War in Ukraine and its Impact on the Insurance Market

Although acts of war come under the rubric of exclusions in most insurance contracts, one should take exceptions into account and realize what risk there is, beyond mere transfer of risk to the market.

The recent invasion of Ukrainian territory by Russia has created a new economic and geopolitical context. On 24 February, when Russian president Vladimir Putin launched a military offensive against Ukraine after recognizing the vaunted independence of the separatist regions of Donetsk and Luhansk, the USA, the European Union, the United Kingdom and the United Nations issued a raft of economic sanctions against Russian organizations, leaders and oligarchs to pressure the country into calling off the military operation. Among such restrictions a few stand out: Travel bans, asset seizure, and locking Russian banks out of the SWIFT international payment system. Such measures, and the conflict itself, inevitably come with deep repercussions to the insurance industry across the world — some brokers and insurers in the countries at war have even decided to halt business there altogether.

As a rule, events arising from acts of war appear under the exclusions section in most insurance contracts underwritten anywhere in the world, for a number of reasons. The main reason is the catastrophic scale of damage that military conflict can bring about, damage of such magnitude that the very financial capability of insurers might collapse under the strain. A war can generate incalculable, uncontrollable loss, accumulating risk too complex to handle if not impossible to absorb by the insurance and reinsurance market. Additionally, should claims arise, the entire analytic process, including damage assessment, settlement and close would be compromised by the armed conflict itself. 

However, there are some exceptions to general exclusion in contracts that deserve a closer look. One must also look into risk management beyond traditional transfer to the insurance market and come up with ways to identify, assess and process such risk through alternate tools, as we will see below.

Where Property and Engineering are concerned, the impact of war in Ukraine will be felt mostly over the medium and long term. This owes to the fact that an act of war, deemed a fundamental risk given its branching effects on a high number of people and property at once, is a general exclusion in reinsurance contracts and insurance policies. 

But, over the medium and long term, we should witness a meaningful reduction of underwriting capabilities both for the Russian and the Ukrainian territories — even with regard to other countries that may have become involved, taking into account leading international insurance and reinsurance groups’ decision to pull out of those geographies. Concerning Russia, this becomes apparent through reputational factors more than it does through the effect of international sanctions.

The local market, in turn, struggles under an economy on the way to default and a sinking ruble. Countless international schemes will now have to be revised as to the level of service and scope of coverage within those countries. The conflict in Europe will also exacerbate a trend in international insurance and reinsurance market, bolstered by the current hardening of the market, which is the diminishing capability available to underwrite political and social risk.

The line which normally falls outside wartime exclusions is marine (including international freight risk and associated risk, namely hull insurance for seagoing vessels, and insurance for aircraft). 

Insurers operating in the transportation space tend to offer war-related coverage. However, the rationale for such coverage focuses on unexpected events in which cargo, vehicles and/or vessels in transit may get caught up in a conflict when it breaks out as a transport operation is underway. Should there be out-and-out, ongoing war, insurers will withdraw their availability to take on risk associated with such events. They will in fact proceed with immediate cancellation of coverage they previously offered, invoking their special prerogatives on contract termination. 

As the invasion of Ukraine escalated, we saw insurers operating in that market notifying their insureds that their risk of war, strikes, riots and civil unrest covering territorial Ukrainian and Russian waters on the Black Sea and Sea of Azov would be cancelled. Termination, however, does not apply to transport operations initiated prior to contract implementation. In such cases, insured assets remain fully covered until their journeys are complete, and insurance coverage can be extended for an additional 30 days at most, for warehousing initiated before notice of contract termination.  

As to Russia, although its territory is not under military attack, economic sanctions will prove to the detriment of many new contracts and renewals, complicating acceptability from insurers. With regard to contracts in place where exposure to the country is a factor, some insurers still cover non-Russian companies, so long as their business is free of ties with companies, institutions and people targeted by sanctions. 

