How the war in Ukraine affects the global insurance sector
Oleg Parashchak, General Director of Finance Media, Editor-in-Chief of Insurance TOP, Forinsurer, Beinsure Media.
The last two years are the most difficult years in recent decades in terms of the social, financial and political environment. After Russia’s invasion of Ukraine, the long-term impact of the war became apparent. The war forced many multinational corporations and financial and insurance groups to withdraw or cut business ties with the aggressor country and triggered a wide array of international sanctions. Now the main focus has shifted from specific events in Ukraine to economic inflation around the world and the destruction of the geopolitical order.
Businesses and governments should not ignore the indirect consequences of the Russian-Ukrainian war, which may continue for a long time. This includes continued risk arising from a large number of new economic, financial and trade sanctions; the global impact caused by reduced availability of key commodities such as oil, fertilizer and grain; and potential insurance claims that would arise as a result of the war.
While the media is currently focusing on aviation and sea shipments of Ukrainian grain, the sanctions have affected a wide range of goods and services supplied to Russia. Companies should be aware of regular changes to sanctions, differences in sanctions regimes between the EU, the UK and the US, as well as other countries joining the effort, such as Singapore, Australia and Canada. This makes it difficult for international companies to determine what sanctions may apply in the different countries in which they operate.
When the war in Ukraine broke out in February, it further added to global inflation and pressure on supply chains, causing prices to jump for a wide range of goods, including energy, food and construction materials, analysts said.
Settlement of losses under aviation, energy, marine, political risk and commercial credit insurance contracts usually takes time. Analysts predict that the volume of insurance payments related to the consequences of war will increase, although everything will depend on the terms of insurance contracts.
We propose to consider new business risks that have appeared as a result of war and various political conflicts, which also affects the global insurance market.
The core business of the insurance industry suffered from the effects of the war from the very beginning. First there was the withdrawal of “Western” reinsurers from the Russian market, then the self-isolation of the Russian insurance market and the cessation of cross-border payments due to the declaration of martial law in Ukraine. Both markets were thus isolated, but insurance coverage was still available locally, albeit with much reduced capacity, particularly in Ukraine.
Marine insurance and international sanctions
The significant increase in sanctions and trade controls against Russia affects a wide range of goods shipped to and from Russia. The EU, the UK and some other countries have also banned export and import financing and insurance. Differences between the sanctions regimes of different countries have added an additional level of complexity and risk to doing business internationally.
It should also be noted that in recent years the US and UK regulators have turned their attention to the marine insurance industry to increase their monitoring of ships and the goods they insure in order to identify ships that may be related to sanctioned owners or involved in sanctions evasion.
For now, all types of marine insurance remain relatively stable, international insurers say, both in terms of overall capacity and pricing, with the exception of increased hull and cargo war rates.
Companies operating internationally need to consider not only the sanctions that apply to them, but also how local sanctions may apply to other parties in their supply chain and may affect their business, as well as their banks, creditors and insurers .
Damage to ship hulls, ports and cargoes leads to damage to Ukrainian ports. In particular, the insurance protection of ground transit of goods in Ukraine has not been effective since the beginning of the war.
Global cargo supply chains and the flow of goods may face further disruptions, both as a direct result of military action in Ukraine and indirectly through sanctions and a tightening of the insurance market, international insurers say.
Military risks are not covered, but under “separate” international agreements, insurers and reinsurers provide limited insurance coverage. Thus, at the end of December, the underwriter Lloyd’s of London Ascot announced that cargo insurance, which provides insurance coverage for deliveries through the Ukrainian grain export corridor, will take place in 2023 without an increase in insurance tariffs. However, due to the war in Ukraine, natural disasters and high inflation, insurance rates, according to brokers’ forecasts, will still increase.
At the end of July this year, Marsh general announced the suspension of cargo insurance, which covered Ukrainian cargo transportation of Ukrainian grain through a safe sea route. This was due to the withdrawal of Russia, as a terrorist country, from the internationally supported agreement on the export of Ukrainian grain, which caused concern in the UN about the potential risk of global famine.
