Today's episode focuses on Ukraine. For this discussion, I'm joined by Vyacheslav Andriyko, who's headed the Willis office in Ukraine since 2005. Before that, Willis was represented in Ukraine, and many of us traveled frequently to Kyiv and other cities, attending conferences, visiting the local market and clients, et cetera.
I'm also joined by Karan Chandan, who's been with Willis since 2017. He works in the Political Violence team of Willis Crisis Management Division. And he's been looking at risks from Ukraine since 2018.
Let's start, if we may, with you, Slava, by looking at the history of political violence cover in Ukraine. And perhaps it might be helpful if you were able to look at political violence in terms of several different periods. Let's say we start between Ukraine's independence from the USSR and the Maidan protests of 2005, and then between 2005 and the Russian-backed separatist movement in Eastern Ukraine and the enforced takeover of Crimea by Russia in 2014, and then between 2014 and February 2022, which was the start of the full-scale Russian invasion, and from then up to the current day.
VYACHESLAV ANDRIYKO: Simon, thank you very much. Perhaps before we go into this retrospect, let me just remind our audience that political violence insurance coverage protects against various forms of political, religious, and ideological violent acts, including terrorism, sabotage, riots, strikes, and other forms of civil unrest and war. This product is very well known and is used to protect business assets in volatile territories.
It is fair to say that before Russia's annexation of the Crimean Peninsula and the outbreak of the war in Donbas, Ukraine rarely faced politically motivated violence. We can probably count less than a dozen instances when such policies were placed for Ukrainian assets. For example, before the Euro Cup Final football games back in 2012, all stadiums in Kyiv, Donetsk, Kharkiv, and Lviv had to be insured against terrorism.
Rare violent incidents that occurred in all the years of the country's independence mainly transpired during elections. You were right to mention several revolutions. But at the same time, it was power struggles in some industrial regions of Ukraine, where emerging regional or oligarchic groups were fighting against each other.
Situation has dramatically changed since 2005 Orange Revolution, when Ukraine chose the European track of its development and completely and even dramatically transferred Ukraine from 2014 after the Revolution of Dignity. The events that unfolded following that Maidan and Russia-backed separatist movement in the parts of Luhansk and Donetsk regions pushed Ukraine to 12th position in the global terrorism ranking, up 43 positions at once.
So the full Russian invasion in Ukraine in '22 has completely changed the political violence landscape in the region. And the situation, unfortunately, remains extremely turbulent till today, with full-scale war going on and multiple other challenges facing the country. As a result of this development, market capacity and availability of the full political violence insurance have diminished significantly. But at the same time, the demand has grown and the understanding of the political violence as a package as perils grew within the Ukrainian businesses.
SIMON AUBREY JONES: That's a very useful background, Slava, and thank you for that. So when would you say clients first recognized the need to buy cover? And what form did it take?
And if I could just develop that question a little bit more and ask you what general level of understanding there is among clients as to how they can protect their assets. What types of cover are available? And how has that understanding of the product changed over time? And then would you say there's particular types of entities or particular geographical regions or occupancies that are more alert to the cover available and taking advantage of it?
VYACHESLAV ANDRIYKO: Oh, Simon, that's a very broad and complex question. And let me just start by saying that, echoing from what I've said in answering your first point, that the demand is growing for what is currently known as war risk insurance. And particularly, it's among businesses and investors.
And it's not only due to the ongoing war, but it's primarily because of the growing number of losses and damages resulting from military actions, armed aggression, aerial strikes, and all sorts of war-related risks. The general understanding among clients and local insurers is based certainly on the nature of these perils. And they're catastrophic perils, as we know. But we need to stop.
SIMON AUBREY JONES: So looking at today's environment, what would you say are the key challenges faced by local buyers and also by the local insurers in satisfying demand? And has the government been at all helpful in providing solutions for the local clients?
KARAN CHANDAN: So thanks, Simon. I believe for local buyers, the most important thing as of today's date in the country is to go for the PVI cover. But unfortunately, due to the commercial market stance, it's coming at a very high and very unaffordable premium for most of the businesses. Most of the times in our market, what happens is that if the clients are buying cover for a number of years, the markets have the data ready for a number of years.
And then they say that, OK, we'll support this client at this difficult time. However, as Slava mentioned that in the past, not many insurers or businesses have bought this cover, which means our markets are providing capacity at a very red-hot climate, which comes at a very, very high price. And hence, the demand is higher now. Supply is low, which drives the price quite crazily in this current state.
SIMON AUBREY JONES: Thank you, Karan. So you would say there is some interest from the international market in supporting the local players. What are they doing in terms of coverage solutions? Are they largely following the local market and local wordings, or are they adopting more conventional international wordings?
