Why insurance arrangements are pivotal to Ukraine’s rebuild

The insurance industry has said it stands ready to provide traditional cover for rebuilding Ukraine’s infrastructure and wider built environment when the market begins to stabilise but restoring the private market for specialist war risk insurance, which has collapsed since Russia’s invasion in 2022, is essential to provide businesses with confidence to invest in delivering projects in Ukraine.

The complete reconstruction – and modernisation – of Ukraine’s war-damaged and destroyed infrastructure and built environment will only be possible when there is greater stability within the country, but work has already begun on ensuring insurance solutions are in place to support a rebuild.

Ukrainian authorities, Western governments and development finance institutions are all likely to have an important role to play to ensure a holistic approach is taken towards insurance arrangements and in providing financial comfort to insurers and reinsurers to convince them to re-enter the market.

Opportunities, risks, and the role for insurance in building investor confidence

Notwithstanding the ongoing conflict, Ukraine has been working behind the scenes with international allies, financing institutions and industry to lay the groundwork for wholescale reconstruction once war subsides, recognising that it has neither the finance nor resources to rebuild the country on its own.

Within that long-term project will be opportunities for global construction contractors, suppliers and developers – and financial institutions too – to direct their capital, skills and technologies towards not just restoring the infrastructure, real estate, energy and industrial assets impacted by the war, but to enabling Ukraine to rebuild those assets to modern, green, digital standards, and in doing so to help put Ukraine on the road to wider economic recovery.

However, that investment will only flow to Ukraine’s reconstruction if businesses can get comfortable with the risks associated with making that investment.

Lots of factors influence business confidence: economic conditions; geopolitical volatility; the risk of corruption in the market; and the availability of loans, grants or other forms of public finance, for example. In respect of major projects specifically, the extent to which there is a reliable pipeline of work, and the ease with which land use and planning issues can be navigated, are further relevant factors.

Insurance arrangements are also highly influential in shaping investor appetite, because access to affordable insurance offers businesses a means by which to manage risk.

Insuring construction projects

A raft of insurance products can be purchased to insure against different risks that arise in the context of construction projects.

Some insurance policies, for example, provide cover for accidental loss or damage to insured property during the construction phase, including from floods, fire, theft or vandalism, while others provide coverage in relation to materials being shipped. Public liability insurance and professional indemnity insurance also offer contractors protection against third party claims that might arise, such as from customers or members of the public, and there are also various forms of property insurance that can be acquired by owners and operators of property.

Specialist forms of insurance can also add further coverage, including around climate or cyber risk.

In Ukraine, the availability of affordable war risk insurance will also be vital to encourage business investment post-conflict. Russia’s invasion in 2022 led to the collapse of the private market for war risks insurance cover in Ukraine, leaving a substantial gap in insurance cover for would-be contractors, developers, and operators or owners of assets, as well as for suppliers of materials, goods or services, in the country.

Some insurance solutions have been developed

Even if war in Ukraine ended in the short term, the restoration of a fully functioning private war risk insurance market in the country would not happen overnight. Insurers will understandably be reluctant to enter or re-enter any market where there is a recent history of conflict to provide war risk cover. There is therefore an important role for states and development finance institutions to play in giving insurers the confidence they need to operate in Ukraine and in turn ensure that there is affordable, comprehensive insurance on offer to investors considering becoming involved in Ukraine’s rebuild.

During the course of the war, some public-private partnerships have emerged to deliver essential war risk insurance cover in pockets of the market.

For example, insurance broker Marsh McLennan and insurance marketplace Lloyds of London worked with the Ukrainian government, export credit agency and state-owned banks to create an insurance facility called Unity in November 2023. The initial facility provided war risk insurance worth up to US$50 million to facilitate “the export of grain and other critical food supplies globally from Ukraine’s Black Sea ports”. The facility was expanded in March 2024 to include non-military cargo for ships carrying iron ore, steel and containerised shipping”.

A similar collaboration between insurance broker Miller, technology provider Clearwater Dynamics, Ukrainian authorities and insurance providers, announced in September 2023, provided ships carrying grain from Black Sea ports with protection against losses arising from the Russia-Ukraine war.

Western governments and development finance institutions have also signalled their intent to support the insurance market in Ukraine.

