Davos debates how to insure Ukraine’s reconstruction

The “why” of enabling capital and insurance to rebuild Ukraine may be clear but, in the absence of security guarantees, the “how” remains difficult, according to a panel debate held alongside the World Economic Forum’s annual conference in Davos this week.

Hosted by Ukraine House Davos in co-operation with Marsh McLennan, the panel responded to remarks by Ukraine’s first deputy prime minister and economy minister, Yulia Svyrydenko, who said companies should urge their governments to find ways to protect their investments.

Svyrydenko suggested these security guarantees could be Nato membership for Ukraine, its allies deploying their own troops there or anti-missile systems to defend industrial zones.

At more than 160 years old, Swiss Re has experience of operating in countries ravaged by conflict, Ivan Gonzalez, chief executive of its Corporate Solutions unit, said. Gonzalez pointed out security guarantees given to South Korea had “prevailed” and helped that country “rapidly” create a viable insurance market. “I would assume something similar would happen in this case,” he said, adding Swiss Re and other re/insurers would be “more than happy” to meet Ukrainian officials “to make sure capital can flow”.

During a ceasefire, “not all risks are the same”, Marsh McLennan chief executive, John Doyle, said. He highlighted the duration of construction risk is much longer than, for example, shipping risk.

There would need to be “greater confidence around how the conflict comes to an end”, which “certainly connects” to security guarantees, Doyle said. The “leverage effect” insurance has on an economy would be “massive”. He added: “It’s the magic of risk pooling, which underlies not just economic stability but growth all over the world.”

European commissioner for economy and productivity, implementation and simplification, Valdis Dombrovskis, agreed there is a clear link between security guarantees and the confidence businesses – “and insurers in particular” – need to invest in Ukraine.

The Budapest Memorandum on Security Assurances of 1994 “did not amount to much”, with Russia as one of the guarantors, although Ukraine had honoured its obligation under that agreement to give up its nuclear weapons, he said. It was a “mistake” Ukraine had not been able to join Nato in 2008, he added, “because Russia, as an aggressor, is provoked by weakness and so we need to demonstrate strength”.

Ukraine’s first deputy minister of economy, Oleksii Sobolev, pointed to Israel having a strong economy and a “thriving” insurance market thanks to security guarantees from its allies. “Everybody is fine with that because they know Israel is well armed and can protect itself,” he said, before highlighting the fact that Ukraine produces as much as 60% of the weapons it is using. A peace deal needs to be one where Ukrainians are not “screwed over” as they had been by the Budapest Memorandum, he said, “and so we’re asking business to be engaged through their governments” on security guarantees for Ukraine.

Europe as a priority

The insurance panel was moderated by Bronwen Maddox, director and chief executive of think tank Chatham House, who referred to the speech Ukraine’s president, Volodymyr Zelenskyy, had delivered at Davos the previous day. Zelenskyy said “all eyes are on Washington”, following the inauguration of Donald Trump as US president, “but who’s actually watching Europe at the moment?”.

Zelenskyy pointed out even the previous US administration, during the Asia Security Summit in Singapore last year, had placed the security needs of Europe third on its list of priorities. “Europe needs to compete for the top spot in priorities, alliances and technological development,” he said.

Maddox said Zelenskyy’s “rallying cry for Europe” was relevant to re/insurers and asked Sobolev to describe the opportunities for them. He reminded delegates the “hundreds of billions” of dollars needed to reconstruct Ukraine and its economy could not be covered entirely by the public purse. “A lot of the funding is going to come from the private sector,” he stressed, “and we’ve calculated for us to achieve sustainable growth out to 2030 we need around $100bn in foreign direct investment, which will not come without insurance.”

Oleksii Sobolev, Ukraine Ministry of Economy

Sobolev highlighted the success of the Black Sea Unity Facility launched in November 2023 thanks to Marsh McLennan (which created a war risk data platform), three commercial lenders and a $20m indemnity fund from the Ukrainian government. In March last year, Marsh McLennan expanded the facility from grain exports through the Black Sea to cover all shipping to and from Ukraine’s ports.

The number of companies that used the facility was less important, Sobolev said, than the signal it sent to the market. “Immediately the rates dropped, and several times over, to the kind of levels that allowed the business of shipping grain out of Ukraine,” he said. “It shows how insurance could facilitate this activity, even if no money is actually spent, because it was a sign the government is ready to take the first loss,” he added.

