The rules for war risk insurance have become stricter. How does it threaten maritime export from Ukraine?
Additional costs for trade operations by sea are shared by importers and agricultural producers
From January 1, 2023 on, military risks in the Black Sea are officially qualified as higher than last year. The P&I Mutual Insurance Club has announced that it is excluding the entire region of Ukraine, russia and belarus from the coverage area of its reinsurance contracts. The withdrawal of coverage means that reinsurance contracts with clients, which are usually renewed for 12 months at the beginning of the calendar year, have not been extended this time. It cancels the coverage of war risks. It means that any vessel planning to enter the potentially dangerous waters of the Black Sea does so at its own risk. In case of an incident, insurers will not cover the loss.
Reinsurance is the delegation and sharing of financial responsibility for a fee. As Mind has previously written, insurers cannot take on large risks without reinsurance, because if they occur, the company can go bankrupt after paying all the money for one significant insured event. To prevent it from happening, some risks are always transferred to the international market. In this case, the insurer shares a portion of the premium with a pool of insurers that may be based worldwide.
According to Insurance Top, Ukrainian insurers paid UAH 3.3 billion in outgoing reinsurance premiums to non-residents in the year under review in 2019. P&I reinsurers cover about 90% of ocean-going vessel risks.
The exclusion of the Black Sea region does not apply to all types of policies offered by P&I clubs. However, it does include the basic one necessary for maritime transportation – shipowner's risks related to war. It covers third-party liability claims, including environmental damage and cargo damage.
Specific rules regulate the protection of the hull and mechanisms from physical damage. It eliminates the risk of hitting a mine, which is realistic for the Black Sea region.
The new rules apply to both ships and aircraft.
Mind analysed how the new rules would affect maritime exports from the ports of Greater Odesa and the "grain corridor" work, which was restored with great efforts.
Was the decision to exclude the Black Sea region from the international reinsurance coverage unexpected? No, it was not.
The level of tension had been gradually increasing since October last year, when signals began to arrive about preparing such an innovation. Local players asked the government to take measures to prevent their work from being interrupted.
Read also: Ukrainian insurance market froze, unable to reinsure abroad. What decisions do insurers expect from the new NBU Head Andriy Pyshny?
Are exclusions from coverage introduced for the entire Black Sea region? Formally, the Black Sea region includes russia, Turkey, Ukraine, Bulgaria, Georgia and Romania.
The area of Ukraine, russia and belarus, which is an ally of russia, is excluded.
Did grain export from Ukraine stop on January 1, 2023? No, it did not. The obvious slowdown in the first ten days was due to the post-holiday "warm-up."
According to the State Customs Service, as of January 9, Ukraine has exported 852,000 tonnes of grain since the beginning of January. It is a smaller, but comparable amount to the same period of the previous year. In January 2022, 1.054 million tonnes were exported.
How did the change in reinsurance rules affect export? The increased risks practically mean that the freight of a vessel for the Black Sea route has become more expensive.
As early as in the first weeks of 2023, a significant increase in the cost of chartering vessels was recorded. The delta is estimated by market participants at least 20%, in some cases – 25%.
Since the amount of insurance payments is calculated as a percentage of the vessel's value, which in turn is $20-200 million, additional costs will increase by several tens of thousands of dollars/day/voyage.
Will rates continue to rise? Yes, it is almost guaranteed.
An optimistic (!) forecast is a 1.5-fold increase compared to last year's rates in the medium term. The increase in rates is due to the rise in the cost of money/capital, which will now have to be included in risk coverage.
Who bears these additional costs? Firstly, the country – the importer/buyer who overpays for the delivery of the cargo.
Secondly, it is the Ukrainian farmer, whose logistics costs are deducted from the purchase price. The gap between domestic and global prices is now at different poles and differs a lot. Such a situation has never happened before in Ukraine's recent history.
Are there also hidden risks? Yes, there are.
The reinsurers' démarche is a bad signal that companies see the risks of being in the conflict zone as increasing.
In particular, one can assume that russia may resort to seizing ships in the Black Sea under the false pretext of transporting weapons or without explanation.
Read also: Great national grain corridor: russia’s blackmail lasted three days. Ships with grain cruise again
Another risk is the growing problem of queues on the Turkish section of the route for mandatory inspection. As of today, more than 90 vessels are waiting for inspection in the Bosphorus, and it is also taken into account by shipowners and lessees when determining the tariff.
Is the export geography changing due to the logistics problems in the Black Sea? Yes, it is changing significantly. And the growing problems in the Black Sea region are catalysing these changes.
In particular, South and North America are increasing grain supplies to Africa and Southeast Asia. Latin America, especially Brazil, as well as are partially replacing Ukrainian grain in Turkey and South Africa.
China, the largest buyer of Ukrainian agricultural products last season, is now compensating for the decline with supplies from the United States.
The volume of global grain trade is estimated at $120 billion.
Does the grain export slowdown from the Black Sea region threaten global problems? Yes, of course.
Reducing the presence of Ukrainian goods on the global market leads to further food inflation in rich countries and direct famine in poor countries.
What is the public position of insurers? According to Ascot, an underwriter at Lloyd's, London, the insurance programme that provides coverage for Ukrainian cargoes travelling through the grain corridor will continue in 2023 without raising rates.
Twenty-one insurance companies support this mechanism. "AsOne's Black Sea facility will continue operating without any planned rating increases," said Chris McGill, head of Ascot's cargo division.
The product was designed so that insurers participating in the programme share the risk without the need for reinsurance. It is a positive but half-hearted solution that does not create an alternative to global reinsurance.
What are the consequences of the new insurance policy? There are three main consequences:
- the already mentioned increase in freight rates to cover the cost of capital used for reinsurance;
- some ships will be uninsured;
- a decline in export and shipping dynamics in the region.
Can Ukraine influence the situation? At the global level, no.
International syndicates have their own risk scales and protocols that are strictly followed.
At the local level, Ukraine can create a war risk insurance fund for ships carrying agricultural products.
The second component is to allow Ukrainian insurance companies to pay for such reinsurance on their own, which is currently prohibited as part of the fight against money laundering, and those transactions that are allowed are limited in amount.
It should be noted that even if the restrictions are lifted, local insurance companies are unlikely to have sufficient free cash to support such transactions.
Is it possible to do without sea exports if they lose a lot of volume? No. Even in a reduced format, maritime trade is necessary and has no alternative.
From August 1 to January 9, 17 million tonnes of agricultural products were exported from Ukrainian ports via the Grain Corridor. In total, since the beginning of 2022/23 MY, 23.6 mln tonnes of grains and pulses were exported. In the same period of the previous season, the figure was 33.701 mln tonnes.
In terms of crops, since the beginning of the current season, it has been exported:
- wheat – 8.712 mln tonnes (in 2021/22 MY – 16.153 mln tonnes)
- barley – 1.663 mln tonnes (5.29 mln tonnes);
- rye – 12.5 thsd tonnes (143.5 thsd tonnes);
- corn – 13.502 mln tonnes (11.871 mln tonnes).
Read also: Safety margin: How business managed to withstand the war year
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