Stranded planes, battered ships, bombed-out buildings and unrecoverable debts created by Russia’s invasion of Ukraine have left the global insurance industry braced for soaring payouts and protracted legal disputes.
The war in Ukraine could cost insurers billions of dollars in claims, with the aviation insurance sector alone facing potentially the biggest loss event in its history due to the hundreds of planes grounded in Russia.
With tougher western sanctions shutting Russia’s aviation and space sectors out of insurance and reinsurance markets, the expectation is that risks will only grow.
“The ripple effects from this terrible situation will be felt widely,” said Caroline Wagstaff, chief executive at the London Market Group. “Insurance claims — possibly significant across the market — will be made, and the market is working to understand their scope and scale.”
Insurers have sought to cap their exposure to the conflict by refusing any new contracts that could open them up to further Russia losses, rewriting policies to exclude the country from future claims, or demanding eye-watering extra premiums to cover ships passing now treacherous waters.
But for the insured ships, planes, buildings and commodities that have been caught up in the fighting, the damage may already be done.
An Aeroflot jet is parked at an airport in Geneva, Switzerland.
The global market for specialist insurance, with Lloyd’s of London at its centre, is expected to take a hit. Shares at Lloyd’s underwriters such as Lancashire and Beazley — specialists in exposed areas such as war and political risk — have fallen sharply in recent weeks.
Big reinsurance groups have reported smaller falls, with executives declining to put a number on their expected exposure.
Lloyd’s of London is expecting a significant but manageable overall loss, according to a person familiar with the matter, who estimated the final bill, after reinsurance pays out, could land somewhere in the $1bn-$4bn range.
“It’s really difficult to peg the upper end of [that range] because there are so many different things that need to play out,” said another senior source in the Lloyd’s market.
Lloyd’s, which took a net blow from Covid-related claims of more than $4bn in 2020, said that Russia and Ukraine account for less than 1 per cent of its premiums.
The Bank of England has remained sanguine about the impact of sanctions on the sector but the reality, say insurance executives, is that it is hard to get a sense of stranded and damaged assets in a war zone.
The difficulty of both on-the-ground assessments and using technology such as drones was creating a “paucity of information” for the industry, said Forbes McKenzie, chief executive at London-based McKenzie Intelligence Services.
Images of grounded planes and ships hit in crossfire have meant that the spotlight has turned on marine and aviation insurers, particularly policies known as “war risk” or “contingent” cover that protect owners against damage or seizure of their assets in a conflict.
Marine insurers have moved quickly to limit the financial damage, with the Joint War Committee, an international body, labelling more and more waters around Russia and Ukraine higher risk, meaning an owner has to contact their underwriter if they wish to enter. But claims are still expected, with a handful of vessels already damaged.
The conflict threatened to create the “single largest aviation loss in history” if stranded planes were not recovered, said Garrett Hanrahan, global head of aviation at Marsh.
Industry estimates are that the near-600 western-built planes in Russia could be worth $13bn. But insurance policies have aggregate limits for how much can be paid out. Marsh estimated that a worst-case scenario where planes could not be recovered would leave the global insurance market with a loss of about $5bn, bigger than it suffered after 9/11.
Such a widespread loss would be a “market-moving event that changes everything”, Hanrahan added, so far outstripping the revenues on offer from this type of insurance that some underwriters might choose to pull back from the sector altogether.
Many expect a legal wrangle over whether the contracts should pay out, with reports that insurers have rushed to cancel some short-term cover.
Last week, aircraft leasing company BOC Aviation said that international insurers were “progressively cancelling certain elements” of the relevant insurance policies.
The crux of the dispute will come down to when cancellation notices were given by insurers and if, for example, they came after sanctions were imposed but before the plane is expropriated.
“It’s our belief that an underwriter can’t issue a notice to reduce or preclude cover on an object of insurance . . . while it is in the grip of an insured peril,” said Hanrahan.
Insurance experts say privately that underwriters might also cite sanctions as a reason they cannot honour claims.
“It’s going to end up in the courts,” said Michael Weiss, chief commercial officer of aircraft asset manager ABL Aviation.
Hiscox expects its exposure for potential claims from damage to assets in Ukraine such as buildings could run into the tens of millions of pounds. But the company is heavily reinsured and said any hit to profits would be “very manageable”.
“These policies are designed to respond to this kind of event. It’s why we write [them],” said chief executive Aki Hussain. Axa, meanwhile, has told analysts it has political risk exposure of €130mn to Ukraine, and €180mn within Russia — though half of it is reinsured.
Also falling broadly under the political risk umbrella is credit insurance, which protects against non-payment by debtors, such as a Russian buyer of foreign goods or recipient of bank finance. Wider financial sanctions have thrown many payments into doubt.