Early success in the effort to restore Ukraine's war risks insurance market, though small in the context of the overall need, is bringing hope that more substantive solutions will be possible.

War risks cover for Ukraine from the private market all but disappeared as insurers and reinsurers withdrew in the wake of Russia's invasion of the country two years ago. But the cover is essential to attract the investment needed to rebuild Ukraine after the war, as well as for keeping the economy ticking during the conflict.

While the private insurance market is still largely absent from the Ukraine market and likely to remain so until the war is over, some cover emerged. November 2023 saw the launch of Unity, an insurance facility offering $50 million of hull and protection and indemnity war risks cover to support the shipping of grain and other food supplies from Ukraine's ports in the Black Sea.

Marsh & McLennan Cos. Inc., which was involved in putting together the facility, is exploring other public-private initiatives with the Ukraine government, according to Andrew Bailey, principal, government and public institutions practice at consulting firm Oliver Wyman Group, part of Marsh McLennan. While these are likewise small-scale efforts and focused on particular segments of the economy, they could offer some useful guidance on how to build some larger-scale solutions in the future.

"We'd hope that this ... supports the Ukraine economy right now but also provides some helpful lessons and proofs of concept," Bailey said in an interview.

The Unity facility is underwritten by Lloyd's of London underwriters and backed by standby letters of credit from Ukraine's import-export credit bank and state-owned Ukrgasbank, and confirmed by German commercial bank DZ Bank.

Marsh McLennan has also worked with the Ukraine government on a war risk data platform, designed to tempt private insurers back into Ukraine by allowing them to quantify the risk involved accurately.

A large and growing risk

Jump-starting the private war risks insurance and reinsurance market is seen as a key part of efforts to maintain and rebuild Ukraine. A group including the European Bank for Reconstruction and Development, the European Commission, Norway and Switzerland signed a statement of intent on cooperating to relaunch the private war risks market in Ukraine at the Ukraine Recovery Conference in London in June 2023.

In the absence of private war insurance, publicly funded cover has been enabling some investment. The Multilateral Investment Guarantee Agency (MIGA), the political risk insurance arm of the World Bank, has so far provided the equivalent of $215 million in guarantees to Ukraine since the start of the war, Olga Sclovscaia, MIGA's regional head of central and eastern Europe and central Asia, said in an interview.

MIGA's Ukraine cover is backed by the Support for Ukraine's Reconstruction and Economy Trust Fund (SURE TF), which it set up in February 2023 with initial $23 million funding from Japan. SURE TF now has $73 million of funding and is targeting $300 million.

SURE TF essentially takes the role of the now largely absent private market; MIGA would typically take a portion of the risk from the cover it provides on its own balance sheet and reinsure "a significant portion" privately. The trust fund covers the risks on a first-loss basis, which provides partial cover for a risk.

MIGA continues to raise funds and is aiming to issue more guarantees than the $215 million it has already. The agency continues to look at collaborating with other entities to support larger projects, but these are mainly in the public sector, Sclovscaia said.

MIGA remains hopeful that more private insurers will be tempted back in. "It continues to be very much our objective and ... an objective of everyone who is involved in supporting investments and Ukraine's recovery to see how we can indeed restart the reinsurance market in Ukraine," said Sclovscaia.

The Unity facility, while small compared to the overall need, is "one example that things are possible still," and that the market had not been stagnant since the onset of the war, Sclovscaia said.

Beyond the war

Providing more comprehensive private cover will be difficult and may not be possible until after the war. Amassing the required war risk cover for rebuilding Ukraine is a tall order and getting taller as the war wears on. Direct damage to Ukraine's infrastructure stemming from Russia's invasion had hit $154.9 billion in January, according to the Kyiv School of Economics. The total cost of reconstruction and recovery has risen to $486 billion as of Dec. 31, 2023, from $411 billion a year ago, according to a joint estimate from the Ukraine government, the World Bank, the European Commission and the United Nations.

Insurers and reinsurers are likely to tread carefully for some time after the hot phase of the war is over, and even then, private capacity is unlikely to be enough. Marsh McLennan has proposed the creation of a war risks pool for Ukraine, similar to the government-backed schemes that cover systemic risks such as terrorism in several countries, but with the support of multiple governments.

"A public-private pool model is the only thing that we could see as having the potential scale to ultimately unlock the scale of investment that would be required," Bailey said. He added, however: "That doesn't mean there aren't very substantial challenges to making something like that happen in practice."

Setting up such a pool would require backing in some form from the G7 and other major economies, Bailey said, noting that even setting up risk pools on a single-country basis is "an involved process." Given the complexity, and the focus on providing for the more immediate day-to-day needs of the war effort, "if you went to talk to G7+ treasuries or ministries of finance, you'd find little appetite to go down this route at the moment. And it may be that that picture doesn't change until we've seen a change in the state of war."

Some initiatives are getting ready to start providing cover post-war, although they are still a work in progress. At the Ukraine Recovery Conference, Aon PLC, Lloyd's and Vienna Insurance Group AG, which is in the Ukraine market, agreed to work together to source international and reinsurance cover for manufacturing and construction risks in Ukraine, excluding war cover, to support reconstruction.

It is not possible yet to say how much coverage the collaboration will provide as the war is continuing, Peter Höfinger, deputy general manager and deputy chairman of the managing board at Vienna Insurance Group, said in an email. "We are working on establishing the necessary contacts and obtaining agreements in order to make a positive contribution to the planned reconstruction in the insurance sector."