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Insider in Full: Ukraine-Russia: The slow-burn, asymmetric, double-digit-billion clash loss

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Topics: Aerospace Claims & Losses Marine Cargo Marine Hull Marine Liability Political Risk & War

The Ukraine-Russia crisis is likely to generate a low double-digit-billion, slow-burn industry loss which will serve as an overhang on market profitability for years to come...

Insurance Insider conducted an extensive market canvass of senior market executives in London and further afield to gather insight on the size, shape and impact of the unprecedented loss event.

While there is still huge uncertainty in several areas – including, of course, the duration of the war in Ukraine – market estimates for the industry loss coalesced around a $10bn-$20bn range, with many sources saying they felt $10bn would be the floor for this loss event.

At this size, the loss is manageable for the industry – a $10bn-$20bn hurricane wouldn’t provoke much more than a shrug of the shoulders in terms of loss quantum. However, the Ukraine-Russia crisis will have effects which are more profound and far-reaching than any hurricane of that size.

The industry is facing a cross-class loss which will fall asymmetrically on the market, depending on the weighting of individual carriers to the affected classes. In insurance these are primarily: (1) aviation, (2) political risk, (3) political violence (PV) and, to a lesser extent, (4) marine war.

From an insurance perspective this is a London-centric loss, with the Lloyd’s market comparatively overweight on aviation, marine war and PV – although London company market players such as AIG, Chubb, Liberty, Fidelis and Convex also write here. Political risk and credit losses will be spread more globally, although Lloyd’s still writes a lot of this business alongside major global players.

The loss is bad news for a fragile Lloyd’s market that has made an underwriting profit only one year in the last five and is at the crucial point of a make-or-break modernisation programme. A major loss which lands on the Lloyd’s market, but spares its US domestic competitors, is additionally unhelpful.

However, a significant amount of these losses are expected to be ceded to reinsurers. In specialty, retentions are bought low and large reinsurance limits are available.

Swiss Re CEO Christian Mumenthaler in April claimed that around 50% of the industry losses from the conflict would be reinsured, and while some executives agreed with this figure, the majority said they felt this estimate of reinsurers’ share was light – with a 60-40 or 65-35 split feeling more likely.

It is worth noting that, as the industry loss grows, a greater proportion of each dollar of losses is ceded to the reinsurers – so the share taken by reinsurers is closely tied to the ultimate loss quantum.

One of the biggest challenges facing the market is how to reserve appropriately as this livecat event rumbles on.

Net numbers are relatively easier to estimate than gross (although there is still significant uncertainty around event definitions) but, perhaps predictably, Insurance Insider’s canvass found no consensus in reserving approach so far.

A number of private companies said they had already put up a large conservative reserve for Q1. However, this does not tally with what we have seen from the public companies, with a smattering of Q1 estimates so far (and some major companies such as Chubb not putting up a reserve at all).

Sources said they would expect most companies to have put up their best-estimate, all-in reserve in Q2, or else face pressure from auditors – although many admitted they would not have a more accurate view of the loss until the end of 2022, when there may be greater clarity on the political risk element of the loss.

It is likely that many companies will take a step-reserving approach as they get greater clarity, although this will create an overhang on profitability for a longer period.

No one speaking to Insurance Insider went so far to confidently predict balance sheet impairments as a result of losses stemming from Ukraine, or Russian sanctions. Lloyd’s management came out early on in the conflict to say losses are unlikely to impact the Central Fund.

Compared to the start of the invasion, there is relatively less panic and nervousness in the market around this loss – particularly with respect to aviation war, even though there is no more certainty around where losses from aircraft lessors will fall (and what the quantum will be).

However, there is generally a sense of gritted teeth that there are a complex and challenging few years ahead as the loss starts to unravel.

There was unanimity that the insured losses from this conflict would be heavily litigated, as well as being a nightmare to adjust. There is also scope for short-tail Ukraine losses to creep, and there is the risk of valuations being way out of kilter with rebuild costs given the inflationary environment.

