Russia-Ukraine war: main insurance activities exposed to risks

The Russia-Ukraine war has a major impact on the insurance business, with several classes of business affected: marine transport, aviation, cyber, credit, supply chain disruption, property and life insurance.

Russia-Ukraine war: Marine transport insurance

guerre ukraineIn view of the value of the capital involved and the damage that may be caused and suffered at sea, recourse to marine hull and cargo transport insurance proved to be essential.

In marine transport, war risks are nowadays considered as exceptional perils which are subject to specific coverages. In contrast, other so-called ordinary risks are covered by a standard policy.

Insurers use two types of standard policies:

  • a policy for marine cargo insurance (Cargo cover) which covers damage to goods, during their transport, loading, unloading or storage (of a maximum of 60 days).
  • a Hull and Machinery cover designed for the coverage of risk of loss and damage to the vessel, its machinery or accessories.

The war risks extension covers political risks, civil commotion, conflicts between nations, Act of State (1), sabotage, vandalism, expropriation, confiscation, piracy, strike, terrorism, insurrection, revolution, ...

This additional coverage is accompanied by special conditions related to navigation or anchorage as well as recommendations and warranties.

Being obliged to react quickly, marine insurers are usually mindful of geopolitical developments. Regions where acts of piracy are frequent, such as the Gulf of Guinea and around the Horn of Africa (the Somali coasts and the Gulf of Aden) are for example considered as "war risk zones".

Ship owners who operate vessels in areas considered as dangerous must declare it to their insurer and pay an additional premium. These dangerous areas are identified in specific lists established by specialized organizations.

As of 6 April 2022, about fifteen regions have been characterized as very dangerous by the Joint Cargo Committee (JCC).

Suite au déclenchement du conflit Russie-Ukraine, le Joint Cargo Committee considère la mer Noire et la mer d’Azov comme des zones de risques accrus, sujettes à la destruction et au pillage des cargaisons.

Following the outbreak of the Russia-Ukraine conflict, the Joint Cargo Committee considers the Black Sea and the Sea of Azov as areas of increased risk, subject to destruction and looting of cargo.

Therefore, ships sailing in Ukrainian and Russian territorial waters (Sea of Azov) are exposed to exceptional risks, hence the requirement to pay additional premiums.

The Joint War Committee (2), another international organization, classified the waters around Russia and Ukraine as a high-risk area on 6 February 2022. In March, the risk zone was extended to the waters of the Romanian and Georgian coasts.

(1) An arbitrary act of a government or head of state or government.
(2) JWC is made up of representatives of Lloyd's and IUA (International Underwriting Association of London) insurance companies.

Russia-Ukraine war: impact on aviation insurance

Hard hit for the past two years by the Covid-19 health crisis, air transport is once again facing headwinds. With the outbreak of the Russia-Ukraine war, aircraft manufacturers, airlines and other aerospace companies are once again facing logistical and financial challenges.

The Russia-Ukraine war situation has resulted in:

  • the grounding of aircraft,
  • the suspension of flights to and from risk areas,
  • the invalidity of insurance contracts,
  • collateral damage due to sanctions against the countries involved,
  • cancellation of aircraft orders. Boeing has already removed 141 aircraft from its order backlog,
  • operational risks generated by sanctions against the invading country,
  • the suspension of spare parts, maintenance and technical support services for airlines in the sanctioned country,
  • the provision of a government bond to allow certain airlines to continue to operate flights to and from risk areas.

Insurers that provide aircraft coverage both on the ground and in the air also face high cumulative risk due to:

  • the no-fly penalties,
  • the decline in premiums,
  • the suspension of air carrier coverage in Ukraine and Russia,
  • the suspension of insurance for flights to and from Russia,
  • legal battles that, due to Western sanctions, will last for years between aircraft leasing companies, insurers and airlines,
  • Russia's seizure of a large fleet of foreign aircraft, that is 500 aircraft with a total value of 13 billion USD,
  • the unprecedented outpour of claims from aircraft lessors. Given the magnitude of the potential losses, insurers are scrambling to terminate coverage.

Having, like all aircraft leasing companies, a specific war risk coverage, AerCap, the largest of them, has already filed a claim with insurers for 3.5 billion USD for more than 100 aircraft stranded in Russia.

According to S&P, in the worst-case scenario, that is if the aircraft are not returned to their owners, the aviation market will suffer a loss of between 6 and 15 billion USD. Analysts at Fitch Ratings predict claims of around 10 billion USD. For Moody's, the bill is likely to reach 11 billion USD, which is much more than the one generated by the events of 11 September 2001.

Lloyd's, scrambling with a net reinsurance bill ranging between 1 and 4 billion USD, would be the most exposed insurer to this loss. In addition to the aircraft hull and third-party liability damages, Lloyd's would have to compensate the confiscation of the aircraft.