The World Bank’s Multilateral Investment Guarantee Agency (MIGA), for instance, last year provided war risk guarantees worth up to US$9.2 million to support the M10 Industrial Park project in Lviv, in what Ukraine’s economy minister Yuliya Svyridenko said at the time was “a signal not only for new potential investors who are considering investment opportunities in Ukraine… [but] … also the first step towards the launch of the war risk insurance market”.

In addition, a group formed of the European Bank for Reconstruction and Development (EBRD), the European Commission, Norway, Switzerland, Taiwan Business and Ukraine signed a statement of intent in June 2023 that signalled their intentions “regarding the joint efforts and collaboration between them with respect to re-launching the private insurance market to support resilience and reconstruction of Ukraine”. The UK government outlined its intent to support the scheme last year too, citing a lack of insurance as a potential barrier to UK companies participating in Ukraine’s rebuild.

More recently in June 2024, the US International Development Finance Corporation announced a new financing package that includes a US$50 million facility aimed at building up the private war risk insurance market in Ukraine.

A call for insurers and reinsurers to change tack

In September 2024, major global brokers Marsh McLennan and Aon teamed up to call on insurers and reinsurers to reconsider their approach to insuring risk in Ukraine. They said “blanket exclusions” should be removed as these “ignore the diversity of risk throughout the country”. The brokers added that grouping risks originating in Ukraine together with risks originating in Russia and Belarus, for the purposes of excluding them from reinsurance contracts and limiting insurance or reinsurance capital, “is not rooted in the data and analytics that drive the assessment of risk”.

They said: “The availability of insurance for war risk, especially across health care and agriculture, will stimulate economic expansion and employment, while strengthening the foundation of Ukraine’s economy to support a robust reconstruction.”

“Arbitrary exclusions for Ukraine contribute to confusion about the vastly different levels of risk in the country. As a result, there are potential issues with how (re)insurers underwrite risks between regions directly impacted by the war and many areas of central and western Ukraine which have suffered little to no war damage. The use of data and analytics can enable more impactful insights into where insurance capital can contribute to Ukraine’s reconstruction and further economic growth,” the two brokers added.

Delivering a holistic insurance solution for Ukraine

Large international insurers will have an important role to play in providing the scale of insurance coverage required to underpin reconstruction. There are many sophisticated insurance markets globally from which such insurers could be attracted to support Ukraine’s rebuild, including the US, China, UK, Japan, France and Germany.

To be attracted to provide insurance in Ukraine, insurers will want states and development banks to stand behind the cover they provide – to act as guarantors for losses they could suffer from potentially substantial payouts they may need to make in the event conflict returns.

Institutions have already begun to step forward – as of February 2024, for example MIGA had issued around US$215 million in political risk insurance (PRI) guarantees in respect of Ukraine. However, MIGA last year highlighted that US$514m worth of support for PRI guarantees and reinsurance had been assessed as needed in Ukraine for 2023 alone. A much larger system of insurance-related guarantees therefore needs to be provided for to cover the full scale of Ukraine’s rebuild. This will dwarf the insurance guarantees provided to support economic recovery in the former state of Yugoslavia following the war there in the 1990s.

While a system of guarantees for insurers will be essential, the insurance industry can also take steps of its own to deliver the sort of comprehensive cover required.

Insurance brokers can play an important role in connecting with different insurers globally to bring together consortiums that can provide the extensive coverage required on a regional or project-type basis, liaising as necessary with the Ukrainian authorities and funders to offer a comprehensive solution. That degree of innovative thinking and collaboration will be hugely valuable since we expect individual insurers to look to avoid so-called accumulations when re-entering the market in Ukraine – they will want to avoid too much exposure to the same types of projects and to the same regions of Ukraine, meaning that multiple insurers will be needed to provide the cover required to facilitate reconstruction.

Delivering comprehensive insurance arrangements will also necessitate bringing reinsurers to the table to help underwrite some of the risks that insurers provide cover on, and existing schemes that involve a pooling of risk across the insurance industry – such as applies in the context of insurance arrangements for complex risk such as nuclear incidents – might also provide a blueprint for potential insurance solutions in Ukraine.

In our view, insurance arrangements for Ukraine’s rebuild projects should be organised in tandem with broader project finance – which in Ukraine will come from a mix of private investors, development banks, and international partners like the EU. The US financial support for Ukraine has been heavily politicised and the long-term position is now unclear following the recent US presidential election result. In turn, insurance and project finance needs to be coordinated properly with a prioritised pipeline of works, which the Ukrainian authorities are best placed to shape in partnership with funders.