The massive scale of the damage suffered by Ukraine in the face of the full-scale invasion by Russia means that investment is needed as well as trade during war. Insurance is needed, and how that comes about is being tested while the battles rage.
Money, or capital, is a coward. So, deploying money into a country invaded by what was once the second-most powerful army in the world might take a little convincing. Or insurance, in other words. Whether this is capital for an investment project or a trade-related effort, there’s a need to make sure that the money is recoverable. Otherwise, the money’s not going in, at least not in the quantities needed.
Ukraine’s investment and trade insurance needs are huge. The types of coverage depend on what’s being protected. Here are just a few examples:
• War risk investment insurance;
• Political turmoil risk insurance;
• Sea-shipping focused insurance, including hull, cargo war risk, maritime liability;
• Event cancellation risk.
These types of insurance and those like them are needed because they lie outside the ‘everyday’ types of insurance, and usually cover events that would come under force majeure exceptions in those policies.
A huge market, if done right
Since Russia launched its full-scale invasion of Ukraine two years ago, the country’s suffered tremendous material losses, including over 131,000 residential buildings alone. While defending itself, Ukraine is still trying to keep business on as even a keel as possible, especially in terms of agriculture. The ag industry is vital, not only for the foreign trade it produces, but also in terms of global food security. Goods are still being imported into Ukraine as well. Moreover, industrial construction is increasing, with some of the new sites being for foreign defense sector companies such as Baykar from Turkey and Rheinmetall from Germany.
In dollar terms, direct damage alone exceeds $150 billion, and replacement is expected to cost over $450 billion, according to the Third Rapid Damage and Needs Assessment, or RDNA3, created jointly by the World Bank, the Government of Ukraine, the European Commission, and the United Nations and released in February 2024. The need for material to rebuild will be immense.
Agricultural output dropped to 79 million tons by the end of 2023. Exports through the end of the calendar year were over 27 million tons. However, those exports need insurance against Russian attacks in the Black Sea or against Polish political events at the border. As Ukraine still accounts for about 5% of the world’s grain trade, insuring the trade and movement of that grain is critical.
Losses
The first year of the war was tough on the insurance industry. Lloyd’s of London announced in September 2022 that Russia’s invasion and war was going to cost the company £1.1bn. Planes stuck in Russia, merchant ships stuck in the Sea of Azov and the Black Seas, and grain stuck in ports each took a toll.
By the end of 2022, even war risk coverage for craft based in Ukraine and Russia had been cancelled, and without insurance, commercial aircraft and ships are not permitted to run. The situation for the grain trade and shipping was particularly dire, as Russia also threatened ships at sea, attacked ports, and mined the waters off Ukraine. For example, the Financial Times reported in January 2023 that the Japanese government had to assume the insurance of its ships in December 2022, after commercial insurers refused to cover ship damage.
Physically protecting the infrastructure and transit was one thing; that was (and still is) part of the military, or hard, war. The human welfare war waged by Russia by preventing the transit of grain to countries that needed it to feed their populations – is another. Protecting money, or capital, is part of what has become an economic war, whether it is seen as the target itself or collateral damage, is a third part, and what we’ll look at in the next installment.
