As well as its appalling human cost, the conflict in Ukraine has had a massive impact on speciality (re)insurance lines. Rajeshwarie VS takes stock
The Russia-Ukraine conflict has been ongoing for more than 150 days, and its impacts have been felt beyond the warring regions, in almost every country and industry. At a time when the world economies seemed to be limping back to a ‘new normal’ after the COVID-19 pandemic, this war has thwarted recovery and plunged us back into uncertainty. There have been severe supply chain disruptions, as Russia and Ukraine account for a major share of exports of oil and gas, industrial metals and agricultural commodities. Standard & Poor’s predicts that the insured losses from this war could amount to US$35bn (£28.9bn), with 50% of these being reinsured. Apart from its direct costs, the war has also led to rising fuel and commodity prices, with inflation at a historic high in many advanced and emerging economies.
Among property and casualty lines, the war’s impact on insurance has been most felt in speciality, specifically aviation, marine, cyber, political violence and trade credit. The Financial Times ran one of its stories on the war with the opening line “stranded planes, battered ships, bombed-out buildings and unrecoverable debts…”, which sums up the situation aptly. Of the predicted losses from the war, the largest are expected to be in aviation. The same Standard and Poor’s report predicts that in the worst case, out of the US$35bn losses, aviation alone would account for almost US$15bn, while the remaining US$20bn is attributed to other special lines.
Marine and aviation
Normal policies on property have an explicit war exclusion. War cover is usually provided additionally through ‘aviation and marine hull war policies’, which cover physical damage, liability and seizure of vessels/aircraft due to war or piracy. Since the crisis broke out and the two countries shut their airspace, images of damaged aircraft and vessels have been doing the rounds on social media, and losses have already been reported. However, by far the biggest uncertainty concerns stranded airplanes and seized vessels. Around 500–600 aircraft are leased to Russian airlines. While these are now stranded, the majority of policies are not fully cancellable. Likewise, shipping vessels trapped in Ukraine and Russian ports could also eventually give rise to claims.
According to the International Maritime Organization (IMO), when the war began in February, as many as 2,000 seafarers and 94 vessels were stranded in Ukrainian ports; by April, this number had fallen to 500 seafarers and 84 vessels. Several cargo ships are reported to have been attacked, with some reporting damage. A Japanese vessel, the Helt, and a Maltese vessel, Azburg, sank off the Odessa and Mariupol coasts, killing three crew. The IMO also reports sea mines off Turkish and Romanian coasts, indicating that the conflict could spill over and affect more vessels farther away from the Black Sea or Sea of Azov. Marine cargo in storage or transit could also be damaged at warehouses or ports or, worse, be abandoned at ports because of the conflict.
Cyber
Alongside the traditional war, there are several reports of a full-blown cyber war. The difference is that these cyber attacks can span a larger geographic area than just Russia and Ukraine. Just as companies have begun waking up to silent cyber and are tightening wordings, this war has resulted in new sources of ambiguity. There have been claims and counter claims by both warring countries that they have attacked, and successfully brought down, government websites.
Cyber policies do not typically cover state-sponsored attacks, but it is hard to pin responsibility for cyber-attacks on individuals, groups or states. Another point of contention is the way war exclusions work with cyber contracts. Cyber terrorism is usually covered; it is defined as an attack on a computer with intent to harm due to political, ideological or economic motives. Many attacks that have occurred or are occurring now could well be covered under a terror clause. In an already hard cyber market, the current war has served only to push up risk perception and, correspondingly, rates.
Other affected lines
Companies that operate globally typically purchase political violence/risk cover for their overseas assets. The extent to which insurers will see political risk claims is still unclear. As with aviation and marine, claims are likely to come from entities whose assets have been expropriated by Russia.
What can also be anticipated is supply chain disruptions causing shortages of essential supplies – such as corn, wheat and edible oil – in other countries, which could eventually cause more widespread strife. Companies that are involved in export or import of goods and services to or from Russia and Ukraine would be expected to claim under contract frustration cover, by which they are entitled to claim irrecoverable costs related to undelivered goods or services. Claims have also arisen out of defaults on loans due to sanctions and currency inconvertibility.
“For aircraft lessors that have planes leased to Russia and Ukraine, the rate increase has been steep – in some instances, as high as 10 times”
Managing exposure to war risk
Insurers around the world have responded with a variety of measures to manage war exposures. The most straightforward are policies with explicit war exclusions. For covers that are cancellable, several aircraft leasing companies have reported that these covers were cancelled when the war broke out. For most type of risks, insurers have stopped underwriting new policies and for policies that are renewing in this period, many have declined to cover risks in the war zone.
The other more obvious option is rate increases. For aircraft lessors that have planes leased to Russia and Ukraine, the rate increase has been steep – in some instances, rates have risen by as much as 10 times. In the marine world, the Joint War Committee of Lloyd’s and the International Underwriting Association regularly review and update a list of high-risk maritime zones. This list helps insurers to calculate an additional premium called ‘breach premium’ for vessels that travel in these high-risk zones. The breach premium is calculated for a week at a time, and is collected in addition to the annual hull war premium. For ships traveling in the Black Sea, Sea of Azov, Russian waters and other areas around this conflict zone, this additional war premium has risen from 0.025% to 5% of hull value for a seven-day period, according to Lloyd’s.
Challenges with claims
Claims reporting could see some delays due to the actual intensity of the conflict in those regions and the disruptions to networks and normal activity; as time progresses, we can expect claims to emerge or develop. Claims assessment cannot practically be carried out in the normal way by adjusters, and it is hard to get an estimate of damaged and stranded assets. Handling claims is also tricky given that several sanctions are in place against institutions and individuals, although large global companies may be at the origin of the claims. There could be many legal disputes around claims settlement due to policy wordings and financial sanctions, and insurers will need to watch how these pan out.
The Outlook
With attempts at negotiating a settlement having failed, and no end to the war yet in sight, the outlook for the insurance indus-try is bleak. In addition to this ongoing war, there have been several other stresses – natural catastrophes such as floods in Aus-tralia, droughts in South America and storms in Europe, as well as the after-effects of the COVID-19 pandemic. The big concern at the moment is record high inflation, and huge worldwide supply chain disruptions that are further fuelling price rises.
Most insurers and reinsurers have set aside reserves as a precautionary measure for the war-related claims expected in the near future. On the assets side, poor investment performance and turbulence in markets have pushed companies to write down assets in the conflict zone. High inflation in the near term is likely to push up claims costs in property lines and increase litigation costs in liability lines of business. The insurance industry’s road to recovery from the pandemic and war is likely to be a long and bumpy one.
Rajeshwarie VS is head of specialty at Swiss Re Bangalore
