PCS Says Ukraine Insured Losses Could Rise Above $20B

According to analysis from PCS, a Verisk company, the ultimate insurance and reinsurance industry loss from the ongoing conflict in Ukraine could exceed $20 billion. This provides some data the ILS market may find useful in understanding what, if any, exposure its structures may hold.

Source: Artemis | Published on April 18, 2022

Terrain crack - Ukraine/Russia

With the conflict still ongoing and war raging in the country, PCS warns that calculating an accurate estimate is impossible.

However, after analyzing data from its own relevant product offerings, including the PCS Global Aviation, PCS Global Marine and Energy, and PCS Global Large Loss services, as well as internal research, PCS has provided us with some useful data that will assist insurance, reinsurance, and insurance-linked securities (ILS) market interests in understanding any potential exposure to the ongoing conflict in Ukraine.

According to PCS, the industry loss will range between a low estimate of $13.05 billion and more than $23 billion.

Based on its analysis of various specialty lines of business, PCS currently has a working estimate of $20.6 billion.

Overall, it is estimated that the insurance and reinsurance market loss from the conflict in Ukraine will be the largest in history.

According to PCS, "based on market intelligence available to date, PCS believes that aggregate industry-wide insured losses could exceed approximately $20 billion." However, it is still early in the conflict, and the flow of information is a trickle in comparison to what will likely come through when loss adjusters gain access to affected sites. As a result, the conflict in Ukraine has the potential to become the largest industry-wide insured loss in history, surpassing even the terror attacks of September 11, 2001."

The analysis conducted by PCS could be very beneficial to those in the ILS market who have exposure to specialty lines.

With the ILS market expanding into some specialty lines and increasing collateralised reinsurance participation in these market segments, and some retrocessional sidecar structures and quota shares including lines of business such as aviation, energy, and marine, PCS' data touches on these areas.

The ILS market is expected to suffer losses as a result of the Ukraine crisis, with the majority of losses expected to be through retro sidecars (Hannover Re warned on this early on), some retro structures that cover specialty lines, and some very specific quota shares or private collateralised reinsurance deals that touch on specialty and possibly specialty property risks.

In the aviation lines of business, PCS believes the insurance industry loss will range from $7 billion to as much as $13 billion, with $10 billion being the current working estimate, implying that "the losses may be more distributed than market participants currently expect, with the entire supply chain potentially sharing in the loss."

PCS sees a variety of potential sources of loss in marine, ranging from sinkings to ports and cargo, with industry losses ranging from $3 billion to $6 billion, with a working estimate of $5 billion so far.

PCS warns marine insurance customers to be on the lookout for blocking and trapping exposures, which can take months to reveal but could account for up to $1 billion in losses.

In the energy insurance market, PCS notes that renewable losses alone could be worth $1 billion, while broader energy exposure from areas such as nuclear power and energy infrastructure is possible.

The estimated energy loss ranges from $1 billion to $4 billion, with a working estimate of $2.5 billion currently in place.

Property per risk exposure is another area of significant uncertainty in the Ukraine conflict, given the level of destruction wrought by Russia and the fact that the country remains an active war zone where loss adjusters cannot assess damage claims.

The low-end estimate of $2 billion for property per risk claims is "a bare-minimum estimate based on specific estimated loss information received thus far, and the loss is likely to creep further," according to PCS.

PCS is currently working with a $3 billion estimate for property per risk, but notes that the upper end of the range is subject to significant uncertainty.

"It is extremely difficult to predict the ultimate industry-wide insured loss from property per risk in the Ukraine conflict, and even a wide range will take some time to emerge." So far, based on intelligence received by PCS, it appears likely to exceed US$2 billion, but as with the energy sector estimate above, it's difficult to determine more than that," the Verisk unit explained.

Finally, PCS adds a small amount to the overall loss to cover personal and small commercial property, which it believes will not be a significant contributor to the industry loss, given Ukraine's low levels of insurance uptake and insured values. As a result, PCS is basing its estimates for these lines of insurance on a $100 million figure.

All of this adds up to a range estimate of $13.05 billion to more than $23 billion, as well as PCS' current working estimate of $20.6 billion.

PCS warns that the industry loss could take a long time to become clearer, especially because the war triggered by Russia's invasion of the country means that Ukraine is not safe for loss adjustment, and notification of claims may not begin until long after the conflict ends, as it will also require people to return to the country.

Any losses resulting from Ukraine's ongoing conflict that fall to the insurance-linked securities (ILS) market, or to collateralised reinsurance and retro vehicles backed by capital market investors, are unlikely to be unexpected.

Investing in specialty lines exposure in the ILS market exposes you to a wide range of loss events, including political violence.

Any incident or occurrence that causes physical or financial loss to the covered business lines, such as aviation, energy, marine, and some specialty property insurance classes, may result in some attrition and losses to structures, such as certain sidecars.

While the majority of sidecars, quota shares, and collateralised deals entered into by ILS funds are purely natural catastrophe exposed and thus will have no Ukraine exposure at all, those with a specialty lines component or focus may have exposure and may suffer losses as a result.

However, it may be some time before there is clarity on any losses, as clarity for the ceding companies or sponsors may also be slow to emerge, given the difficult situation on the ground and the ongoing war, as well as the possibility of litigation surrounding issues such as leased aircraft.

Finally, we spoke with Tom Johansmeyer, Head of PCS, and inquired about the PCS estimate.

"It's important to remember just how early we are in this loss event right now," Johansmeyer cautioned. What we've estimated is a point-in-time view based on solid market data thus far. There's a chance of loss creeping in here. It will be critical for reinsurers and ILS funds to keep an eye on this event as it develops."

Johansmeyer also stated that the Ukraine-related industry loss will highlight the importance of hedging and retrocession.

"The nature of the loss data flow thus far emphasizes the utility of the specialty lines ILW market," he said. "As we demonstrated in our briefing, there is the potential for significant marine and onshore energy events." And, in general, the risks to the aviation sector have been well documented, even if potential insured losses from airports have received little attention. We could see loss activity in the specialty retro market.

"Although it is likely too late to transfer risk exposed to the conflict, now is an important time to look ahead." The conflict in Ukraine will almost certainly be the fourth year in a row that a political violence event exceeds $2.5 billion in industry-wide insured losses. This may have strategic ramifications for risk and capital management.

"It's also important to consider what's next for cyber." If an increase in cyber activity follows the eventual cessation of the kinetic phase, the window for completing cyber ILWs may be closing."