The war in Ukraine has significantly impacted the investment landscape, necessitating innovative solutions to mitigate risks associated with war and political instability. War-risk insurance has emerged as a potential tool to attract and protect foreign investments.

This article explores recent developments in war-risk insurance products for investments in Ukraine, highlighting key initiatives and the draft law “On the system of war-risk insurance” currently under consideration by the government.

Recent developments in war-risk insurance

Several organizations have been at the forefront of efforts to mitigate military risks for foreign investments in Ukraine, amongst them the Multilateral Investment Guarantee Agency (MIGA) and the US International Development Finance Corporation (DFC). These organizations—and others—have engaged in multiple projects, providing essential coverage to encourage investment despite the ongoing war.

MIGA’s initiatives

MIGA has insured several projects, including the M10 Industrial Park in the Lviv region. These efforts are part of a broader strategy to support Ukraine’s economic resilience and attract foreign capital. MIGA is also working to raise additional funds for the MIGA Sure Trust Fund, with contributions from Japan, the UK and Norway.

DFC’s commitments

The DFC has announced a US$357 million package for political risk insurance in Ukraine. This includes a US$50 million reinsurance facility for war-risk policies, US$150 million for the agricultural export sector, and US$152 million for the manufacturing sector. The DFC is also financing projects such as the Lviv-based Superhumans Centre for Prosthetics, Reconstructive Surgery and Rehabilitation. The reinsurance facility, brokered by Aon and distributed by ARX, a Ukrainian subsidiary of Fairfax Financial Holdings Limited, aims to build a portfolio of war-risk insurance policies for companies operating in Ukraine and to support ARX in expanding its war-risk insurance offerings. It is expected to unlock more than US$200 million in new coverage for static assets in Ukraine, helping to build investor confidence and reduce investment risks. The initiative is part of the DFC’s broader efforts to support Ukraine’s economic recovery and reconstruction by leveraging private sector involvement and mobilizing capital.

European Bank for Reconstruction and Development (EBRD)

The EBRD is developing a multi-hundred-million euro war-risk insurance mechanism for property in transit and storage. This initiative involves the Ukrainian insurance market and partners in the European Commission.

Role of Ukraine’s Export Credit Agency (ECA)

Ukraine’s ECA plays a crucial role in insuring investments against war and political risks, providing a safety net for both domestic and international investors. It has recently insured its second investment project against war risks, providing UAH 92 million in coverage for Ukrainian food manufacturer Vilis. This project includes new equipment, its delivery and installation as well as the construction of a boiler house. The modernization will allow the enterprise to increase production and expand its sales markets.

National Export Credit Agencies (ECAs)

More than 14 national ECAs from various countries have opened limits for medium-term insurance of operations and investments in Ukraine. These agencies have started insuring the risks of private investments from their respective countries, with a total limit exceeding €1 billion.

Private sector involvement

Despite significant efforts by international and governmental organizations, the market share of private-sector insurers in war-risk insurance remains relatively small. The involvement of private insurers will be crucial for scaling up the availability of war-risk insurance and ensuring comprehensive coverage for a broader range of investments. The increasing efforts, initiatives and commitments by international and governmental organizations—and their cooperation and joint projects with the private sector—may eventually spur greater activity by private insurers.

Draft law on war-risk insurance system

The Ministry of Economy of Ukraine, in cooperation with the National Bank of Ukraine (NBU), has announced the development of a draft law on the war-risk insurance system. This legislative initiative aims to create a robust framework for war-risk insurance, enhancing the country’s ability to attract and protect foreign investments. The draft law is expected to address key issues such as coverage limits, eligibility criteria, and the roles of various stakeholders in the insurance process.