KARAN CHANDAN: The wordings, which our markets are more willing to write the businesses their traditional wordings, the conventional Hiscox and Beazley, which is tried and tested wordings in the market across the portfolio. The best thing about those wordings are that most of the insureds, if they have got a claim or a loss due to some unfortunate event, depending on the policy terms and condition, it does result in a fair payout, depending on the loss at the time.
SIMON AUBREY JONES: So we could say, could we, that there is a mix of locally developed wordings by the local insurance market and international wordings, which are widely used both locally subject to reinsurance and then placed onto largely the London market, I would guess. Looking at the reinsurance scene, Karan, please, if you may, what could you say about the international market's actions to broaden the availability of cover?
KARAN CHANDAN: We have noticed a shift in appetite from our market in the course of last three years, wherein it has been a full-blown invasion from Russia into Ukraine. The result of that was in the initial 2022 onwards, there was a blanket exclusion across the portfolio, be it standalone accounts or be it global accounts with Ukrainian exposure in it. And the markets were taking a very stern stance that it will be excluded, as the reinsurance treaties will not cover those kind of exposure.
However, things are changing. And there has been a bit of fresh pair of eyes approach adopted by a lot of insurers and the brokers as well. The main thing which is helping this is the presence of publicly available data due to the help of Ukrainian government, wherein people have got access to a couple of websites wherein they can literally see the data for every 24 hours. And it's pretty much the live example of how the things are changing in the country.
What is also very important to understand is the size of the country. Ukraine is the second biggest country of Europe. And it is a wide country, wherein the Western part of the country is far better than the Eastern part if I talk about today's context in terms of PVI insurances.
To my knowledge, the markets are not writing-- are not interested in writing certain kind of risk, which is the normal thing in any country, which is like government assets or military assets or specific energy-based infrastructure because we have seen in the last couple of years that they have been targeted quite widely in the country.
SIMON AUBREY JONES: Thank you, Karan. Slava, do you want to add anything to what Karan has just described?
VYACHESLAV ANDRIYKO: I think it is also very correct to admit that for many underwriters, foreign underwriters, the size of Ukraine became an eye-opening factor. It's a huge country, and it's only a small fraction in the East, which is the front line. And so during these three years of the war, the underwriters learned to treat Ukraine on its geographical size and merits.
And also, I would like to add a few more words about the local insurers, local market. The companies in Ukraine have all the necessary skills and understanding of the product, and they can certainly contribute in fronting, justing, settling claims, and making sure that everything is provided in complete and professional manner and, most importantly, in accordance with the Ukrainian law in practice.
SIMON AUBREY JONES: And, Slava, would you say there are any operational obstacles that get in the way of cooperation between the local market and the international market? We've heard also quite a few noises about PPT developments, and perhaps you could just touch on those briefly.
VYACHESLAV ANDRIYKO: When the war started, you remember that there was a ban on reinsurance premium transfer. That was a definite hurdle, which the market, together with international brokers and international markets, managed to overcome and persuaded the government that insurance is a very important global tool to protect business against perils, including war insurance.
Currently, the discussion and the search for setting up a APP project or an asset or a company that will be run by the government and will primarily focus on war risk, this search and this discussion is going on. There have been a number of initiatives. Some of them have already been rejected by the market and even the stakeholders.
However, there were several presentations, including very recent ones in Rome and Brussels, where the National Bank of Ukraine and the Ministry of Economy have presented their views on how to make the state agency that will provide coverage for bank collaterals, very disputable at the moment question. Many experts believe that it may lead to monopolistic pricing and may neglect underwriting guidelines altogether and may virtually turn this initiative into an additional tax.
As I say, the search and discussions are ongoing. I'm very pleased that we are a signatory to the memorandum of understanding on insurance market development for Ukraine, which was signed and released at the Ukraine Recovery Conference in Rome on 11th of July this year. And the purpose of this memorandum is to articulate the intention to work collaboratively on key priority initiatives to develop the insurance sector in Ukraine and support private-sector investment.
SIMON AUBREY JONES: Thank you, Slava. And turning back to you, Karan, I understand there was a meeting recently hosted by the chairman of Lloyd's, which involved a number of Lloyd's syndicates. Can you tell us a little bit about that initiative?
KARAN CHANDAN: Sure, Simon. There were a lot of efforts done in the background, but eventually, it was taken very positively by the insurance world. This was held in the Lloyd's of London alongside ministry of UK and Ukraine, both. There were a couple of ministers present alongside top secretaries of the insurance companies, including the brokers as well.
And the event was called Re-engaging the Global Insurance Industry: London-Ukraine Insurance Roundtable Conference. On this one, it was good to see the positivity around the solutions which the ministry was looking forward to. The topics covered were circled around insurance operations in Ukraine, public-private partnership framework, and market development strategy, which basically was setting the practical steps to be taken forward in order to assess the businesses locally.
