In the midst of ongoing conflict, one solution is emerging that could be a crucial factor in attracting foreign investment to Ukraine: war risk insurance. Asters Senior Partner Armen Khachaturyan, Dentons Partner Adam Mycyk, Integrites Partner Igor Krasovskiy, and Redcliffe Partners Managing Partner Olexiy Soshenko discuss how this specialized insurance product is shaping the investment landscape.
“A Gap-Filling Insurance Product”
“Since the outbreak of full-scale war, only direct damage to public and private sectors in Ukraine has reached over USD 150 billion, let alone indirect losses and additional expenses needed for the recovery needs,” Krasovskiy begins.
“An ongoing war, with nearly 3 years of destruction of critical infrastructure, typically doesn’t draw your average risk-averse investor to any country,” Mycyk adds. As a result, “investments in Ukraine have been limited, significantly constraining the potential for economic growth,” Soshenko agrees. “One of the primary challenges for foreign investors is the lack of political or war-time risk insurance to protect their assets in Ukraine.”
“Standard insurance policies typically exclude risks associated with wartime scenarios, such as missile or drone attacks, property losses due to occupation, and related damages,” Soshenko observes. Krasovskiy says that “unfortunately, most of the insured companies are unable to recover their losses as the standard pre-war insurance products expressly excluded the coverage for damages caused due to political violence. Surprisingly, even rare holders of political violence insurance policies have struggled with receiving compensation from insurers. Naturally, even risk-taker investors, who are brave enough to invest during wartime, are anxious to reduce their exposure to war risk.”
War-risk insurance, “unlike standard commercial insurance policies that traditionally exclude losses caused by war, has become a tool to help mitigate risk exposure for investors,” Mycyk continues. “As a gap-filling insurance product, it aids in unlocking capital and enabling reconstruction efforts.”
Consequently, “war-risk insurance is crucial for attracting foreign investment to Ukraine at the time of its lasting war with invading Russia,” Khachaturyan notes. “It provides for investors’ financial security thus incentivizing investments badly required for reconstruction of Ukraine’s industry, transportation, housing, and energy ruined or damaged during the war. It can also improve the resilience of local businesses suffering from Russian military attacks.”
Key Elements
In terms of what is included, Khachaturyan explains that “in September 2024 the Ministry of Economy and the National Bank of Ukraine submitted the draft Law on the System of War Risk Insurance, providing for establishing a nationwide insurance system to compensate losses incurred by individuals and companies as a result of military actions in Ukraine. The bill also provides for the establishment of the State Agency for War Risk Insurance, which will be responsible for implementing the policies on assessing and managing war risks.”
War-risk insurance, Khachaturyan clarifies, “covers a wide range of risks, from physical destruction to business interruption. The specific elements of this type of insurance depend on a particular insurer.”
Distinct from standard insurance, Soshenko elaborates that war-risk insurance typically includes: (a) coverage for damages caused by hostile actions, such as military operations, missile strikes, and drone attacks, (b) compensation for property loss or profit loss due to occupation of territories where assets are located, and (c) coverage for injuries or fatalities of personnel working near conflict zones.
Mycyk adds that two key categories of insurance products are primarily being offered: “Political Violence Insurance – covering losses from physical damage caused by war, terrorism, riots, or civil unrest,” and “Political Risk Insurance – protecting financial components of investments by covering risks like expropriation, currency inconvertibility, debt defaults, and government actions.”
Role of International Institutions
In this context, “international financial and development institutions play a pivotal role, particularly given the limited capacity of local insurers and Ukraine’s classification as a red zone by foreign reinsurers,” Soshenko explains. “Notable initiatives include the EBRD’s collaboration with Aon to launch a EUR 110 million guarantee for Ukraine war-risk insurance” and “DFC’s reinsurance facility for ARX, offering up to USD 50 million in political risk insurance.”
“Although local insurers still have very limited access to the global reinsurance market, they offer war risk coverage to businesses and SMEs,” Krasovskiy continues. “The caps on such insurances rarely exceed USD 1 million per insured and the assets located near critical infrastructure or closer than 100 kilometers to the frontline are uninsurable. However, thanks to an up to USD 350 million reinsurance facilities mechanism of the DFC, devised in collaboration with Aon, local insurers are expected to raise the limits up to USD 1.5 million per location and considerably expand their insurance portfolios.”
“International and multilateral organizations, international and development finance institutions, and export credit agencies took the lead by working with private insurers to expand offerings,” Mycyk agrees. “While some global insurers are beginning to offer policies, premiums and terms remain highly variable. The Ukrainian government is also working to incentivize insurance solutions, including through Ukraine’s own Export Credit Agency.” Additionally, he notes that “IFIs/DFIs and ECAs are playing a pivotal role by offering financial guarantees and risk mitigation tools,” as these organizations “offer investment guarantees to reduce perceived risks for private investors, partner with private insurers to expand war risk insurance capacity, and support Ukrainian government initiatives to develop sustainable insurance markets.”
Khachaturyan also draws attention to international organizations that have contributed to war-risk insurance initiatives in Ukraine. “The Multilateral Investment Guarantee Agency (MIGA) provides political risk insurance and credit enhancement to private sector investors and lenders,” he emphasizes. “It also protects investments against non-commercial risks and can help access financing on improved terms. Since the beginning of the war, MIGA has provided over USD 215 million to support businesses in Ukraine.” Additionally, “The US International Development Finance Corporation provides political risk insurance, as well as loans, loan guarantees, and direct equity investments. It is now considering establishing a permanent office responsible for military risk insurance in Ukraine. In June 2024, the DFC announced a package of USD 357 million for political risk insurance in Ukraine.”
Furthermore, Krasovskiy says, “Marsh McLennan, Lloyd’s, and the Ukrainian government have launched a so-called ‘Unity insurance facility’ to provide affordable war risk insurance for ships carrying all non-military cargo.”
What To Expect
Looking ahead, Khachaturyan highlights that “Ukraine’s investment attractiveness was always based on its geographical location, favorable climate, abundant natural resources, and pursuit of integration into the EU. Based on a recent survey of the European Business Association in Ukraine, Ukraine’s Investment Attractiveness Index has slightly improved in 2024, but the war remains the main negative factor affecting the investment climate. The efficient and transparent war-risk system should stimulate international investors to enter the market, giving them not only an opportunity to recover damages but the confidence to do business in the warzone.”
Soshenko also underlines the need for additional measures, including “amending the cross-border payments moratorium (NBU Regulation No. 18 dated February 24, 2022) to enable non-resident insurers and reinsurers to enter the Ukrainian market,” and “adjusting regulatory requirements to provide greater assurance to market participants.”
“It is unlikely that a robust insurance market in Ukraine can be created without the involvement of global private reinsurers,” Krasovskiy adds. “The government in collaboration with international organizations should encourage and incentivize global reinsurers to re-engage on the Ukrainian war risk which is a crucial pre-condition for private investments to flow in Ukraine.”
Mycyk believes that war-risk insurance is, “just one tool available to scale investment flows into Ukraine.” Additionally, “complementary incentives, such as tax breaks, investment guarantees, and financing support for insured projects can help further reduce perceived investment risks. The effectiveness of war-risk insurance often relies on international guarantees and support – if this support diminishes, the availability and affordability of insurance could be adversely affected.”
This article was originally published in Issue 11.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