The war between Ukraine and Russia also takes place online, waged by state organizations of the warring sides and even anonymous individuals across the world. 

Cyber insurance includes clauses that exclude war and terrorism — and the ongoing conflict has shone a light on the importance of cyber coverage given how difficult it is to perform such contracts. The nature of cyber-attacks and the particular traits of criminals who almost always remain unidentified makes it so. Insurers often find it impossible to obtain clear evidence of facts and information on origin, source, motivation and context for a specific attack.  The possibility of, and success in, applying war exclusions depends largely on how policies are worded; the exact terms on paper and on local jurisprudence. It is difficult therefore to envision concrete, predictable scenarios, and that uncertainty proves harmful to insurers, as they may incur lengthy and expensive court proceedings with likely unfavourable outcomes. 

It cannot go without saying that Ukraine and Russia both have legislation demanding that insurance contracts be issued by duly empowered local insurers. Now, local policies in both countries, even the ones included in international programmes, are still in effect as a matter of principle. However, the wording on that kind of insurance also incorporates exclusion clauses for war. Therefore, claims arising from war-related events will be excluded. 

As other lines of insurance do, Persons — Life, Health, Accident, Travel — exclude war risk, but such exclusions may vary.  

From the outset, any contract will exclude active participation in acts of war, guerrilla, terrorism, or any other form of insurrection. However, it is possible that situations where the insured was involuntarily drawn into armed conflict may be covered. It is then of the utmost importance to ensure that existing coverage will safeguard such risk.

Another frequent exclusion, specifically in travel insurance, addresses situations where people deliberately and voluntarily travel to a war zone with prior knowledge that an armed conflict is unfolding there. However, even for scenarios like that you have exceptions — journalists can be covered by specific contract clauses. 

Companies managing credit risk also place war under their exclusions, as a rule. 

An insurer that handles this line with backing from the Portuguese government has issued a note to its insureds on the day that the invasion of Ukraine began to warn them of the temporary suspension of all coverage decisions related to Russia, Ukraine and Belarus. The company further advised that all invoices issued post 24 February with regard to "policies of the Credit Insurance Line for Short-Term Exports with Assurances from the Portuguese State that are in effect will be deemed to carry aggravated risk and, as such, will not be covered by insurance.” In short, all those insured with sales made to Russia and Ukraine up to 1 March who had purchased a government-backed policy had safeguarded political risk/transfer — in which war is included. However, such coverage was suspended from that moment on.

War in Ukraine is concurrent with other international crises and global strategic challenges (digital transformation, decarbonisation, energy transition, coronavirus pandemic, among others) which represent new risks to companies and, as a consequence, more concerns for risk managers and decision-makers in general. 

It should be pointed out that the conflict disrupts supply chains and gas delivery, propels inflation and impacts interest rates, brings in additional cyber-security hazards, leads to escalation in economic sanctions, increases geopolitical risk and, no less importantly, creates a notorious humanitarian disaster, with millions of refugees and internally displaced persons. It’s an example of how disruptive, unexpected global events can take place at any time and, therefore, companies should make adequate preparations to navigate uninterrupted periods of instability. 

Despite transfers to the insurance market, a portion of the risk in question cannot be covered, either because of its inherent characteristics, their high potential for catastrophe, or market context at any time. In that light, risk managers play a vital role in identifying and assessing risk, as well as developing and implementing mitigation and monitoring strategies, which will in the end make businesses more resilient. 

By the MDS Technical Committee
Coordinated by Jorge Luzzi, the MDS Technical Committee includes Ana Mota (Persons), Luís Paralvas (ERM), Nuno Rodrigues (Property and Construction Parametrics), Pedro Pinhal (Liabilities and Claims), André Figueiredo (Retail and ME), António Fernandes (Captives and Alternative Risk Transfer), Tiago Mora (Reinsurance), and Bruna Carvalho (Operational Assistance).