Furthermore and most importantly, Willis want to be the part of the journey in the long run. We believe there are a lot of opportunities when the country is turning towards normalcy in the near future, as there will be, hopefully, a lot of lenders-driven projects for infrastructure which will come in Ukraine. And we want to be there to assist the clients when they need us.
SIMON AUBREY JONES: Thank you, Karan. You mentioned normalcy. And of course, we all hope that there will soon be a ceasefire across Ukraine. How would you imagine that the market will react to that?
KARAN CHANDAN: A ceasefire, in general, everyone from the insurance world will take it with a pinch of salt because when the ceasefire happens, we have to give it a bit of waiting time to see whether it's actually successful or is there any violation to the ceasefire? God willingly, I mean, it will be hopefully successful when it happens in Ukraine.
And what may happen due to ceasefire is that we will see a lot more demand. Most importantly, what we will be noticing is the capacity will be available to Ukraine businesses, which will drive the pricing down and make it far more affordable to the clients based locally. And there will be a big turnaround in terms of growing the country up in the right direction.
SIMON AUBREY JONES: And should there be no ceasefire just around the corner-- perhaps I could turn this back to you, Slava-- where will the local market and indeed the international market-- where will they go should there be no ceasefire around the corner? Will they be able to expand their activity, or will they draw back into themselves and cease cover altogether?
VYACHESLAV ANDRIYKO: Being local and hopefully understanding what may happen or what may not happen, I may say that the situation in Ukraine is transforming a lot of things, including the political violence policy and coverage as we know it till today. And I agree with Karan that the market likes when there is a long-term commitment to peace and when there is no violence or little violence in the future.
But I believe we are going into a reality where ceasefires will be terminated by activities with more or less frequency, and the market will have to learn how to work with Ukraine because Ukraine is not going to give up. Ukraine is supported by European Union and United States and other countries. And not only supported, but a lot of weapons have been already provided to Ukraine to defend its country.
And that means that investors will come. Ukrainian business will continue to operate, and they will need to protect their assets. They will need to protect their business. And it's only through insurance that, again, we'll have to adapt to the new reality. We'll have to accept this new way of operating at a time when there will be, like zebra, black and white spots in time.
SIMON AUBREY JONES: You mentioned earlier, Slava, that there is an initiative within the Ukrainian government to establish some kind of company or agency. Will international governments or IFIs step in to support that agency if the international commercial market is unable to do so or unwilling to do so?
VYACHESLAV ANDRIYKO: That's a very serious question. And in fact, next week, there will be another hearing that will involve the Ministry of Economy, National Bank, and several Ukrainian insurance associations. We are part of the League of Insurance Companies, and we were asked to speak at that gathering.
And the view or the concept will be discussed tomorrow. And our thoughts around this concept are as follows, that the Ukrainian insurance market alone cannot provide a solution to war perils. At the same time, the government tried several times, and they've seen negative reaction from the private market and even from the private business.
And therefore, I believe we need to have a approach-- or discuss the approach that will combine local insurance companies who risk their own capital. And over a period of time of about two years, they were insuring war perils themselves without any reinsurance support. We should form a group of these companies, international brokers, and large international insurers, including Lloyd's syndicates, to discuss what can be done in a situation like Ukraine, which is, don't forget, the biggest military conflict after the World War II in Europe, and how different state sovereign actors may support this initiative, this scheme of insurance. And perhaps that would be a combination with sovereign support and international insurance business.
SIMON AUBREY JONES: And I understand that Citi UK is supporting the Ministry of Economy and has established a number of working groups to look at specific features of coverage and how to, I suppose, extend the affordability and availability of cover going forward.
VYACHESLAV ANDRIYKO: Very much so. And what is even more important, Simon, you asked about the awareness of the Ukrainian business and investors about political violence or war insurance in Ukraine. And that is exactly what Citi UK is also providing to the wider Ukrainian audience, and that is literacy and understanding of the products.
I think it is important that everybody should speak the same language, understand the same concepts, and do not develop something which is not proven but rather base efforts on definitions and wordings that have been widely tested, have the backing from the major reinsurance companies and, of course, the understanding of the local insurance market.
SIMON AUBREY JONES: And is it fair to say-- and perhaps this one is for you, Karan. Is it fair to say that all of us in the international market have a responsibility to try and support the local market, the availability of cover, and extend knowledge locally and internationally about what can be done/
KARAN CHANDAN: Absolutely. And I think Lloyd's of London has always played a vital role in shaping or developing various products across the insurance world. In particular to Ukraine, I'm pretty sure that everyone is looking forward to the future. They are willing to assist in whatever shape or way they can. It will take some time, but we all are working towards that, yeah, as a whole.
SIMON AUBREY JONES: Well, thank you, Slava and Karan, for joining me today. And thank you all for listening to this Geopolcast. To get the episodes as soon as they're released, please make sure that you subscribe to the Geopolcast. You can find us via your usual podcast players. And please recommend us to your friends and colleagues.
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