“A lot of the funding is going to come from the private sector and we’ve calculated for us to achieve sustainable growth out to 2030 we need around $100bn in foreign direct investment, which will not come without insurance”
_{Oleksii Sobolev
Ukraine Ministry of Economy}

In June last year, Aon partnered with the US International Development Finance Corporation to launch an insurance programme to support war risk policies for businesses operating in Ukraine. Then, last month, Aon launched a €110m ($115.5m) facility in partnership with the European Bank for Reconstruction and Development (EBRD) to support global reinsurance companies via a guarantee when covering specific war-related risks underwritten by Ukrainian insurers.

However, not all private transactions require war risk insurance, Sobolev stressed, pointing to last October and the largest foreign investment in Ukraine since the Russian invasion in February 2022 – a consortium led by French billionaire Xavier Niel acquired and merged Ukraine’s Lifecell and Datagroup-Volia telecoms companies. The EBRD and the International Finance Corporation provided $435m in financing for the deal, while the French government and the EU provided guarantees to cover some of those two loans.

Doyle highlighted how re/insurers can collaborate on solutions for Ukraine, even with their natural competitors. Last September, for example, Aon and Marsh McLennan called on the re/insurance industry to build on its capital and expertise to help Ukraine’s resilience by catalysing economic growth and strengthening the country’s foundations for a post-conflict economy. The two companies emphasised the removal of blanket exclusions, which ignore the diversity of risk throughout the country, would further support Ukraine’s economy.

Gonzalez highlighted the “exponential” economic benefit created by every dollar spent on insurance, but the war exclusions are restricting progress for re/insurers. “The faster we can get to that next phase, the faster the insurance industry can react,” he said.

The fact insurance is an essential part of financial services “goes without saying”, Bank of America’s president of international, Bernard Mensah, said, and a role for banks is to “crowd in capital” in its various forms.

“It underpins what we do, whether it’s in Ukraine, California or the UK, and I think the industry actually can be quite innovative in helping us get going,” Mensah said, highlighting approaches to risk management such as sector-specific first-loss structures.

“Even though the absolute amount of premiums written in Ukraine – I read something about $2bn – dropped up to 30%, it is now maybe rising slowly,” Mensah continued. “The next phase would need different types of war risk insurance, catastrophe insurance, other things the insurers might be experts in, to really catalyse that initial growth phase coming through,” he said.

Nuanced approach

The European Commission sees unlocking insurance as a “critical element” of boosting Ukraine’s economy and attracting private investment, Dombrovskis said. “All international re/insurance companies have left Ukraine since the beginning of the war and imposed a blanket exclusion on all kinds of re/insurance policies, so there are only a few private Ukrainian insurers and therefore a limited offer of insurance products in Ukraine,” he said.

“We encourage the industry to take a more nuanced look, because we understand war insurance and all that, but the insurers in Ukraine don’t have access to reinsurance for anything else, like floods or earthquakes or construction insurance, nothing.”

Dombrovskis highlighted geographical differences, saying around 60% of regions in Ukraine had not experienced a single missile attack since the start of the war, while front line areas were suffering bombardment of an intensity not seen since the Second World War.

During the Ukraine reconstruction conference in Berlin in June last year, the government of Ukraine, the European Commission and the EBRD signed a memorandum of understanding to establish a war risk insurance scheme. “Right now, we’re finalising the pilot phase for this and also providing a €50m financial allocation for this programme from the EU’s side,” Dombrovskis said.

Bernard Mensah, Bank of America

“This will be launched in the coming months and we’re working with the EBRD on how we can scale it up from this pilot phase,” he continued. “It’s also clear something needs to be done on the public sector side, to give additional support so the insurance industry feels more confident about re-entering the Ukrainian market.”

Gonzalez referred to his upbringing in Colombia during the 1980s, saying he understood what it was like to live alongside an armed conflict and he underscored Swiss Re’s long history, which had included two world wars as well as many regional conflicts and acts of terrorism. “Insurance is so important to enable economic development and it’s important to understand insurance needs to be, first of all, quantifiable, and second, well understood,” he said.

“The next phase would need different types of war risk insurance, catastrophe insurance, other things the insurers might be experts in, to really catalyse that initial growth phase coming through”
_{Bernard Mensah
Bank of America}

Before Russia’s illegal invasion, Ukraine had a “very vibrant” re/insurance market, but then capital swiftly left the country. “What the insurance and reinsurance companies did was, first and foremost, to apply a war exclusion. That’s because, if you cannot quantify what exposures you’re taking and you cannot even have a parameter in terms of what are the losses you will be assuming or will be paying, then it doesn’t meet the criteria of doing business.”

Having said that, Swiss Re is providing capacity for Ukraine’s agriculture sector and the export of grain cargo, as well as insurance to enable the reconstruction of the country, particularly from an engineering perspective. “Of course, that’s not even close to where it was when the war started,” he said and congratulated Aon and Marsh for “bringing together an alliance of companies”, not only to think about current issues, but also how Ukraine starts its reconstruction.