Finally, the last estimate is that between 30 and 40% of the losses of the aviation business could be taken over by reinsurers.

Russia-Ukraine war: exposure to cyber-attacks, a rising risk

cyberattaqueFrom a regional event, the Russian-Ukrainian conflict could take on a whole new dimension. It could spiral down into a cyber war, disrupting the world economy, affecting administrations, government institutions, critical infrastructures, and companies. It is not only a question of material damage such as buildings, airports ... but also of destruction of computer software, databases, files, …

It is this cyber war that raises the biggest concerns among insurers today. The occurrence of an extreme event of this type is by nature systemic while the volume of operating losses would be uninsurable.

To counter this hazard, insurers are generalizing restrictive clauses with Lloyd's publishing model clauses excluding the risk of war from its cyber policies while Munich Re is rewording the exclusions of its cyber coverage.

Another concern for insurers is the Covid-19 health crisis, which has highlighted gaps in the wording of insurance contracts. In order to avoid being exposed to claims and lawsuits as they were during the pandemic, insurers are scrutinizing the wording of their contractual documents. They are eliminating existing grey areas in their cyber policies and are not hesitating to reword coverages in a clearer and more unequivocal manner.

The goal is to harmonize industry practices and provide an effective response to such a complex coverage issue.

On the other hand, in 2022, brokers and policyholders are worried about the proliferation of cyber exclusions and limitations.

Another setback for policyholders is that while demand for coverage will increase exponentially in 2022, many insurers and reinsurers will withdraw from this market, causing a capacity crisis. Underwriting cyber risks in 2022 is becoming increasingly difficult.

For the record, in 2021, cyber premiums have more than doubled, amounting to approximately 15 billion USD. As companies increasingly seek to protect themselves against ransomware and computer viruses that could cripple their business, the need for cyber risk insurance has grown.

Russia-Ukraine war: impact on export credit insurance

Export credit insurance protects companies (importers or exporters of goods or services) against non-payment by debtors, such as buyers of foreign goods or recipients of bank financing. It protects their assets and financial interests against monetary losses due to specific political risks.

Export credit insurers generally cover two types of risks:

  • Commercial risk covers unpaid invoices from customers for financial reasons, such as declared insolvency or prolonged failure.
  • The political risk covers non-payment due to events beyond the control of the insured, such as political events (wars, revolutions), natural disasters (earthquakes, hurricanes) or economic difficulties: shortage or restriction of foreign currency. These events prevent the transfer of sums due from one country to another.

portIn terms of risk, trade and financial transactions with Ukraine and Russia are already subject to disruptions and payment defaults. With payment delays in credit insurance policies ranging from 120 to 180 days, the magnitude of the payment defaults will not become apparent for some time.

The concern is mainly about the current contracts. With the exclusion of Russian banks from the international payment system Swift, many transactions are therefore blocked.

In order to adapt to the context of the conflict, credit insurers have changed their position by drastically reducing or even cancelling their coverage, no longer offering coverages for new flows to the region. The current turmoil has also forced most operators to halt their shipments.

Significant financial and economic repercussions are therefore to be feared by any state, territory or entity that has developed a business flow in the regions affected by the war.

These disruptions have triggered:

  • volatility in stock markets, oil prices and commodities,
  • an additional risk of inflation,
  • colossal claims for credit insurers,
  • high freight, marine, land and aviation transport costs,
  • disruptions in banking and investment operations,
  • a loss of Russian import/export contracts,
  • a halt in the production of certain Russian and Ukrainian raw and agricultural materials,
  • suspension of insurance coverage, due to war risk exclusions,
  • the loss of resources and assets for investors, lenders and entrepreneurs who are no longer able to operate,
  • the inability of insurance companies to indemnify transactions covered by Western sanctions, under penalty of fines.

For the record, the political risk and credit market has been shaken for the past two years by the increase in claims related to Covid-19 and by the bankruptcy of some commodity traders.

The most notable bankruptcy is that of the Singaporean oil broker Hin Leong Trading. A victim of the health crisis, it collapsed in 2020, leaving its creditors scrambling with a debt of 4 billion USD.

Read also | War risk insurance

Russia-Ukraine war: impact on property damage insurance

Military strikes and street fighting have caused significant damage to Ukrainian property. Companies with property and political risk coverage will not be automatically compensated.

Since the beginning of the 20th century, property insurance policies, with the exception of marine cargo risks, have generally included a war risk exclusion clause. Insureds should therefore expect to be denied losses and expenses arising from wartime activities.

Russia-Ukraine war: impact on Life and health insurance

War risks are generally excluded from the legal scope of insurance. However, in some countries, life policies may include the risk of terrorist attack under pre-defined conditions.

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