Insurance as a Critical Enabler for Investing in Ukraine

Ukraine needs massive investment to rebuild and modernize its economy. Russia’s ongoing invasion has caused immense destruction, with current estimates of reconstruction costs ranging between $411$750 billion. These costs may eventually top $1 trillion. Private sector investment is critical for Ukraine’s economic modernization. Uncertainty around the structure and durability of a peace settlement has made private investors leery about Ukraine. Even prewar, Ukraine’s investment climate was deemed too risky for sufficient foreign and domestic investment. Currently, risk mitigation tools offered by traditional multilateral development banks and development finance institutions (DFIs) are very limited, while private insurance is either nonexistent or very expensive.

To attract private investment, Ukraine needs significant policy and regulatory reforms. Moreover, private-public partnerships will be needed to spread risk. The donor community will need to assume early risk that can eventually be transferred to Ukraine and the private sector. These initial insurance and guarantees may create the confidence needed for private sector investments to flow in Ukraine.

Q1: What are risk mitigation tools and why are they important for investors?

A1: Risk mitigation tools, which transfer project risks from private lenders to third parties, include guarantees and insurance. Variations include the type of instruments covered (debt or equity), coverage (full or partial), type of risk (commercial, political, trade), and payment (principal or interest).

Guarantees and insurance are used in greenfield and brownfield on-balance sheet equity investments, project finance and public-private partnerships (PPPs), corporate bonds, and other debt products. These products are offered by export credit agencies in trade finance, such as loan guarantees and export credit insurance. They are also used to support the targeted operations of financial institutions, for example by de-risking a bank loan portfolio for small and medium enterprises (SMEs). The public sector can also receive guarantees, for instance through the World Bank’s policy-based guarantees initiative or the United States’ sovereign guarantees program. Subnational governments and state-owned enterprises can also benefit from guarantees.

Several institutions issue guarantees and insurance: multilateral development banks (e.g., World Bank’s Multilateral Investment Guarantee Agency, or MIGA), bilateral donors (e.g., the U.S. Agency for International Development, or USAID) and DFIs (e.g., International Finance Corporation, U.S. International Development Finance Corporation, and European Bank for Reconstruction and Development, or EBRD), specialized guarantee providers supported by development agencies, private insurance companies, and sovereign governments.

Q2: What was the state of the insurance market in Ukraine before Russia’s full-scale invasion in 2022?

A2: There are roughly 60 political risk insurers in the world, although not all were active in Ukraine prewar. In 2021, across all segments covered, the Ukrainian net market premium was 1.8 billion. Among the 20 largest insurance providers in Ukraine, all appear to be privately held. Given Russia’s annexation of Crimea and fighting in the Donbas region since 2014, many private insurers stopped offering Ukraine coverage. Some insurers began offering a product called Full Political Violence which covers “mass riots, strikes, revolutions, rebellions, civil war, war, conspiracy, terrorism, sabotage” but most backed out completely. As early as 2015, political risk in Ukraine was deemed very high by the private sector.

Q3: What has happened to the Ukrainian insurance sector following Russia’s invasion?

A3: Guarantees and insurance products offered by traditional multilateral development banks and DFIs are very limited in Ukraine. The private insurance market in Ukraine has in many cases ceased operations since the invasion began, with most remaining insurers scaling back. Remaining insurers cover health and other nonwar related risks. Several local insurers in Ukraine have maintained their basic property treaty facilities but their capacity of 50–60 million euros is insufficient. The global reinsurers have imposed a blanket exclusion of Ukraine, resulting in inadequate capacity across the country. The materialization of risks covered by insurance, such as property damage or foregone income, could result in $20 billion of losses. Corporate policyholders are finding it difficult to file claims under existing policies because most have a “war exclusion” clause. Even under policies that include political risk insurance, those insured must prove that the loss was a direct result of the war and not from related factors such as property abandonment.

Since the war began, Lloyd’s has provided one of the only new insurance products to support the Black Sea grain deal that covered up to $50 million in damages to grain carried from Ukrainian ports. The deal includes multiple players, with Marsh brokering the agreement, Ascot serving as the lead underwriter, and Lloyd’s using their licensing system to enable many insurers to share risk. The London market was crucial because there are a large number of carriers to pool high risks. The program has continued into the beginning of 2023 with no rate increases.

Reinsurance has also been extremely limited, with Munich Re and Swiss Re being the most significant players. Munich Re exited Ukraine beginning in 2023, while Swiss Re took a loss of $283 million in the first quarter of 2022 partially because of Ukraine market exposure. Reinsurance contracts typically renew on January 1, and at least 12 of 13 major ship insurers canceled war risk insurance in Ukraine due to a lack of reinsurance in January 2023. This disincentivizes potential investment from the private sector.