The insurance program, led by Ascot and supported by other underwriters, provided coverage of up to $50 million per cargo. Hosted by Marsh and led by Ascot, the Lloyd’s syndicate provided marine cargo and military insurance coverage. This allowed ships carrying grain and other food products from Ukrainian ports to have reliable and affordable cover for their export voyages. According to the terms of the agreement, ships can pass through designated Ukrainian ports through safe access corridors.
Russia’s withdrawal from the grain export agreement has left the sea route uncertain and significantly increased the risks associated with transporting cargo. Insurance coverage was critical to protecting cargo through the secure corridor. “However, there is an expectation that insurance coverage will continue, even though it can be very expensive,” said Marcus Baker, Marsh’s global head of marine and cargo.
Existing limits on military risk insurance are already significant and are expected to increase. This factor may make shipowners hesitate to allow their vessels to enter the war zone without Russia’s consent. In addition, floating mines in the region pose an additional risk to shipping.
If we compare the current situation with three to four weeks ago, it is clear that the entire region has become more dangerous, reinsurers say.
Now Ukraine is again actively negotiating with international participants in the insurance market. On the part of Ukraine, part of the risk will most likely be supported through the state road fund of the country, created for the repair of Ukrainian roads. The Ministry of Development of Communities, Territories and Infrastructure of Ukraine has published clarifications regarding the algorithm for insurance of vessels bound for Ukrainian seaports.
The Cabinet of Ministers approved the Procedure for providing guarantees for compensation for damage caused to charterers, operators and/or owners of sea vessels and inland navigation vessels as a result of the armed aggression of the Russian Federation. This applies to vessels under Ukrainian and foreign flags (except Russia and Belarus).
The insurance compensation mechanism will allow shipowners and charterers to ensure the entry of ships to the ports of Ukraine, regardless of whether the grain agreement works.
Aviation and space insurance
Sanctions by the UK, the EU and others, which prohibit the supply of aircraft or their spare parts to Russia, as well as related financing or insurance, followed by Russia’s expropriation of aircraft leased abroad, have led to many aircraft from international lessors being “expropriated” by the Russian authorities. About 500 planes and engines are stuck in Russia after the US, Britain and the EU imposed a series of sanctions against the Russian government and Russian entities. As part of these sanctions, NATO airspace was closed to aircraft operated by Russia.
Western governments have banned aviation insurance and reinsurance of any aircraft for use in Russia, among other key financial services. In response to these sanctions, the Russian government banned the repatriation of aircraft assets to international lessors, who were required to terminate their leases and demand the return of the aircraft in March 2022.
This has led to significant losses for air insurance companies and was the result of a 200% increase in global rates for air insurance of ships against military risks after the start of the war in Ukraine. In addition, most insurance and reinsurance companies have reviewed their coverage.
Insurers were concerned that reinsurers had excluded all of Ukraine, Russia and the Belarusian region from coverage since January.
According to Marsh, the international aviation insurance market could become “tighter”, further “stressing” the aviation industry as it struggles to recover from the effects of the pandemic.
Aviation and space sanctions have also resulted in international insurance coverage for satellite launches and deployments becoming unavailable for Russian satellites and launch sites in the Russian Federation. In the period from 2017 to 2021, Russia accounted for about 16% of global launches.
The risk of a protracted war in Ukraine will make it even more difficult to resolve insurance claims related to aircraft leasing, which will take years to settle, and experts believe that this will require complex arbitration and court procedures. What lessors will be able to recover from insurers will largely depend on the insurance coverage in place. Lessors are covered by insurance under contracts concluded by airlines, as well as their own contracts covering military and unforeseen risks, if airline policies do not meet these requirements.
Military coverage usually has a clause aboutcancellation within 7 days, which may lead to disputes as to whether the coverage was canceled before it was activated.
