Facilitating the recovery in Ukraine: Marsh McLennan sets out framework for insurance solutions
One of the most significant industry initiatives to be unveiled this year was Marsh McLennan’s proposal for the creation of a multinational public-private partnership centred around a war-risk pool to underpin project financing for Ukraine’s recovery and reconstruction.
Unveiled in June, the proposal received G7 support amid recognition that the (re)insurance market cannot provide a solution without some form of “worst-case scenario” government safety net.
Three months on from those discussions, Oliver Wyman’s public sector practice partner Crispin Ellison told The Insurer that while there was acceptance some form of guarantee is required, international governments have yet to provide it.
“The G7 have all noted our recommendations and I think everyone has accepted that the insurance industry is not going to step in at scale without some form of backstop,” Ellison explained.
“No one has come up with an alternative solution, but, perhaps unsurprisingly, no one at this stage has volunteered to expose their balance sheets.”
Marsh McLennan’s framework is for a multinational public-private partnership largely based on the existing terrorism insurance pools that operate in several G7 nations.
In essence, it proposes that (re)insurers provide pooled coverage, together with their risk mitigation, modelling and claims management services, with government backstops in the event of major loss.
Guy Carpenter Europe CEO Julian Enoizi, who also oversees the broker’s public sector practice, said the backstop remained critical in allowing the industry to insure the reconstruction work required to rebuild Ukraine’s infrastructure and shattered economy.
“If you don't have the backstop, you won’t have a functioning market,” he said.
Enoizi noted a misconception that a backstop is the same as providing financial support.
They are promises of financial support, he clarified, which never actually materialise because the design and construct of the pooling mechanism should allow a market to function without a need for any transfer of funds.
Until last year, Enoizi was CEO of UK terrorism scheme Pool Re, a position he held for a decade.
“My experience over the last 10 years is that governments will look for an alternative to giving a guarantee. They will rightly spend as long as it takes until they are 100 percent convinced that there is no alternative to a government guarantee,” he said.
One element to be addressed is the backstop’s structure.
The “gold standard” would see a multilateral agreement between the G7 plus other volunteering countries.
Option two would see a number of separate bilateral/national arrangements where a government underwrites its own investments, an option Ellison felt could complicate investments from multinational sources.
“One is complex and really difficult to agree on all the details to get it working. The other one has big gaps in it,” he said.
Another delaying factor, according to Ellison, is that large-scale investment cannot start until there has been a marked decrease in violence.
However, he warned against delaying what will be a “very complex, very large and quite expensive project”.
“I think the risk is that people will say it's a post-war problem and it may be, but there's 12 months’ design work needed to put it in place and that needs to start as soon as possible if it is to be ready when the war ends.”
And the design will be critical for a framework set to facilitate Ukraine’s recovery – estimated by the World Bank at $411bn – over “one and a half decades”.
“When the war ends I think we can get tens of billions and then a ramp up to larger numbers, perhaps getting at its peak to around $100bn a year. But I don't think that's been mapped out. No one has looked beyond the low number tens of billions,” said Ellison.
Ukraine govt provides “lesson”
Both individuals lauded the Ukrainian government, with Enoizi stating that it had provided “a lesson in how to do public private partnerships”.
Enoizi continued: “It is impressive the level to which the Ukrainian government has engaged with the insurance industry to seek out solutions to problems which either the government on its own, or the industry on its own, would not be able to fix.
“They have gone out of their way to try and understand the power of our industry and then to work with us to design solutions, frankly, in a way that many more developed economies just still have not done faced with today’s increasing systemic risks.”
One example is the Ukraine data platform, which has seen the Ukrainian government share detailed loss data with Marsh McLennan in a bid to establish an authoritative database that could support a long-term war insurance solution.
“It's trying to get the differentiation by geography, and by sector, which will allow investors and insurers, for the first time, to make their own relatively accurate assessments of risk,” explained Ellison.
Ellison said the platform’s prototype was “going well”, with the full platform set to go live in the second half of September.
UDF and grain agreement
The Ukrainian government’s exploration of public-private partnerships goes beyond the data platform.
The Ukraine Development Fund (UDF), a BlackRock- and JP Morgan-advised recovery fund seeking to attract billions of dollars of private investment, is exploring the creation of an insurance arm.
“Ukraine is examining whether when they get donors to contribute to the UDF, they would not just contribute investment, but they might contribute towards some form of insurance pool to insure those investments,” Ellison said.
Secondly, following Russia’s withdrawal from the Black Sea grain treaty, Ukraine’s government is exploring a scheme to insure grain transport.
Ellison outlined: “We are working with the industry and the Ukraine government to put a scheme together over the next few weeks as a public-private partnership. But this time, it's not a backstop, the Ukraine government would be contributing a first loss fund.”
The cost of a Black Sea war-risk premium, which is typically renewed every seven days and is in addition to annual insurance expenses, is estimated at tens of thousands of dollars per ship.
This scheme is hoped to put the Black Sea marine market in a position where it can operate at an affordable price.