Q4: What are the insurance needs in Ukraine?

A4: The insurance needs in Ukraine are significant, but it is important to differentiate between risk type, foreign and domestic investment, sectors, and types of products insured.

The first main differentiator is between risk mitigation for investors (such as political risk insurance) and standard insurance policies for other events (such as healthcare, property, and auto, home, and commercial casualty), and life and annuity products.

Types of risks covered for investors generally fall under these broad categories:

  • Political Risk: This is where the borrowing entity’s capacity to fulfill its debt obligations, or the equity investor’s financial exposure, is affected by government actions (or lack thereof): breach of contract, nationalization, expropriations, the inability to import or export, forced abandonment (permanent political violence/loss of use), restrictions on foreign exchange transfer or convertibility, civil unrest, terrorism, or wars.
  • Stand-Alone Terrorism and Political Violence: This solely covers the investors’ risk of property damage and loss of income (business interruption) due to events such as civil unrest, terrorism, and wars. This coverage is usually issued on an annual basis, with renewal uncertain.
  • Standard Insurance: This is coverage where the investor (including its local Ukrainian subsidiaries) faces risk of traditional risk perils such as fire, theft, natural disaster, liabilities, and executive liability for its operations in the country.
  • Commercial/Credit Risk: This is where the borrower’s inability to meet its financial obligations is due to nonperformance of the investment or asset.

Very little political risk insurance is being offered because of the extremely high risk. The private sector insurance and reinsurance market also has an extremely limited appetite to provide such coverage and carriers are generally off-risk until the conflict reaches a state of acceptable stability.

The second difference is between providing insurance for domestic or foreign investment. Some institutions, like MIGA, can only provide coverage to foreign investors while other multilateral institutions such as the EBRD are able to provide guarantees to domestic investors.

Finally, sector-specific insurance must differentiate between all products in the supply chain. In agriculture, for instance, there are coverage needs from seeds, farmland, storage, transportation, and ports. While some parts of the supply chain are covered, others are not and so a needs assessment is warranted.

Q5: What lessons from prior conflicts can apply to Ukraine?

A5: Spain provisionally established a political risk insurance (PRI) program in 1941 to support recovery after its Civil War (1936–1939). It covered losses from “extraordinary risks,” including natural disasters, terrorist attacks, and armed conflict. Claims could be made based on property damage and business interruption, and the territory covered was domestic with limited international offerings. Insurance was provided by an unlimited state guarantee with no reinsurance in place.

Because Spain’s PRI was financed following war, it may offer a precedent for Ukraine. Insurers in Ukraine have already struggled to access reinsurance, so the unlimited state guarantee may prove important. Beyond immediate recovery, Spain’s PRI program was adjusted during its EU integration. Since Ukraine aspires to obtain EU membership, selected aspects of the Spanish case may be relevant. However, a guarantee from the Ukrainian state alone may not provide sufficient due to mounting budget challenges.

Israel’s history with political risk insurance (PRI) could also provide a model. In Israel, claims could be made based on property damage, such as a manufacturing plant being damaged by a missile strike, and business interruption, such as lost profits from war. The territory covered was primarily domestic, although damages outside of Israel are covered for planes and ships. Compensation is partially paid by a state compensation fund and partially paid by private insurers.

Israel, like Ukraine, lies in an unstable neighborhood with reoccurring threats to its security. Israel also receives substantial U.S. aid as a crucial security partner, and Ukraine appears likely to benefit from the same support. Finally, Israel has sizable information technology and agriculture sectors, as Ukraine does. However, differences lie in the fiscal margin of the state, the availability of historical data, and the nature of damages. Israeli policies cover against damages incurred at a well-defined and small geographical scale (e.g., political violence on a single house), whereas reinsurers see war risk in Ukraine as potentially resulting in full destruction of the entire portfolio. In the long run, then, PRI based on the Israel model requires a security agreement for Ukraine.

Thomas Mahl, managing director of SFR-Consulting, suggested replicating an existing structure used in Africa. The structure groups a pool of policies underwritten by local insurers, of which a large portion of losses could be borne by donors. On a preliminary basis, another avenue may be the use of capital markets risk-transfer such as ILS (insurance linked securities), including CAT bonds as those investors do not have the same concentration of exposure as the reinsurance communities and if subsidized by donor funds could be a worthwhile endeavor to explore. 

Q6: What are donors and DFIs currently offering to potential investors?