Energy and insurance
The energy insurance market is experiencing an immediate impact on premium volume due to sanctions against Russian oil and EU efforts to reduce dependence on Russian energy carriers. As of December 2021, Russia accounted for almost 10% of global oil production. Germany and other EU members, which previously bought Russian natural gas and oil, are trying to build alternative energy sources, including possibly delaying initial plans to phase out coal or renovating existing coal-fired power plants.
EU sanctions, which ban EU companies from insuring any shipments of Russian oil, came into effect in December 2022, causing energy prices to rise even more. Great Britain still holds back a similar ban, limiting partial imports.
One of the key services that ensures the transportation of oil by sea, especially the so-called P&I protection and indemnity insurance, which deals with liability to third parties. The UK is the world leader in P&I insurance, accounting for 60% of global insurance coverage. Lloyd’s has said it will take steps to ensure market participants comply with the UK government’s new rules, which effectively bar countries from obtaining insurance services to transport Russian oil unless it is bought at or below a price set by a Western government. The EU also introduced a ban on insurance for vessels transporting Russian oil.
Changes in the positions of Britain and the EU depend on the outcome of the US attempt to reach an international agreement on limiting the price of oil, which will allow to insure the supply of oil at a certain price.
One of the long-term consequences of the Russian-Ukrainian war is the acceleration of the transition to renewable energy sources.
Liability insurance of top managers
Boards and senior management are vulnerable to “business” influences that can potentially undermine the financial health, continuity and reputation of any company.
Corporate executives and their insurance companies will not be happy that new class action filings for merger and acquisition objections continue to decline. Lawsuits challenging mergers continue and are now typically handled as single-investor state lawsuits to avoid scrutiny from judges who are increasingly conflicted about approving deal terms, including payment of plaintiffs’ attorneys’ fees or fees.
Exit of major insurance players
The war, among other things, signaled a change in the corporate response to events that cause moral and ethical decisions. More than a thousand companies have announced their exit or voluntary curtailment of their activities in Russia, the process of exiting the markets of the aggressor country is long, especially for large network brands, insurance and financial groups.
Some participants of the insurance market have left the Russian market, some are “in the process”. The first action taken by insurers and reinsurers who worked on the market of the Russian Federation after the start of the war was the application of sanctions by limiting insurance and reinsurance coverage of risks, reducing their activities or even exiting the market completely.
The largest reinsurance brokers Marsh McLennan, Willis Towers Watson and Aon left the Russian market immediately after the invasion. In May, Zurich Insurance Group announced that it had agreed to sell its business to 11 Russian members of the division’s team. Under the new owners, the business will operate independently under a different brand.
Reinsurer Munich Re said it supports sanctions against the Russian economy and will not renew existing contracts in Russia and Belarus, while new business has been suspended. French reinsurance company SCOR has announced that its Russian subsidiary has stopped underwriting new business.
Allianz Group has also agreed to sell a majority stake in its Russian operations to Interholding, the owner of Russian insurance company Zetta Insurance, although Allianz will hold a minority stake of 49.9% in the combined company after the deal is completed.
The Dutch insurance group Aegon announced its withdrawal from Russia. From a financial point of view, it can be estimated that the insurance industry has once again proven its resilience, the main global reinsurers are reserving reserves for potential losses arising from Russia’s war of aggression against Ukraine. Moreover, despite very difficult conditions for doing business, representatives of subsidiaries of international groups operating in Ukraine confirmed that they have gradually stabilized their results and activities.
However, global geopolitical instability with wide-ranging macroeconomic implications has more implications for business lines such as political risk, lending and aviation, while the world’s numerous natural disasters and other additional stresses have a much greater impact on insurance and reinsurance than the Russian-Ukrainianyin war
The core business of the insurance industry suffered from the effects of the war from the very beginning. First, there was the withdrawal of “Western” reinsurers from the Russian market, and then the self-isolation of the Russian insurance market and the cessation of cross-border payments due to the declaration of martial law in Ukraine.