Ukrainian insurance market "on the verge of a huge crisis"

Published in: Risk, Risk management, Reinsurance, Regulation, Rest of Europe, People

Companies: Insurance Business Association of Ukraine, European Insurance Alliance

Leaders from Ukraine's Insurance Business Association and European Insurance Alliance tell Cintia Cheong how the country's insurers are coping with the operational and financial impacts of the war

Amid a desperate situation in Ukraine, there is an insurance industry doing its best to support the economy and the war effort – and keeping itself going.

Since the invasion by Russia on 24 February, the country's insurance sector has been fighting on many fronts.

The war has created unprecedented operational and financial risks. Along with the obvious disruption caused by military action, Ukraine declared martial law and imposed financial measures, including a moratorium on cross-border foreign currency payments. On the other hand, there has been some relief from regulatory requirements.

Insurers have also campaigned for Western companies to support them by cutting ties with Russia.

But the risks for Ukraine's sector continue to spiral. Companies are not only worried about employee safety and business continuation, but the growing solvency, inflation and liquidity risks.

In this Q&A, Vyacheslav Chernyakhovsky, general director of Ukraine's Insurance Business Association, and Maryna Voronianska, head of the managing board at non-life and health insurer European Insurance Alliance, explain how the sector is coping with the situation and what they think of Western insurers' response to the Russian invasion.

Can you explain your situation at the moment? Are you, your family and your colleagues safe? How have you been able to continue working?

Vyacheslav Chernyakhovsky: My family is relatively safe in a Kiev suburb where it is still quite calm. Some of the employees of the association remained in Kiev despite regular shelling and destruction of residential buildings.

During the pandemic, we have established remote working. Considering in most regions of Ukraine – except for those where the situation is the most difficult (for example, Mariupol, Chernihiv, Kharkiv) – the internet connection is stable, it is possible to continue working. This is what we are doing, because it is necessary to help insurance companies adapt to war conditions, as well as coordinate interaction with our colleagues abroad.

"We cannot say that all employees of our member companies are safe" 

Unfortunately, we cannot say that all employees of our member companies are safe. There are already cases of injuries. Houses and apartments have been destroyed or significantly damaged. We do not yet know what happened with employees who have not been in touch with their companies for more than two weeks.

Maryna Voronianska: Everyone makes efforts and contributes towards winning the fight by keeping the economy functioning, including the insurance business, which is also having a hard time right now. My family and I stay in Ukraine and try to work and help our army.

Have insurers been able to continue doing business since the war began? Are staff able to work? Are new policies being written? Are claims being paid?

VC:The insurance market has suffered significant losses but most insurance companies will continue to operate: offices have either been moved to western Ukraine, or employees are working remotely from different parts of Ukraine and even from cities outside the country.

Vyacheslav ChernyakhovskyResearch conducted by our organisation with 15% of insurers in Ukraine shows two-thirds of companies have seen their revenues drop by 50% to 90%.

Only 5% of companies continue to work without problems. About 60% of companies continue to work despite difficulties. Almost a third have interruptions in their operations and can only work partially. Almost 10% of companies cannot continue to operate.

Marine insurance does not work, because now it is impossible for ships to enter Ukrainian ports. Aviation insurance has completely stopped. Travel, auto and property insurance have all but stopped. There are corporate clients who continue to work and pay regular premiums.

The insurance market of Ukraine is now on the verge of a huge crisis, as the bulk of solvent customers have left for abroad and the timing of their return to Ukraine is still unclear.

The rise of the dollar and the euro after the lifting of the National Bank of Ukraine (NBU) moratorium [on foreign currency transactions] is expected to be significant, which means the prices of all imported spare parts and materials will rise sharply. At the same time, insurers collected premiums and formed reserves in hryvnia under other economic parameters, i.e., there will simply not be enough money for repairs when buying spare parts at new prices.

There will be injuries and deaths from abandoned and unexploded ordnance, and this will already be covered by life and accident insurance policies.

MV: The insurance market has suffered significant losses since the beginning of the war, but insurers, including our company, continue to work. Most of the staff have found the opportunity to work remotely since the outbreak of the coronavirus pandemic. So, depending on the situation in the region, some work remotely, some are in the office.

Undoubtedly, there is a significant drop in payments. Voluntary medical insurance and motor third-party liability agreements are in the greatest demand. Insurers are making payouts despite force majeure announcements by the Ukrainian Chamber of Commerce and Industry.

Are Ukrainian insurers able to help society in other ways, for example with the humanitarian crisis resulting from the war?

MV: Insurance workers have joined the ranks of the Armed Forces of Ukraine, many to the Territorial Defence Forces. Some work with volunteers, like all conscientious citizens of Ukraine. Our company has also transferred funds to support the Armed Forces of Ukraine.

VC: Absolutely, all Ukrainian insurance companies are now helping the country to win [the war]. Many have transferred taxes to the state budget in advance, as requested by the NBU. Almost all have made large donations to support the Ukrainian military and humanitarian initiatives.