“We are very interested in finding ways with the government and our business partners to be able to support the country,” he added.

Asked what the terms of a peace deal would need to be to attract re/insurers to Ukraine, Doyle said it was “hard to speculate” but highlighted there are fully developed insurance markets in countries that have “been in ceasefire” for as many as 75 years and “are still, technically, at war”.

“Certainly, it is possible, but there’s going to be a range of factors that underpin a level of confidence for investor interest and insurance capital to come back to the market. It’s difficult to speculate on exactly what a ceasefire might look like, versus an end to the conflict,” he said.

Sobolev stressed Ukraine’s potential should not be underestimated. “We’re going to be in the EU, we think, faster than anyone anticipates… but if companies need to cover political risk then they need to have an instrument that doesn’t exist right now. We could use something similar to war risk insurance instruments to cover political risks, with donor government support underneath them,” he said. The war has meant the Ukrainian market has just $1bn to $2bn in premiums underwritten a year, which Sobolev contrasted with Poland, where the figure is about $17bn.

Business deals are taking place, he stressed, such as the newly announced contract for Vestas to supply 384 MW of wind energy capacity for the second phase of DTEK’s Tyligulska project in Ukraine. This order adds to the 114 MW Tyligulska I order Vestas received in March 2021 and successfully commissioned in the spring of 2023. For the latest order, Vestas will be supplying, delivering and commissioning 64 wind turbines. The project is backed by a financial guarantee from Denmark’s export and investment fund.

Such infrastructure needs to be in place to grow the insurance market and vice versa. “It’s chicken and egg, but if we wait until the insurance market sees there’s a lot of activity then we would lose half a year on the actual investment,” Sobolev said.

Strong defence

Citing Zelenskyy’s speech the day before, Sobolev said:  “Whatever the US thinks, whatever Trump thinks, Europe should be powerful enough to act on its own. And we think Ukraine’s defence sector, energy and critical minerals can make Europe stronger. We will eventually have a bigger insurance market for all these products. But why wait? There’s possibility for peace, which will completely change the macro situation,” he said, pointing to the swift return of 200,000 displaced citizens to Syria since the overthrow of Bashar al-Assad.

Mensah stressed the “enabling policies” the Ukrainian government needs to produce to ensure the regulatory environment is “working as efficiently as possible”. One barrier at present, for example, is a lack of travel insurance for the many business people who would like to visit the country, but are restricted to travelling there by train at the moment.

“But you don’t need to have air travel to work with the government to figure out the sectors it wants to prioritise, so for the past eight months I know my colleagues have been very focused on trying to crowd in those who could provide emergency and other power, which will be useful as Ukraine comes out of the blocks and this is developing now,” Mensah said.

Valdis Dombrovskis, European Commission

He continued: “What does the government think about the power sector? Will it be renewable? Where will they end up with their large nuclear facility? There’s a huge amount of work you wouldn’t want to wait for the all-clear to start, because then you’d be two years behind. That gives an opportunity to the frontier businessman – and even those who are not so frontier – to say they will work with some of the development finance agencies to derisk some aspects of these projects. And actually, the Ukrainian government has derisked some aspects of them as well, so we should be optimistic about the future.”

Doyle said work is under way on an insurance solution through a public-private partnership model that will allow Ukrainian airports to reopen and Mensah added Bank of America is working on the risk elements and trying to restore traffic, at least into the western part of the country, and putting together the insurance capital this will require.

“We encourage the industry to take a more nuanced look, because we understand war insurance and all that, but the insurers in Ukraine don’t have access to reinsurance for anything else, like floods or earthquakes”
_{Valdis Dombrovskis
European Commission}

Insurance and defence are “intricately interlinked”, Sobolev stressed. “We don’t need the Unity facility that much anymore, and not just because the markets are working, but because Ukrainian drones chased the Russian navy to as far away as nobody can see. The drones are providing this insurance because the ships can’t really attack the cargo ships that come from Ukraine. The airport situation is the same – the question of whether there is enough air defence to be able to have insurance.”

The following day, Nato secretary-general, Mark Rutte, told delegates in Davos he sees too many politicians, both inside and outside Ukraine, discussing what peace talks would mean for the territory that Russia has captured, and for Nato membership for Ukraine. The focus instead must be to bring Ukraine to peace talks in the “best possible position”, he said, so as to avoid a repeat of the Minsk Protocol in 2014, which was followed eight years later by Russia’s full-scale invasion of Ukraine.

A “bad deal”, he said, would lead to the president of Russia “high-fiving” with the leaders of North Korea, Iran and China.