The immediately affected lines of business such as aviation war and PV are already seeing rate rises, with some rating uplift in connected lines written as part of the same portfolio (for example aviation all risks and terrorism).

The prospects for a broader rating uplift are less certain. A number of sources said this event was another bit of bad news, alongside elevated inflation, which would act as a deterrent for further rate tapering. They added that the drip-drip nature of how this loss will be recognised would give underwriters a reason to argue for the slow drift down of rate rises to be longer.

A more pessimistic view is that the loss would have little to no impact on the US P&C pricing cycle, on which Lloyd’s in particular is more reliant.

In the rest of this piece we take a closer look at the immediately affected classes: aviation, PV, political risk, marine war and specialty reinsurance.

Aviation war: The biggest swing factor

  • ‘Common sense’ suggests this is a war loss, sources say
  • Insured exposures assuming war loss around $12bn-$15bn
  • Litigation will draw uncertainty out on aviation impact for several years

The situation facing the aviation war market is the biggest part of the Ukraine-Russia loss and the biggest swing factor in the ultimate loss quantum.

This publication first reported extensively in early March that the aviation space was staring down the barrel of years of litigation as the market attempts to defend itself from billions of dollars of claims stemming from aircraft lessors seeking to recoup losses from stranded craft in Russia.

At the time, sources estimated insured exposures of $12bn-$15bn in the event of a war loss. However, since Insurance Insider’s initial report, the market has no real further clarity on the size of the loss, or on what part of the market it will ultimately land.

Most executives said “common sense” would suggest this is a contingent aviation war loss, but moves by the largest lessor, Aercap, to claim $3.5bn on its all-risks policy, have thrown this into dispute. Furthermore, the lack of a clear loss trigger has the market divided on whether this is a loss for the aviation market at all, depending on how that trigger conflates with the imposition of sanctions.

With the exception of Aercap, most lessors have not yet filed a formal loss notification on any of their contingent policies but a number have already started to write off the value of planes.

Insurers tend to buy extensive reinsurance for their aviation war books, given its availability and value for money.

However, how much cedants can recover will depend heavily on the event definition. Notably Hannover Re’s Q1 reserve charge for Ukraine did not include aviation due to uncertainty.

Cedants typically consider a PML event to be something involving two planes, or a handful of planes at the outside, pointing to a total mismatch around an event which could include hundreds of planes being lost.

Disputes again seem likely in this situation, with cedants likely to push for any losses to be defined as two events to allow them to reinstate cover.

Another eventuality that could be challenging is if theft claims are made under contingent all-risks policies (à la Aercap). Under this circumstance, it is not clear that reinsurers would allow cedants to aggregate these losses, potentially inflicting multiple sideways retention losses on insurers and leaving them recovering under proportional treaties only.

PV: The tide finally turns

  • Early industry insured loss estimates of $1bn-$2bn, although sources note the war is ongoing
  • Rates already moving on PV business with some spillover into terrorism, SRCC
  • Expectation that cedants will pay significantly more for reinsurance from 1 January

Losses to the market’s PV book are arguably the most straightforward part of this clash loss and the shortest tail.

Insurance Insider’s canvass generated an estimate for insured losses for PV at $1bn-$2bn stemming from assets in Ukraine, which compares to gross exposures of up to $5bn estimated by sources at the beginning of the conflict.

The $1bn-$2bn range also tallies with news broken by this publication that a leader of Marsh’s PV facility had sought to trigger a get-out clause – which is invoked in the event of $1bn of industry losses – on a premium discounting mechanism.

Sources noted that the most damage had occurred in the south and east of Ukraine, with far less damage in the west of the country – limiting losses to date. However, they also noted that this was a livecat event, and the war showed no signs of abating.  

PV is widely written across both Lloyd’s and the London company market, but sources identified – in alphabetical order – AIG, Chaucer, Liberty Specialty Markets, QBE and Talbot as carriers which could have significant Ukraine PV exposure.

The longer the war rumbles on, the greater the volume of losses insurers will retain – with most reinsurance protections including a 30-day clause, which effectively treats every 30 days of conflict as a single event, and ground-up losses are reset to zero.

