Russia’s invasion of Ukraine could add to inflationary pressures and will likely have a substantial impact on the global insurance industry. The insurance market is exposed in several areas, including political risk insurance (PRI), trade credit insurance (TCI) and cyber.

Trade Credit Insurance

TCI protects sellers of goods and services on credit against the risk of customer non-payment due to customer insolvency, protracted default, political events, or acts of war that prevent contract performance. They also normally cover loss profit (Not overall revenues) and failure to perform penalties associated with sanctions. However, such provisions tend not to cover sanctions from the business’s own country. Also normally excluded is the impact of sanctions by (democratic) countries such the US, UK, France and Japan. However, it would cover Russia imposed reciprocal sanctions.

Political Risk Insurance

PRI provides coverage to investors, financial institutions, and businesses that face financial loss due to political events. Policy coverage typically extends to all types of losses due to political action and instability including confiscation, expropriation or nationalization. It also includes currency inconvertibility and non-transfer, political violence (including terrorism and war), contract frustration due to political events, sovereign payment default, wrongful calling of on-demand guarantees and bonds.

Political and Trade Credit Insurers Provide Protection Against Loss of Assets and Profits for U.S and Global Businesses in Ukraine

Ukraine (UKR) is one of the largest insured risk countries for political risk and trade credit insurance. This predates the current situation in UKR and started immediately after the country’s accession to sovereignty.

Based on data from the Berne Union, the trade association representing credit and political risk insurers, PRI carriers issued US $19 billion of new coverage globally in 2021 of which $2 billion went to cover risks in Europe and $1.6 billion to cover risks in Russia. Based on this and other published data, we estimate that PRI insurers have insured between $1 billion and $7 billion in Ukraine risks over the last 5 years.

New PRI losses in Ukraine due to Russia’s invasion will likely be material but well within the ability of private carriers to perform on their obligations. Several factors are contributing to reducing private PRI insurers’ exposure in Ukraine:

• Some PRI and TCI carriers stopped writing Ukraine risk in 2014 • Carriers with existing Ukraine risk have likely taken reserves against future losses • 80% of PRI coverage is provided directly or indirectly by government agencies such as OPIC in the U.S. and from multi-lateral agencies such as the World Bank’s MIGA.

Insured Losses in Ukraine

In Ukraine, PRI and TCI tend to be primarily purchased by foreign companies with cross-border trade or investments in the following industries:

• Energy • Manufacturing • Infrastructure / Project Finance • Natural Resources

Losses due to Russia’s invasion of Ukraine fall under comprehensive Political Violence, and more specifically under War and Civil War, and Strikes, Riots, and Civil Commotion. It is important to note that PRI’s Political Violence’s War and Civil War coverage excludes declared war between the permanent members of the UN Security Council which includes Russia.

Sanctions: Loss of profits due to sanctions may be covered by PRI and TCI policies. However, the coverage is structured to cover sanctions by the host (ex: Ukraine) or a third-party (ex: Russia) country, not the insured’s home country. For example, a U.S. company investing in Ukraine may or may not be covered for sanctions imposed by the United States.

Markets and Policies

The majority of private carriers providing PRI insurance are based in the U.S., at Lloyd’s, and in Bermuda. PRI providers include AIG, AXA XL, Chubb, Sovereign, Caitlin, and Zurich.

Private insurance markets providing TCI are in the US, France, Germany, Lloyd’s, and Bermuda. The largest providers of TCI coverage are Euler Hermes, worldwide credit insurer Compagnie Française d’Assurance pour le Commerce Extérieur (COFACE) and Atradius. Government or multilateral agencies providing either PRI, TCI or both include OPIC (US), EXIMBANK (US), EDC (Canada), UKEF (UK) and MIGA (World Bank).

PRI insurance coverages tend to range between $US 100 million and $US 4 billion. TCI coverage can range from $US 250,000 to $US 2 billion. The main buyers of PRI come primarily from the extraction sector, manufacturing, and infrastructure. Those industries are also significant buyers of TCI, in additional to import-export businesses in soft commodities (produce, livestock), and hard commodities (natural resources that must be mined or extracted—such as gold, rubber, and oil).

Rates for PRI tend to range between 0.5% and 2.0% of the insured limit and for TCI between 0.10% and 1.5%. Above such rates, the products tend to become either less attractive to buyers or unavailable due to the risk profile. When coverage is available, rates for Ukraine would be at the higher end of these ranges.

Domestic U.S. Cyber Risk

The main risk associated with Russia’s attack of Ukraine for business in the U.S. and the E.U. is state-sponsored Russian cyber-attacks on U.S. business and critical infrastructure. This is regardless of whether or not they have operations, investments, or do business in Russia or Ukraine. Indeed, Russia has a well-documented history of unofficial cyber-attacks on Western assets. The impact of declared or undeclared Russian cyber-attacks on U.S. businesses would be covered by a company’s cyber risk policy. A PRI policy is not necessary to cover Russian cyber-attacks against U.S. businesses in the U.S. Because some cyber policies exclude state-sponsored actions, insureds should contact their insurers to confirm whether state actions are excluded from their coverage.

Guest author:

Michel Leonard, PhD, CBE Vice President, Senior Economist and Data Scientist, Head of the Economics and Analytics Department of the Insurance Information Institute, III. Dr. Leonard leads III’s Economics and Analytics Department. He is responsible for providing analysis and insight on industry economics and business performance, as well as other forward-looking, data driven insurance insights.