Is war cover dead?

Sharon Paterson - Chief Executive Officer Infiniti Insurance Limited

The Impact on insurance of the Russian Ukraine Conflict on War Cover in the Aviation and Marine Markets

Is insurance war cover a thing of the past and where does that leave our mutual clients?  Whose responsibility is it to cover losses that arise as a direct result of an invasion and the sanctions that inevitably follow?

The Russian-Ukraine conflict has resulted in far-reaching implications for insurers and reinsurers worldwide, with the inevitable knock-on effect on brokers and clients alike. The situation is compounded by the large numbers of aircraft grounded in Russia and sanctions preventing any parts being supplied to Russia. S&P Global predicted in August that the losses could reach as high as USD35 billion – adding that it may take many years to settle the ultimate losses incurred by aircraft leasing companies. 

While property insurance in South Africa has excluded war cover, traditionally, war cover has been included in Marine Insurance and Reinsurance policies, and made available to the Aviation market on request. 

Renewals that have been processed on Aviation since the invasion and the subsequent uncertainty regarding the volume of losses have seen increased pressure on War treaties with decreased commissions and capacity in the market.  A number of the Lloyds syndicates have withdrawn completely from the Aviation Hull War market, while airlines able to renew war cover have seen premium increases around the 100 percent mark, as new exclusions, such as expropriation, come into play.  The claims are now materialising, particularly in respect of contingency policies with Avolon, an aircraft leasing company, taking action against Lloyds in the Irish High Court to recover damages as a result of aircraft stranded in Russia.  I am sure that as the conflict progresses more and more such cases will be seen.

While initially the Marine market was more positive about the potential losses and War cover was not entirely deleted from reinsurance treaties on renewal, limitations were put in place.  This included the exclusion of certain areas, in some cases a shortening of the allowable cancellation notice period by the insurer in the event of war and event limits specifically for war losses.  

An article by Kassandra Jimenez-Sanchez in the Reinsurance News sounds the alarm on the probability of claims under the ‘detainment clause’ which indicates that a vessel can be determined a total loss after 12 months of restraint.  Ukrainian ports have been closed since the day after the Russian invasion in February 2022 and vessels have been prevented from leaving.  Jimenez-Sanchez predicts that the market will face a number of total-loss claims in the first quarter of next year with losses up to as much USD 1 billion.

If you look at the initial impact of the possible claims at much lower estimates on the war cover that was, traditionally, so easily given by reinsurers and insures alike, I am concerned as to what the impact will be as more and more claims develop. 

In this Russia–Ukraine war scenario, related industries, Energy and Cybersecurity are also severely affected, expected to give rise to another wave of claims. The position demands re-assessment, considerations as to exclusions and modifications, as well as premium increases expected to affect coverage for future losses.

Sweeping sanctions against Russia, explains the IMF, have combined with the worldwide supply chain crisis and wartime disruption of Ukrainian trade to deliver a massive economic shock of unprecedented proportion.

It is time to recalibrate whose responsibility is it to cover losses that arise as a direct result of an invasion and the sanctions that inevitably follow.

Will insurance war cover going forward only be available at a cost that is impossible for the average client to pay?  And whose responsibility is it really?