Taking the invasion of Ukraine on 24 February as a starting point, two lots of 30-day periods have already passed.

The provision of reinsurance for PV has come under the spotlight in the wake of the conflict, as a risk which was often thrown into composite treaties for very little additional premium.

There is the widespread expectation that PV reinsurance will now be split out and separately priced, with one source suggesting the price for PV reinsurance protection has already effectively doubled.

WRB’s inability to secure PV protection at 1 April provided a precursor for what is expected to be a challenging period of negotiations between cedants and reinsurers at 1 January, when a large proportion of treaties renew.

Many insurers told this publication that the whole PV market was effectively predicated on the provision of cheap reinsurance, and this would trigger a wholesale uplift in pricing in the PV market, with potentially some spillover into terror and strikes, riots and civil commotion.

Sources said this uplift was already happening for accounts unaffected by the conflict, and this marked a definitive sea change in a market which has perennially complained of compound rate reductions for years.

Greater rate momentum is expected in the insurance market when carriers have a better idea of their reinsurance costs, and some flagged the potential for greater differentiation between PV, terrorism and SRCC pricing for the first time in many years.

Also in focus are the broker facilities on which the PV market is heavily reliant, with loss notifications already being received on business written via the arrangements. Sources said they expected these facilities to come under pressure in the wake of the conflict, but to date there had been no concrete sign of real pressure for them to bring down remuneration or make terms more favourable to carriers.

Political risk: Waiting for the dust to settle

  • More clarity expected on losses in six months’ time
  • Final industry loss number not expected for many years
  • Market already reacting to uncertainty with low-double-digit rate rises

The extent of political risk losses is one of the biggest “known unknowns” in this event and there have been very few loss notifications to date.

While a select few ventured very preliminary industry insured loss estimates in the $1bn-$5bn range across credit and political risk, many said it was far too early to tell.

This compares to previous March estimates by one source that credit and political risk exposure was around $2bn in Ukraine and $4bn in Russia.

There was consensus among those canvassed that there would be greater clarity around insured losses in around six months’ time – although it was noted that the full extent of the political risk component of the Ukraine-Russia loss wouldn’t become apparent for a number of years.

However, the market already appears to be reacting to the uncertainty, with sources suggesting rates were up in the low double digits.

Political risk players include large company market carriers in London – such as AIG, Chubb and Liberty – and various Lloyd’s syndicates. However, the “big three” in the credit market are Coface, Atradius and Allianz Trade (formerly Euler Hermes).

It was noted that much of the market started to manage down their Russia political risk books following the annexation of Crimea in 2014, although significant exposure still exists.

There is also scope for early loss estimates to be managed down as recoveries are made by clients, and some sources said they had not yet seen the level of expropriation of assets as they had been expecting.

However, the situation is highly complex. Even if Russian companies can deliver on their obligations, there is additional uncertainty about whether they can access the dollars to pay, sources said.

Reinsurance for political risk is bought separately to composite specialty treaties and is typically written on an excess-of-loss basis.

Marine war: The 12-month wait

  • Stranded ships will be written off as total losses typically after 12 months
  • Value of stranded vessels previously estimated at $700mn-$800mn, although this could now grow
  • Highly reinsured by the continental reinsurers

The losses from the marine war market are easier to estimate than in other classes and stem from boats stranded at Ukrainian ports.

Sources have previously told this publication that ships with a total value of around $700mn-$800mn are unable to depart for safe waters, although a handful of sources speculated whether that may be now underbaked, due to the breach zone being extended to include inland waters.

However, a major loss event would only come to pass around March 2023 – the 12-month cut-off point for when ships are written off as total losses. There is hope the conflict will be resolved by that date.  

There is still the possibility of individual vessels being struck by missiles, but so far losses have been manageable, sources noted.

Marine war is a heavily Lloyd’s-focused market, but major company players include Fidelis MGA Navium and Convex. The Scandinavian market also has some involvement, while some of the big war mutuals – The Swedish Club and The Hellenic War Risks Club – are reinsured by the conventional marine war market.