"To be honest, I do not know a single person in my social circle who would not be engaged in helping the country"

Some have gone abroad or to the western part of Ukraine to help as volunteers: they collect humanitarian supplies and financial assistance, help resettle refugees and tell the truth about what is happening in Ukraine to our foreign colleagues who cannot fully comprehend the horror of the catastrophe that Russian troops staged in peaceful Ukraine.

To be honest, I do not know a single person in my social circle – both among colleagues of insurance companies and just acquaintances – who would not be engaged in helping the country and our fellow citizens to the best of their ability now.

What do you think of the Western insurers' response to the Russian invasion? Do you welcome the decision by many insurers to sell their Russian assets and withdraw from Russian business? What more can be done to help?

MV: There are different reactions. The NBU has requested international reinsurers to continue provide reinsurance protection without payments, since Ukraine has introduced a ban on transferring foreign currency abroad. Therefore, insurers cannot make payments under reinsurance agreements.

Maryna VoronianskaIn addition, on 3 March, the NBU asked international reinsurers and brokers to stop working with Russian insurers. Russia has decided to ban cooperation with Western reinsurers, which we only welcome.

On the positive side, Ukrainian citizens can travel abroad in their own cars without insurance green cards as a result of agreements reached by the NBU, the Ministry of Foreign Affairs of Ukraine and state bodies of Poland, Slovakia, Hungary and Moldova, etc. This step is very important and timely.

The alienation of the assets of Russian insurers is certainly supported. This is a bloody business.

VC: Fully welcome. The outcome of the war will be decided by the economy. Every sanction, every exit of any business from the Russian market helps to stop Russia's aggression.

In the very first days of the war, all the insurance trade bodies of Ukraine wrote to all insurance associations, insurers and reinsurers in Europe and the US with an insistent request to completely abandon any interaction and financing of the Russian insurance business.

Now we are writing to insurers that are still operating in Russia. We explain the sanctions against Russia and the collapse of the rouble exchange rate will make the Russian insurance market uninteresting for many years due to the inability to conduct profitable activities.

We understand how much Western insurers are doing to help Ukraine. In particular, many European countries have provided our refugees - who are mainly women, children, the elderly and those under stress and despair - free cross-border insurance and coverage for possible losses in road accidents with Ukrainian cars.

"The alienation of the assets of Russian insurers is certainly supported. This is a bloody business"

I received very touching letters and calls from colleagues from Eastern European associations with important words of support and offering any help to our employees if they come. It's incredibly valuable. After all, it is the countries of Eastern Europe that know better than most what Russian aggression is.

At the global level, the best help is unconditional support for the imposed sanctions and, independently of them, the complete severance of any business ties with Russia.

Your association has requested relief from several regulations during the war. What has the government agreed to do, so far?

VC: The NBU has so far decided to not apply penalties for late reporting, for violation of capitalisation requirements and for violation of a number of requirements under licence conditions.

In addition, insurers are not subject to measures for violation of the mandatory criteria for the adequacy of regulatory capital and solvency, liquidity, profitability, assets and operational resilience.

The regulator has allowed simplification of the handling claims process and accepting applications for payment and necessary documents in electronic form.

The new Insurance Law became effective on 19 December 2021. However, the market was given a two-year period (i.e., by 1 January 2024) to align with the new requirements. Has the crisis affected insurers' implementation of the requirements?

MV: Of course. It is likely there will be a need to revise its terms and the period of enactment, since many of the new conditions of the law should have been implemented in a stable economy.

At the same time, the insurance market will clearly need to recover from the financial crisis after the victory. We certainly look forward to the support of our Western partners in the future, and we are sure that the restoration of the country will serve as a significant impetus for the development of the insurance market.

VC: It is now quite obvious that after the war it will be impossible and completely pointless to try for a period of less than two years to implement the requirements. I have repeatedly stated their redundancy, even in peacetime, in the process of drafting the bill.

Only the Verkhovna Rada [the Ukrainian parliament] can change the timing of the implementation of the law. Of course, at present, the parliament is busy adopting laws directly related to the functioning of the state during the war. After its end, our association will send an appeal to the Verkhovna Rada with proposals to amend the law and revise the terms and procedure for its adoption.

How has the war affected Ukrainian insurers' solvency?

VC: Definitely negative for the reasons I described above. Right now, insurance companies have reserves made from the premiums they had collected before the war, but because they hold assets such as fixed-term deposits and government bonds, insurers cannot turn them into cash quickly. At the same time, insurance claims have increased.

If this situation continues, companies will be forced to lay off employees.

MV: The NBU has temporarily lifted sanctions for insurers' violation of solvency indicators, asset quality and a number of other indicators. The current situation is difficult for insurers [as] there is a significant drop in premiums.

However, we are all working hard to maintain the business, maintain customer confidence and the credibility of the financial sector. For our firm, the reserves have been formed in full and solvency indicators are being met.