively address the significant and evolving risks posed by the conflict. We trust the commitments made at the London conference will be honoured, aiding in the stabilisation and recovery of Ukraine post-conflict.