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Political risk insurance and Ukraine – pouring oil on troubled waters

Financial, Executive and Professional Risks (FINEX)

By Sam Wilkin , Stuart Ashworth and Paul L. Davidson | April 28, 2022

The volatile geopolitical landscape means companies should prepare for a prolonged test of their ability to manage global risks.

It has been seven weeks since the start of the Russia-Ukraine conflict, and despite prior warnings from Western intelligence agencies about Russian intentions, the scale of the conflict has come as a shock – with stated Russian objectives going beyond what many expected.

The action has met with widespread condemnation and the imposition of wide-ranging sanctions against Russian and Belarussian companies and individuals by numerous foreign governments, including Australia, Canada, the EU, Japan, New Zealand, South Korea, Switzerland, Taiwan, the U.K. and the U.S. Sanctions have already escalated to include restricting Russian central bank transactions and excluding certain Russian banks from the SWIFT financial messaging system.

One widely understood “red line” has thus far held firm, however: European countries and NATO have avoided direct military involvement in the conflict. As a result, much Western opposition has been in the economic and commercial sphere, comprising sanctions and other measures that appear likely to inflict serious harm on Russian businesses, including both state-owned and private businesses.

Presuming that Russia continues to pursue its objectives and this red line remains in place, we may assume that Western economic pressure on Russia will only intensify. Senior Russian politicians have already threatened to respond via economic retaliation against Western companies.

56% of the companies we surveyed expressed concern about governments retaliating against companies in diplomatic disputes.

In our 2022 WTW Political Risk Survey, 56% of the companies we surveyed expressed concern about “governments retaliating against companies in diplomatic disputes.” This concern has now been borne out, with both Russian and Western companies likely to suffer significant losses as a result of the conflict. In early March, Russia's ruling party, United Russia, said that a government commission had approved the first step toward nationalizing assets of foreign firms that leave the country in the wake of economic sanctions over Ukraine.

Potential losses from the conflict

Russia and Ukraine are large exporters, especially of commodities. By way of example Russia and Ukraine together represent 29% of global wheat exports. The impact of delays, port closures and sanctions will likely be felt in economic losses all over the world. Meanwhile, higher energy prices have the potential to severely impact countries that are dependent on energy imports.

In addition to such economic losses, companies may experience specific losses from insurable political risk perils.

Losses arising from the imposition of sanctions

  • Pre-shipment contract frustration policies

    Companies who have purchased contract frustration insurance for their export contracts for the supply of goods and services to Russia and Belarus and who are now unable to deliver those goods and services and raise payment invoices would be entitled to file a claim under the insurance policy for the irrecoverable costs and expenses incurred in relation to the undelivered goods and services.

  • Post-shipment contract frustration policies

    Companies who have purchased contract frustration insurance for their export contracts for the supply of goods and services to Russian and Belarus public buyers, which have already been delivered but have not been paid for when due, would be entitled to file a claim under the insurance policy for the nonpayment of their invoices.

  • Physical damage losses in Ukraine caused by political violence and war

    Companies that have purchased political violence and war insurance on their property and physical assets located in Ukraine would be entitled to file claim under the insurance policy for any war damage that arises from the Russian invasion.

Losses arising from the forced abandonment of property and physical assets located in Ukraine

Companies that have purchased forced abandonment insurance on their property and physical assets located in Ukraine would be entitled to file claim under the insurance policy for the losses sustained where they are forced to abandon their property and physical assets in Ukraine due to their inability to manage their property and physical assets safely as a consequence of the Russian invasion.

Losses arising from the expropriation/seizure of foreign-owned assets in Russia or Ukraine

Companies that have purchased expropriation insurance on their property and physical assets located in Russia and Ukraine would be entitled to file a claim under the insurance policy for the losses arising from the seizure or confiscation of their owned property and assets by the Russian or Ukrainian government and/or body purporting to act as a governing authority in control of a region formerly a part of Ukraine, whether or not recognized by the government of the insured and notwithstanding the manner of its accession including by military force.

Losses arising from the forced divestiture of foreign-owned assets in Russia or Ukraine

Companies that have purchased forced divestiture insurance on their investment, property and physical assets either located in Russia and Ukraine, or arising from an investment in or joint venture company with a sanctioned Russian or Ukrainian company, would be entitled to file a claim under the insurance policy for losses arising directly as a consequence of the imposition of a law, order, decree, regulation, or directive issued by their own government, which requires them to sell their interests in these entities.

Losses arising from the inability to remit hard currency or convert local currency into hard currency

Companies that have purchased exchange transfer and inconvertibility insurance on scheduled remittances such as dividends and intercompany loan repayments from Russia and/or Ukraine may be entitled to file a claim for these sums if they unable to transfer or convert them for a period not less than the applicable policy waiting period (typically 180 days).

Losses arising from the failure of the Russian/Ukrainian borrower to make loan repayments due under a loan provided by a foreign lender

A bank that has purchased nonpayment insurance in respect of a loan to a Russian/Ukrainian borrower would be entitled to file a claim under the insurance policy for the amounts due from the borrower if they have failed to make payments of the sums due on the due dates under the terms of the loan agreement.

While insurers are, for obvious reasons, unlikely to entertain any new enquiry for risks domiciled in Russia or Ukraine, at present they are nonetheless committed under the policies that have already been underwritten in these countries – as political risk policies are noncancelable by underwriters for the entire period of the policy (other than for the nonpayment of premium), and policy periods can be underwritten for noncancelable periods of up to 15 years.

Note that the foregoing does not seek to make absolute statements as to the recoverability of any specific loss under an applicable insurance policy since the validity of any claim under any of these insurances is subject to and governed by the specific terms, conditions and exclusions of each policy, but it does seek to describe the circumstance in which an insured party would be able to file a claim under such a policy.

Looking ahead

Even when the conflict in Ukraine comes to an end, assumptions about the open globalization system on which many Western companies’ business models are predicated will remain in question. Companies will need to brace themselves for a long struggle in which their capabilities in managing global risks will be sorely tested. A retreat from globalization is certainly possible, and business models will no doubt need to be reshaped in order to enable organizations to identify, manage and effectively navigate the new risk landscape.

Given the continuing volatile geopolitical landscape across the globe we would expect that increasing numbers of multinational companies and global exporters to give increased emphasis to the consideration of political risk insurance programs as part of their normal prudent risk management processes.

Disclaimer

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).

This article may contain information or materials created or provided by third parties over whom Willis Towers Watson has no control or responsibility. These third-party information or materials are not under Willis Towers Watson’s control, and Willis Towers Watson is not responsible for the accuracy, copyright compliance, legality, or any other aspect of such third-party information or materials. The inclusion of such third-party information or materials does not imply endorsement of any third parties by Willis Towers Watson or any association of Willis Towers Watson with any third parties.


Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for losses relating to the Ukraine crisis. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include coverage relating to the Ukraine crisis. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third-party sources we consider reliable; however, we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates. The Ukraine crisis is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information.

Authors

Director of Political Risk Analytics, Financial Solutions

Head of Credit risks and Political Risks for Corporates, and Head of Sales, Client Management and Innovation, Financial Solutions

Senior Advisor, Financial Solutions

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Senior Vice President, US Political Risk Product Leader
Political and Credit Risk

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