A6: Donors play a critical role in enabling bilateral and multilateral institutions to develop risk mitigation products. On the multilateral donor side:

  • The EBRD, whose Trade Facilitation Program (TFP) covers commercial counterparty risks for international commercial banks. Since the war began, the EBRD has supported 400 million euros in trade transactions in Ukraine, a significant increase compared to the pre-war period.
  • Recently, the EBRD formed a partnership with the World Bank’s MIGA. Under this agreement, MIGA will issue $200 million to support trade transactions made through Ukrainian state-owned banks.
  • Additionally, in September 2022, MIGA allocated $30 million to Ukraine for a political risk insurance pilot project. While the scope of this project is limited, the goal of the pilot is to scale the program in the future and preliminary results will be released in April.
  • Ukraine’s economy minister has proposed consolidating different efforts aimed at providing political risk insurance for Ukraine.

On the bilateral side, several donors are also creating programs to incentivize companies, especially from their respective countries, to invest in Ukraine.

  • UK Export Finance (UKEF) is providing war risk insurance for British companies that invest in Ukraine and has allocated 200 million pounds for political risk insurance in Ukraine.
  • KUKE, the Polish Export Credit Agency will provide cover to Polish exports to Ukraine that are exempt from the National Bank of Ukraine’s payment moratorium, including coverage for political risk.
  • The German Federal Ministry for Economic Affairs and Climate Change is offering investment guarantees for German companies interested in investing in Ukraine. Risks covered are war, expropriation, transfer and conversion risk, and breach of contract.
  • The United States Development Finance Corporation (DFC) mobilized $250 million to support access to capital for Ukrainian SMEs, and provided additional financial support and portfolio guarantees to commercial banks in order to support lending to SMEs. The DFC also provides political risk insurance for the ERU Group and its partners to support foreign investment in the Ukrainian energy sector. The DFC and USAID recently entered into a memorandum of understanding (MOU) with the Ukrainian government to identify private sector projects to be considered for financial support. 
  • Finally, USAID provided technical assistance for Advantage Ukraine, which will provide both U.S. and non-U.S. investors guarantees to cover Ukrainian exposure.

Although these are laudable initiatives, the volume of insurance needed for domestic and private investors will be significant. Donor agencies and DFIs could partner on a more concerted effort and pool resources to provide a multi-donor political risk or war insurance mechanism, with a view to crowd in private investment.

Q7: What will the key pieces be in enabling the private insurance market in Ukraine, especially in the early stages?

A7: During the war and initial recovery phase, private insurers will have little appetite to provide insurance in Ukraine. A donor-backed political risk or war pool could provide coverage even if uncertainty around the conflict remains. The coverage could focus first on war insurance for inland transit of movable and stored goods, which may exhibit a less deterrent risk profile. It could then be extended to direct and indirect property damage, as well as agricultural yield losses. A multi-donor war pool would diffuse risk borne by each individual donor and maximize the likelihood of private sector participation. As Ukraine strengthens its economic growth during recovery, it can begin to take on risk. Several agencies are working on such proposals, including USAID, the European Investment Bank, and the EBRD.

Insurance for the international and Ukrainian private sector will be equally critical, and the international community needs to coordinate efforts. Technical assistance should also be provided to the Ukrainians and private political risk insurance market to develop best practices. Public support relies on the participation of the private sector, which should gradually increase as the intensity of the conflict fades. Local and global insurers should be involved as soon as possible.

Another key piece will be exploring regulatory challenges. Even prior to the war, an insurance company could only operate in Ukraine if they were a registered Ukrainian insurance company. In addition, there are currently currency controls in place that restrict the transfer and conversion of local currency into hard currency or transferring hard currency out of the country. This policy is affecting the ability to pay premiums to international insurance carriers. The National Bank of Ukraine is working to address these concerns, but greater speed and effort is needed.

The grain deal provides a case study of how the public and private sectors can cooperate despite great challenges. The United Nations signed an MOU with Russia that protects food and fertilizer exports in the Black Sea. The United Nations also provided risk assessments and intelligence to give a private sector actor, Lloyd’s, confidence to assume risk. The insurers of the grain deal also spread risk, which is another method to lower risk for each individual actor.

Romina Bandura is a senior fellow with the Project on Prosperity and Development and the Project on U.S. Leadership in Development at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Janina Staguhn is an associate fellow with the Project on Prosperity and Development at CSIS.

Janina Staguhn

Janina Staguhn

Former Associate Fellow, Project on Prosperity and Development
Romina Bandura
Senior Fellow, Project on Prosperity and Development, Project on U.S. Leadership in Development