Key highlights of the draft law include:

A unified system

• Creation of a single, nationwide system for war-risk insurance, integrating existing programs and establishing clear rules for all participants
• Includes mechanisms such as the Unity program for insuring shipping vessels, which has already revitalized the market and reduced rates significantly

Government and international support

• System will be funded through mandatory insurance premiums and financial assistance from donors
• Collaboration with international organizations, such as MIGA and DFC, is expected

State Agency for War-Risk Insurance

• To be established under the Ministry of Economy to set policies, standardize insurance products and manage a centralized database
• This agency will also determine risk assessment and acceptance policies for insurers participating in the system

What will be covered

• Physical damage caused by war, including mandatory insurance for mortgaged property and residential construction projects (at later stages, coverage may be expanded to include more objects and a broader range of war risks, including strike and riot-related losses, etc.)
• Political risk will not be covered at the launch of the system (but may be covered at later stages)
• Objects already insured by foreign entities (ECA, MIGA, DFC, etc.) will not be repeatedly insured

Implementation timeline

• Draft is expected to be submitted for Verkhovna Rada committee consideration in December 2024

Will it work?

The outlook for war-risk insurance in Ukraine is promising and could play a crucial role in attracting foreign capital and investment despite ongoing hostilities. Here are some key points:

• Development of infrastructure: Ukraine has made significant strides in developing a war-risk insurance infrastructure. This includes mechanisms for insuring ships against war risks and the first cases of investment insurance against war risks.
• Government and international support: The Ukrainian government, in collaboration with MIGA and the DFC, is actively working to expand war-risk insurance offerings. These efforts are aimed at mitigating risks for investors and encouraging foreign investments.
• Increased investment opportunities: The availability of war-risk insurance is expected to boost investor confidence, leading to increased foreign direct investment. This is particularly important for sectors like infrastructure, manufacturing, agriculture and healthcare, which are critical for Ukraine’s recovery and economic growth.
• Competitive premiums: Initiatives like the Unity facility have shown that government guarantees can help lower insurance premiums, making it more attractive for insurers and reinsurers to enter the Ukrainian market.
• Broader economic impact: By providing a safety net for investments, war-risk insurance can help stabilize the economy, promote job creation and support the reconstruction of critical infrastructure.

While war-risk insurance can be beneficial for attracting foreign investment to Ukraine, there are several potential drawbacks to consider:

• High premiums: War-risk insurance premiums can be prohibitively expensive due to the high level of risk involved. This can make it less attractive for some investors, especially smaller businesses.
• Limited coverage: The scope of coverage might be limited, excluding certain types of risks or damage. This can leave investors exposed to significant financial losses despite having insurance.
• Market instability: The ongoing war creates a volatile environment, making it challenging for insurers to accurately assess and price risks. This instability can lead to fluctuating premiums and coverage terms.
• Dependence on international support: Effective war-risk insurance schemes often rely on international guarantees and support. If this support diminishes, the availability and affordability of insurance could be adversely affected.
• Operational challenges: Implementing and managing war-risk insurance in a conflict zone involves significant logistical and administrative challenges. This can lead to delays and inefficiencies in processing claims and providing coverage.
• Investor confidence: Despite the availability of insurance, the overall perception of risk in a conflict zone can still deter investors. War-risk insurance alone may not be sufficient to overcome broader concerns about safety and stability.

The development of war-risk insurance products is one of many strategic approaches to attracting foreign investment to Ukraine while the war persists (and beyond). Initiatives by MIGA, DFC, EBRD and private insurers like Aon are paving the way for a more resilient investment environment. The draft law on war-risk insurance represents a significant step towards institutionalizing these efforts and ensuring long-term economic stability and growth in Ukraine. While challenges remain, potential investors will ultimately need to weigh all factors when considering investments in conflict-affected areas. Hopefully the availability of (affordable) war-risk insurance will help tip the balance in favor of investing.

If you have any questions about war-risk insurance, whether your investment qualifies, or you want to explore potential opportunities in Ukraine, don’t hesitate to contact our partner Adam Mycyk or any of our other lawyers in Kyiv.