Marsh McLennan proposes “war risk pool” to insure $400bn+ Ukrainian reconstruction plan under discussion
As political leaders and G7 finance ministers converge on London for the Ukraine Recovery Conference (URC) tomorrow, Marsh McLennan has proposed the creation of a vast “war risk pool” to insure the reconstruction work required to rebuild the country’s infrastructure and shattered economy.
The two-day event – hosted by British Prime Minister Rishi Sunak on 21-22 June – will see attendees debate Marsh McLennan’s broad framework, which could eventually underpin the project financing for Ukraine’s recovery and reconstruction, which it is estimated could cost up to $1trn.
The poor state of G7 public sector finances, still struggling after the pandemic, means it is inevitable the private sector will do much more of the financial heavy lifting as well as the infrastructure rebuild – and both will require insurance.
This has prompted Marsh McLennan to propose the creation of a multinational public-private partnership centred around a war risk pool that would be modelled along similar lines to terrorism pools which exist in Australia, France and the UK.
Speaking to this publication, Oliver Wyman’s public sector practice partner Crispin Ellison explains: “On its own war-risk insurance will not ensure the investment happens, but there is virtual unanimity that without such cover the investment will not be forthcoming. What is required is war-risk insurance on a scale never before contemplated.”
With the bloody conflict still raging, Russia continuing to target Ukrainian infrastructure and no sign of a peace settlement, the eventual rebuild costs and timeframe remain highly uncertain. In March, the World Bank estimated it would cost $411bn but that excluded the occupied territories.
The scorched earth devastation seen in cities such as Mariupol and Bakhmut, together with the continued destruction of infrastructure like the Russian-controlled Kakhovka Dam earlier this month, have prompted some to calculate the overall cost could eventually reach $1trn.
The Insurer understands three Marsh McLennan units – management consultancy Oliver Wyman, reinsurance intermediary Guy Carpenter and the industry’s largest global risk adviser Marsh – combined to produce a framework report for the British and Ukrainian governments on how London’s expertise and the (re)insurance industry could facilitate the mammoth rebuild effort led by the private sector to be considered at URC 2023.
The global firm is also understood to have consulted widely with insurers and reinsurers to examine their willingness to assist.
There are a number of obvious difficulties, as Guy Carpenter’s public sector practice head Julian Enoizi points out.
“The first is that the industry is itself already impacted by the conflict with billions of dollars of losses and claims across a wide range of classes including aviation, credit, marine and political risk.”
Second, continues Enoizi, the industry has never habitually covered war risks. “The industry excludes war as standard and the specialist aviation and marine war markets are a fraction of the size required.”
The figures back up Enoizi’s claim. Before Russia’s February 2022 invasion, for example, the aviation war market was small – perhaps little more than a $100mn in annual GWP.
Underwriters have since scrambled to reprice the risk and sources estimate the Lloyd’s/London-centred market is probably now $600mn in GWP. Nonetheless, this is a fraction of the aggregate risk premium that (re)insurers would need to charge even if they had the capital (they don’t) to take on in full the risk of a mammoth, multi-year private sector-financed rebuild.
The lack of a vibrant domestic insurance industry is also an issue as it means (re)insurers can’t depend on local risk knowledge and mitigation expertise.
However, global specialty (re)insurers are showing a willingness to be responsive. Last year, for example, Marsh and Lloyd’s insurer Ascot developed a new marine facility to insure Ukrainian grain exports.
But there is a big difference between coverage for specific and relatively contained projects and a $1trn, 10+ year rebuild of a European country on a scale not seen since America’s Marshall Plan after World War II. The global P&C industry simply doesn’t have the collective balance sheet to take on the risk.
“The market alone cannot provide a solution. The insurance industry is not prepared to expose itself to the risk of insolvency by taking on war risks in Ukraine, even once the current ‘hot’ phase of war has ended but heightened war risk remains,” notes Ellison.
But the research undertaken by Marsh McLennan suggests (re)insurers are prepared to participate meaningfully if they are supported by “worst case” safety nets in the form of governmental backstops, either at a national or multinational level.
“There is a consensus,” explains Enoizi, “that a public-private partnership model along the broad lines of the terrorist insurance pools that have been successfully used at national level in several countries, but which have never been expanded to share risk internationally.”
Enoizi was, until last year, the CEO of UK terrorism scheme Pool Re, which relies ultimately on a governmental backstop but only as a last resort and when the industry’s committed reserves are exhausted.
The new Marsh McLennan-proposed Ukraine framework has similar qualities, as Enoizi points out.
“We think insurers would be willing to cede premiums and the associated war risk into a ‘war risk pool’ which could initially be seeded by donor funds. This pool would take the first loss after any insured and insurer retentions, and purchase reinsurance from the global industry and capital markets.
“Only if the pool and entire capital stack was consumed would the government backstop be called upon. The pool would also have responsibility for creating the conditions for a functioning commercial market, and over time, as with terrorist insurance, the market would take on increasing proportions of the risk and government’s potential liability would reduce.”
The devil, of course, is in the detail. Could separate national pools be developed operating under a common framework, for example? What would happen if one failed or if conflict resumed after a temporary respite?
These are difficult challenges but the entire concept remains no more than theoretical unless the G7 governments agree to provide such a backstop in the first place.
As it stands there is little evidence they will – at least when it comes to the stretched treasury departments.
“It is certainly true to say the G7 finance ministers have not yet committed to provide the kind of backstop the industry wants,” explains Ellison.
But he adds: “Nor have they proposed any other solution which would unlock the market to provide this essential insurance.”
This may shift if the political will becomes more apparent this week – or indeed before the next URC, which is scheduled for Berlin next year (the first took place in Lugano, Switzerland in July 2022). In the meantime, there are other items on the agenda this week which would also be necessary to develop the type of unprecedented public-private partnership Marsh McLennan is proposing. Chief among these is accurate data.
Currently the insurance industry does not have access to the war-risk data that would allow it to assess risk,” explains Ellison.
“An early opportunity to build confidence with the insurance industry is to put in place a mechanism for sharing bulk, unclassified incident data with the industry and this is one of our recommendations to be discussed this week.”
Another critical requirement is for Ukraine to demonstrate to investors and insurers that it will address the rule of law, contract certainty and regulatory issues that bedevilled the country prior to the invasion (Ukraine was positioned 122nd in Transparency International’s corruption perceptions index in 2021, a modest improvement on its 142nd place in 2014).
Also under discussion will be a number of small, bespoke projects that are already at the development stage. The target is to provide up to $500mn of cover insuring projects by year-end that are in – many cases – being funded by donors such as Australian mining billionaire and philanthropist Andrew Forrest, who has publicly committed up to $740mn.
It is expected that multinational organisations such as the World Bank and the European Bank for Reconstruction and Development and export credit agencies will likely provide some short-term insurance although there are also opportunities for private insurance involvement.
There is scepticism that these smaller, more immediate pilot schemes will provide the aggregate target of $500mn cover by the end of the year.
Nonetheless, if they are implemented then they would go some way to meeting immediate needs and, Ellison points out, they would also “create some confidence in the market and, importantly, start to build claims data on war-risks that the insurance industry needs and is currently lacking”.
The Insurer Comment
Marsh McLennan is to be commended for the framework proposal as it could prove to be an invaluable opportunity for the industry to showcase its risk management skills in helping Western governments solve one of the great political and humanitarian challenges of the 21st century.
Later this week, we will have a better idea whether this bold proposal has registered with political leaders. Only then might the G7’s finance ministries begin to explore it. If they do, the industry has a wonderful opportunity to highlight its relevance…