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Insurers are scrambling to update the definition of war

The Ukraine crisis demonstrates how far businesses have become a target for sanctions or retaliation.

PHOTO: Stock
Since Russia invaded Ukraine, more than 750 western companies have either left Russia or curtailed operations there. Only those in sanctioned sectors were compelled to leave; others have done so in support of Ukraine or as a result of consumer pressure.

But companies remaining in Russia may have trouble getting insurance because underwriters fear they will unwittingly insure companies with operations that touch areas under US, UK or EU sanctions. Companies violating sanctions face significant penalties, especially from the US government, whose punishments range from million-dollar fines to prison sentences for executives.

Geopolitics is causing different trouble for other businesses too. After more than three decades of globalisation, companies are now a convenient target when governments want to retaliate against other countries. For instance, Beijing has curtailed access to the Chinese market for companies from Australia, Taiwan and other countries. And Russia plans to seize the assets of western firms now leaving the country. Mercedes-Benz predicts losses of €2bn if Russian authorities seize its assets.

Insurance is, of course, meant to protect businesses against sundry risks. But asset seizure as a geopolitical tool doesn’t fit neatly into an insurance category. “The US, the UK and the EU have tried to harmonise their sanctions, but there are still significant differences and each one is a pitfall,” says Neil Roberts, head of marine and aviation at the insurance industry body Lloyd’s Market Association.

“For insurers, there’s no choice. If they want to keep insuring, they have to absorb the due diligence work, but even so it’s difficult to notice sanctions exposure. Additionally, there is a moral and reputational aspect, and we’re seeing increasing self-sanctioning, where entities simply decide to pull out even if they’re permitted to trade.”

Meanwhile, geopolitically motivated import suspensions or punitive tariffs have cost Australian winemakers 96 per cent of their exports to China. And while underwriters offer war insurance, calamities like these don’t precisely constitute war either.

“The insurance industry is scrambling to update the definition of war,” says Julian Enoizi, who was until earlier this month chief executive of Pool Re, a terrorism underwriter jointly backed by the insurance industry and the UK government. “But there are going to be gaps, which will create uncertainty. Businesses may think they have cover and will find out they don’t, or they may want to buy insurance and can’t.”

As confrontation short of war between states continues to proliferate, companies will face other new and costly contingencies that also don’t quite fit into existing insurance categories. Insurers even face having to model and price any risks resulting from hostile government actions that may not yet exist. “Even climate change is easier to model than war-related activities,” Enoizi notes. “The average underwriter can’t know what a nation-state is capable of.”

Today’s geopolitical wrangling is so dangerous to business because it’s taking place in a globalised world. International operations, supply chains and sales are, of course, a prerequisite for continued financial success. But now this presence is becoming a vulnerability.

In its 2021 emerging risks report, Lloyd’s of London, the insurance marketplace, suggests that a gap in geopolitical insurance protection is emerging. Like insurers deciding to suspend coverage so as not to risk unwittingly violating sanctions, underwriters may conclude it’s not worth trying to insure unknowable threats posed by squabbling governments. And without insurance available to protect them, companies could conclude that certain sorts of business are no longer feasible.


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