CEOs around the world are suddenly overwhelmed by a worry they didn’t have last year: what kind of business assurance do they have in Ukraine and Russia?
It’s a timely question, and the answer could be costly. Billions of dollars are at stake and the conflict in Ukraine has already prompted a fundamental rethinking of risk management across all sectors.
A financial blow may rightly seem like a trivial concern amid the human carnage and misery caused by Russia’s invasion of Ukraine. But companies doing business in either country still have to respond to stakeholders, and many of those who suffered economic loss are now finding out exactly what their insurance will and won’t cover.
In some cases, no one knows the answer. For example, Russian President Vladimir Putin in March authorized the seizure of hundreds of commercial aircraft that Russian airlines were leasing from Western aircraft lessors. “It’s just something that was never considered,” says Garrett Hanrahan, global head of aviation and space at insurance broker Marsh. Many more seizures of Western assets could occur.
“The most important thing we’re keeping tabs on is that the Russian government could appropriate the assets of Western companies, especially those that have signaled their exit,” says Laura Burns, political risk expert at the consultancy in WTW insurance. “It would be a monumental event in our industry.”
The unprecedented aviation breach illustrates the uncertainties companies operating in Russia may face. Just over 500 Western-built aircraft, along with associated equipment, are stuck in Russia, worth an estimated $10 billion to $15 billion, although some estimates are as high as $30 billion. Most of these planes are flown by Russian airlines but are owned by Western aircraft leasing companies.
The world’s largest aircraft lessor, Dublin-based AerCap, has already written off $2.7 billion, acknowledging a ‘total loss’ on the 113 planes it cannot get out of Russia, and filed a insurance claim for approximately $3.5 billion. The company “will vigorously pursue all available remedies to recover our losses,” CEO Aengus Kelly said in a statement. His hawkish stance reflects the reality that AerCap’s insurers cannot shell out $3.5 billion without tough negotiations, creating conflict between insurer and insured.
Insurance policies almost always include fine print, nuanced stipulations and other lexical details, so choosing the right policy is crucial. Hanrahan notes, for example, that AerCap’s insurance claim does not say that Russia “confiscated” or “seized” Western-owned planes; he says Russia stole them. Indeed, an aircraft owner’s coverage can include several types of policies. A “hull war” policy covers damage, destruction or seizure of an aircraft even if caused by war or warlike events, but with one major caveat: “There are aggregate limits associated to the hull warfare market,” says Hanrahan. In any given year, hull warfare insurers will only cover losses up to a certain amount, and if ever a year looks likely to exceed the limit, 2022 is it. In contrast, “all risk” policies may not cover war damage, but cover theft – and in this market there are no blanket limits.
Insurers can refute the claim that Russia stole the donor planes, turning the choice of words into a highly debatable issue.
Businesses across all sectors have suffered losses in Ukraine and Russia, and their ability to collect insurance payouts is highly dependent on the types of policies they purchased before the February invasion. If a company’s buildings, vehicles, or other property were destroyed in the fighting, ordinary home insurance won’t help. These policies have “very strong exclusions for war and warlike actions,” says Robert Gall, U.S. real estate claims manager at Marsh. Although they are referred to as war exclusions, they still apply even if Russia has not officially declared war. These exclusions generally specify that property damage caused by invasion, insurrection, rebellion, revolution and other similar events are not covered.
To protect against situations like the invasion of Ukraine, companies need political risk insurance. Some of the most widely used types include:
• Coverage of political violence. This policy covers property damage even in war zones. “Especially in eastern Ukraine and the Donbass region, very many customers have suffered loss from political violence,” Burns says.
• Forced abandonment cover. This policy is for scenarios where there is no property damage, but the danger has become so great that a company must abandon its assets or operations. In Ukraine, many agribusiness and manufacturing companies file notices of such claims. Burns says that’s currently an even wider coverage area than coverage of political violence.
• Cover against contractual frustrations. This policy covers conflict-related losses for businesses without a physical presence in the region. For example, companies that have cross-border contracts with organizations in Ukraine or Russia may find it impossible to send or withdraw money, or convert currencies. Western sanctions against Russia, which prohibit actions that directly or indirectly benefit Russian entities, can render contracts worthless, making such a policy useful.
Although not a form of political risk insurance, credit insurance is a close cousin to contract frustration cover, insuring many customers’ claims when they cannot unwilling or unwilling to pay, rather than hedging contracts with a single counterparty.
As always, it’s one thing to have an insurance policy and another to get a check from the insurer. Some claims of political violence can be settled quickly; if a building is destroyed, for example, satellite imagery can sometimes verify the damage even if no adjuster can get there safely. Forced Quit coverage generally requires a waiting period of 180 days; if the owner of an asset cannot use the asset for 180 days, it is considered abandoned and the insurer can pay.
Stuck aircraft will likely be a different story. With companies filing massive claims and few precedents, negotiations could take years. “This is an insurance industry problem that needs to be addressed,” says Hanrahan. “Otherwise the only ones who are going to make money are the lawyers, because they probably see it as a buffet. And they are not, shall we say, motivated to get an early settlement. His concern: “the idea that it’s been dragging on for 10 years.”
Russia’s invasion of Ukraine has alerted CEOs and CFOs to new risks in a rapidly changing global order. “It was a huge wake-up call for the business community,” Burns says. Even companies that don’t operate in Ukraine or Russia are worried about the ripple effects – for example, the blockade of grain in Ukraine is driving up bread prices in other countries and causing uprisings that topple governments . Burns says some business leaders are seriously considering an even more ominous possibility: “Is this a big dress rehearsal for a China-Taiwan situation?”
Insurance is boring until you need it. The Russian-Ukrainian conflict reminds business leaders that insurance exists because risks exist, and for global businesses, what happens in one corner of the world has far-reaching consequences in another.
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