From Ukraine, to the Red Sea: Securing Cover Amidst War-Related Risks

In an increasingly polarised political landscape, business risks associated with regional conflict and terrorism are on the rise. As ongoing conflicts in Ukraine and Gaza heighten global political tension, businesses are becoming aware of the need to manage property loss and business interruption risks arising from acts of war and terrorism. At the same time, war cover options on offer are changing in response to geopolitical volatility.

In this article, we address an emerging gap between war-related risks and the opportunities for companies to secure the cover they need. In exploring this challenge, we also highlight the importance of engaging with the insurance market to find a solution that meets the current and future business disruption and risks associated with war events.

 

Geopolitical tensions are on the rise

"While businesses around the world were still recovering from disruption coming from the COVID pandemic, a new global risk emerged. War broke out in Ukraine in February 2022 and there is still no end in sight to this conflict. With the Israel-Hamas war in Gaza already having lasted for the past year, the conflict continues unabated. As Houthi attacks on ships in the Red Sea demonstrate, the war in Gaza has the potential to escalate and have a deeper and more significant impact on business operations, global supply chains, as well as affecting oil and gas prices."

With an estimated 70 countries, including the US, holding elections in 2024, there is potential for shifts in foreign policy to heighten existing conflict. Changes in governments and the global political dynamic, could also increase political polarisation, creating new tensions that, in turn, trigger power struggles between, or within, nation states. Organisations within the transport and logistics sector are awaiting the ramifications of Trump’s upcoming presidency, particularly in regards to tariffs for China imports.

Businesses are not acutely aware of these risks. The latest Aon Global Risk Management Survey conducted in 2023 ranked political risk at 16. As a future risk, it ranks at 11, showing businesses are concerned that the effects of geopolitical volatility will likely increase the risk to their organisations in the months and years to come.

War insurance capacity is becoming scarce

As geopolitical volatility becomes the norm, the increased risk of war is being met with a range of responses from insurers. For many years, war insurance has been readily available, either as standalone cover or as an inclusion on most business policies. More recently, the conflicts in Ukraine and Gaza have reintroduced war as a material risk for insurers to assess and quantify. The aviation industry has also been impacted as airports continue to be shut-down due to war and political turmoil. As a result, many insurers are either drastically increasing premiums or choosing to remove war cover from their policies.

In some instances, insurers are even cancelling war cover with a seven-day notice period. This leaves companies with few options for keeping their assets and operations protected from war-related risks and events. The alternative is to seek cover elsewhere and pay a much higher premium given the lack of capacity currently available for this type of cover. This means that the relatively low cost to transfer war risk has now risen significantly and is likely to take up a far larger portion of the overall risk budget for a business.

Insurers have increasingly avoided providing war-risk coverage for listed high-risk areas such as the Red Sea, particularly due to rising threats of piracy, terrorism, and military conflicts in the region. This shift has prompted a significant change in global marine traffic, with many shipping companies opting to reroute vessels around the Cape of Good Hope to avoid the Red Sea and the Gulf of Aden. While this detour adds 10-14 days of extra sailing time between Asia and Europe, it also results in higher fuel costs, increased operational expenses and extended delivery timelines – which then impact the global supply chain. The diversion has broader economic implications, such as increase insurance premiums for alternative routes and added strain on already tight shipping schedules. Furthermore, the longer routes contribute to higher carbon emissions, conflicting with sustainability efforts within the maritime industry. Insurers and shipowners must now navigate these challenges, balancing risk mitigation with economic and environmental considerations.

In regards to recent threats of politically-induced warfare, Trump’s administration’s approach to trade and defence, including increased tensions with China and North Korea, can contribute to heightened risks in key maritime and aviation routes. This is particularly relevant for the South China Sea and East Asia. These tensions increase the likelihood of incidents such as blockades, military skirmishes, or cyberattacks on critical infrastructure, prompting insurers to reassess premiums and policy terms for war-risk coverage. The rising militarisation of strategic waterways and airspaces in Asia also created challenges for claims processes, as disputes over liability and causation became more complex in such a volatile environment. Insurers operating in the region have to refine their risk models, enforce stricter underwriting practices, and negotiate tailored coverage terms with clients exposed to these escalating regional risks.

 

 

 

A proactive approach can secure cover in a tight market

In this rapidly changing market for war insurance, securing ongoing cover starts with a discussion to keep a current war policy or inclusion in place. This is where the Aon global team can assist in discussions with insurers about reasonable terms to retain a current policy. Aon can also benchmark any premium increase companies are facing to ensure they are still getting value from their existing cover.

As well as offering war cover for marine cargo from our existing Lloyd’s of London facility, Aon have access to a global network of insurance providers and underwriters. This enables us to arrange specific policies and inclusions for all types of risks through standalone cover or broader risk transfer solutions.

Aon has several options for Red Sea Buy Back, tailoring the solution to best meet your organisation’s needs. Contact your local representative, or follow the “get in touch” link below for more information.

As one of the largest global brokers operating in Ukraine, Aon coordinated a comprehensive $50M reinsurance facility, working closely with DFC and the Ukraine Ministry for Development of Economy and Trade to support the active and ongoing issuance of on-the-ground war risk policies to businesses operating in Ukraine. Aon and DFC collaborated on an additional $300M in war risk insurance specifically designed for Ukraine's health care and agriculture industries.

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