What has been the impact of the full-scale Russian invasion on the Ukrainian insurance industry?
Before the outbreak of war, the Ukrainian insurance industry was experiencing steady growth, albeit from a relatively underpenetrated position compared to the country’s Eastern European counterparts. The Ukrainian market witnessed a number of positive developments in terms of product diversity and increased insurance premium revenue. Unfortunately, since the full-scale Russian invasion began, this growth trend has come to a halt, and the industry has entered a period of decline.
In 2022, the total premium production in the Ukrainian non-life insurance market dropped by 21% year-on-year, in line with the overall decline in Ukrainian GDP. Although there are signs of a potential recovery in 2023, it is still too early to talk about a return to pre-war market volumes.
How has the Ukrainian insurance industry responded to the challenges created by the Russian invasion?
The insurance sector faced a multitude of challenges following the Russian invasion. Loss of businesses in temporarily occupied territories and the migration of up to 10 million people contributed to a sharp decline in the incomes of insurance companies. However, thanks to their strong solvency positions, which afforded them the necessary flexibility, Ukrainian insurers managed to navigate these operational risks.
Moreover, the implementation of currency regulations, although necessary for the country, posed initial obstacles for insurers in paying reinsurance premiums and providing coverage for certain products. Toward the end of 2022, these regulations were gradually eased. Leading insurers in the market have successfully reinstated their reinsurance programs, a critical step not only for the insurance industry but also for instilling confidence among new and existing investors in the country.
It’s worth noting that, under the supervision of the market regulator, the National Bank of Ukraine, the country’s insurance market participants demonstrated remarkable solidarity and managed to weather these turbulent times to the best of their abilities.
Finally, the remote work capabilities developed during the Covid-19 pandemic proved invaluable in ensuring uninterrupted operations during these tumultuous times.
What is the current situation regarding war risk insurance in Ukraine?
Since the conflict began in 2014 with the occupation of Crimea and Russian invasion of eastern Ukraine’s Donbas region, insuring against war risks for operations in Ukraine has played a crucial role in enhancing the investment climate. Before the onset of the full-scale invasion in February 2022, the Ukrainian insurance market offered a relatively wide variety of products originating from major global reinsurance markets like Lloyd’s of London. However, since 2022 reinsurance coverage for new war risk insurance products has been withdrawn. Despite significant customer demand for this type of coverage, international reinsurers have yet to provide widespread coverage for war risks.
Local insurers, with limited capacities, have recently started offering coverage for smaller war risks, such as insuring vehicles against war-related damage. Both Ukrainian insurers and international reinsurance companies are collaborating to provide comprehensive war risk coverage for larger assets like real estate and construction projects. However, there is currently no product with a significant coverage limit. It is possible that insurers will initially offer this coverage with sub-limits and gradually increase those limits over time.
Looking ahead, what role can the insurance industry play in facilitating investment and supporting Ukraine’s economic recovery?
Safeguarding investments is a key challenge for investors in Ukraine, and the insurance market presently operates efficiently for all risks except war-related ones. When war risk insurance becomes available for larger investments, it will have a transformative impact on investment growth in Ukraine.
Both locally and internationally, efforts are underway to establish a war risk mechanism that secures investments in Ukraine. International financial institutions, the reinsurance market, and local authorities are collaboratively working to achieve this goal, with hopes that it will become available soon.
Risk analysis is another critical aspect. The insurance sector can lead the way in assessing the level of war risk in different regions of Ukraine. If this assessment mechanism becomes available to insurers, reinsurers, and investors, it could significantly improve the investment climate in regions with minimal war-related risks. According to the Ukrainian authorities, more than 75% of the communities in Ukraine have not experienced war risk-related incidents. The role of the insurance market is to convey this message to reinsurance markets and convince them to provide relevant war risk coverage for investors in Ukraine.