Some of the biggest names in marine reinsurance are just days away from stopping covering key war-related risks for ships bound for Russia and Ukraine, a potential source of alarm for shipping companies that transport everything from oil to grain.
Hannover Re and Munich Re are among the reinsurers that have warned against underwriting any more risks – even indirect ones – in connection with the Ukraine conflict from the beginning of 2023, according to people familiar with the matter.
“The major German reinsurers and others are trying to rule out losses resulting from or related to the war in Russia and Ukraine,” said Chris McGill, cargo class insurer at insurance company Ascot Group, declining to name specific companies. “This is the first time we’ve even had to consider a material change to our reinsurance program.”
The reinsurers’ potential withdrawal comes after many have seen their results set back by the war. Hannover Re said it had set aside 331 million euros ($351 million) in reserve for potential conflict-related losses in the first nine months of 2022.
Reinsurers are pushing to ensure the price of coverage reflects the full extent of the risk involved, said Marcus Baker, global head of marine and freight practice at Marsh, one of the world’s largest insurance brokers.
risk sharing
“The concern of most reinsurers at the moment is the accumulation of risks and thus potential losses from an event,” he said. “For example, if Russia had seized all of those planes, all planes that were stuck at multiple customers in Russia would have resulted in a loss.”
If no solution is found, some owners and their primary insurers may have to assume a larger share of the risk for ships sailing to the two countries. It remains unclear at this point whether Hannover Re, Munich Re or others can give way, or how much appetite there is from others to fill the gap.
War risk coverage covers many things including bombs, torpedoes, terrorism, foreign attacks and ship seizure.
Representatives of Hannover Re and Munich Re declined to comment. Other reinsurers are believed to be taking a similar approach to the two companies.
reduce borders
The fewer reinsurers cover, the greater the burden on insurers. Some will likely have to reduce supply – which will force shipowners to rush to try to find alternatives, or even operate with less coverage.
“We need to reduce the boundaries that we set,” McGill said. “That will force interest rates to rise as you get an automatic reduction in supply.”
Higher premiums and lack of coverage threaten to complicate the export of key commodities, potentially fueling supply chain chaos and global inflationary pressures if shipments falter.
Although sanctions against Russia are not considered a direct motive for the reinsurers’ step, they do make it more difficult to deal with the country’s raw materials.
Anyone wanting UK or European insurance for Russian crude oil can only do so if they pay $60 a barrel or less for the freight. A similar mechanism begins in early February for refined fuels.
Negotiations between insurance providers and their reinsurers take place once a year and are often contentious. This year’s talks have been particularly tense because of the war, people familiar with the matter said.
If the big reinsurers eventually stop covering naval business in Russia and Ukraine, shipowners could turn to insurers from Chinese or Turkish firms, according to Denis Shashkin, P&I correspondent in Russia’s major port of Novorossiysk.
“Premiums could go higher in the short term, but over the long term it’s unlikely to make much of a difference,” he said. “Shipowners may choose not to insure cargoes, but they must obtain P&I insurance in order to have their vessels chartered by charterers.”
The wording of the disclaimers and the fact that they include indirect risk is a concern because it’s unclear what other trades might be affected, McGill said.
So far, these things have not been clarified, he said, echoing the views of several other industry representatives.
“If we get another Arab Spring related to food price hikes, are you going to tell us: we don’t have reinsurance on that because it’s caused by the war or is directly related to it?” he said. “They can’t answer that.”