The class is highly reinsured into continental reinsurers. Most carriers have a reasonable retention of $5mn-$10mn on excess-of-loss contracts, but some do buy quota share.

Again, whether this loss is defined as one event or several will be key in determining how much insurers can cede to their reinsurance partners.

Specialty re: RIP the composite treaty?

  • Retentions bought low and limits high
  • Expectation among cedants that these losses are heavily reinsured, although reinsurers argue the picture is more nuanced due to wordings
  • Moves by reinsurers to unpick composite treaties and reprice going forward

The Ukraine-Russia loss has pulled the specialty reinsurance market into the hot seat. Described by some sources as the “darling” of the reinsurance players, this is a book of business which was both diversifying away from cat, and generally had run quite profitably.

Specialty treaties generally attach quite low – most people estimated these in the $5mn-$10mn range – and the available limits are high. A blend of quota share and excess-of-loss structures are used – with the Lloyd's market leaning more towards the latter.

It was emphasised by market executives that specialty reinsurance is generally cheap to buy, and therefore it often makes sense to heavily reinsure specialty books. Out of all the specialty classes, aviation reinsurance was highlighted as the best value for money for buyers.

In just one available data point, Markel booked $105mn of gross losses in Q1, of which $70mn were ceded to reinsurers.

These buying habits have furthered the general expectation that a significant part of this loss will be ceded to specialty reinsurers – the major players in this space including Swiss Re, Hannover Re and Munich Re, as well as the likes of Liberty Specialty Markets, Validus Re, Scor, RenaissanceRe and MS Amlin.

In response to questioning on Ukraine exposure, Swiss Re has previously said it has a 10% share of the global reinsurance market but did not clarify if this was for specialty specifically.

At the time of writing, only Hannover Re and RenRe out of the reinsurers had reported Ukraine-related losses in their Q1 results. Hannover Re included a “precautionary” reserve of 3% of NEP, or EUR143mn ($150mn), related to Ukraine, while RenRe reported $27.1mn in net claims and claims expenses related to the invasion on its casualty and specialty books.

Hannover Re said in an investor call that this reserve does not include aviation due to ongoing uncertainty.

The bigger the loss swells from the conflict, the more is likely to land on reinsurers – and there is potential for these specialty reinsurance players to take greater net losses from this event than compared to a nat cat event, given the far more limited specialty retro market.

Some reinsurance writers said the situation was more nuanced and would vary from cedant to cedant. They pointed to hours clauses in PV reinsurance wordings and exclusionary language in some aviation war covers which would mean that a lesser proportion of cedant losses would fall on reinsurers.

Hannover Re management gave some clarity on its retro provision on its Q1 investor call. Board member Sven Althoff said: “We buy specific insurance and retro for marine and aviation. It’s more all-risk, less war, but we have coverage for both. K-Cession comes into play on all-risk losses, and the aviation part in K would have coverage.”

Althoff confirmed Hannover Re was not buying retro in trade credit or political risk.

The composite treaty is in focus, in which several classes including aviation war, marine war and PV are rolled into one protection for pricing which many have argued has long been less than risk adequate. (See: Ukraine losses will expose the cracks in specialty (re)insurance).

Many in the market said they felt this would be the end of the composite treaty in its current form, with protections for different classes split out and priced and structured separately.

There was already evidence of this at the 1 April renewal, with WRB unable to secure reinsurance for its PV book in London, and Chubb seeking to work around the challenges by taking the unorthodox move of invoking the “run-off” clause on its existing treaty and buying two separate covers for the 2022-23 year.

The move by Chubb, which effectively leaves its reinsurers holding the tail risk for Ukraine losses, has created some frustration among reinsurers.

There is the expectation in the market that there would be a flight to quality in the specialty reinsurance market, with reinsurers favouring better-performing cedants and offering slightly better terms there.

A handful of sources said they expected the pressure to ramp up towards the end of the year as 1 January negotiations get underway. However, most said they expected to pay significantly more for their outwards protection on specialty going forward. 


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