14.08.2024

War (Risk Insurance), h’uh, what is it good for?

A war is a war is a war

Which of the following countries has the USA never declared war on?

Germany
Spain
Vietnam

It’s important to understand the definitions of the terms we use when answering questions like these. The US was at war with all the above at various points in time but has only declared war on two of the three. In the US, Congress has exclusive power to declare war. [1] While there is room for debate about whether the US can be at war legally without their approval, the actual act of formal declaration definitively can’t happen without Congress.

The US declared war on Spain in 1898, and their last declaration of war was with Germany during WWII. No formal declarations have been made since then, not even against Vietnam despite the conflict between them in the mid-20th century (commonly known as “the Vietnam War”). Nor did they declare war on Laos or Cambodia, who they also dropped millions of tonnes of bombs on.[2]

What is War Risk Insurance?

In short, war risk insurance is insurance protecting against damages incurred as a result of war. However, defining war can be quite difficult. To paraphrase, and appropriate, the Supreme Court’s ruling on obscenity, ‘perhaps I could never succeed in intelligibly doing so. But I know it when I see it’. [3]

Clearly, it might not be ideal to have governments be the sole arbiters of whether they are at war or not, there are several reasons why they might want to be less than truthful. Since World War II, various “wars” have gone by alternate official terms in governmental press releases, for example former US president Truman called the Korean War, “police action”[4] and Putin calls the war in Ukraine, a “special military operation”. [5]

Other countries, not directly involved in the “war” may also have political reasons for deciding whether it is a war or not. The issue of defining war in relation to insurance policies is one which has been debated in English law a few times [6] and will surely come up again. The general outcome from these cases is: unless otherwise specified, a war means what an ordinary person or business participating in the insurance agreement would expect the word to mean therefore they do not require formal international agreements. This article follows that convention.

The War Exclusion Clause

“You are not insured for: war, civil war, revolution, rebellion, insurrection, or civil strife arising therefrom or any hostile act by or against a belligerent power, capture, seizure, arrest, restraint or detainment (piracy excepted), and the consequences thereof or any attempt thereat, derelict mines, torpedoes, bombs or other derelict weapons of war (whilst The Property Insured is on land)” [7]

You may be familiar with war exclusion clauses like the one above as they grace the fine print of most insurance policies. They outline the circumstances under which the writer would have no obligation to pay for particular claims due to war-related events.

This is a more detailed explanation of what war risk potentially covers. By having a long, specific list of what is or is not included in a policy, insurance companies are able to sidestep issues around which conflicts count as wars and which do not. They are able to save the time and money spent on litigation, not to mention making it clearer and easier for policyholders to purchase the correct coverage for them.

War risk policies could cover all these risks excluded from the policy referenced above, and more. They may also specify what participants in wars a policy will include or exclude for example many policies explicitly exclude wars between any two of the five permanent UN security council powers; the UK, the US, France, Russia, or China.

Often companies selling war risk policies will have a department for War, Terrorism and Political Violence. These are three separate areas and require different approaches and techniques to price, but there are some similarities between them and some grey areas where they might overlap. Some companies just group all those related policies as War Risk.

9/11

On September 11th, 2001, a terrorist attack on the World Trade Centre left much of the world reeling.

As well as the uncountable human and emotional toll exacted by this act, there was an estimated $30-$40 billion in losses for the insurance industry. [8] 33% of this was from business interruption, 30% from property losses. [9]

Before this time, terrorism risk was normally not explicitly included in policies, but was included by virtue of not being specifically excluded. Post 9/11, many companies put terrorism exclusion clauses in their policies and the remaining companies offering terrorism risk insurance increased premiums massively.

Eventually Congress stepped in and passed the Terrorism Risk Insurance Act to correct this perceived market failure and created the Terrorism Risk Insurance Program. This allows companies to offer terrorism insurance at pre-9/11 levels, the government will share monetary losses if they are substantial enough (with a slew of other caveats including the Treasury needing to certify the incident as terrorism, and limits on how much is eligible for claims). Congress has since renewed it repeatedly and it currently expires in 2027. [10]

Although this law specifically does not include war, and as mentioned war and terrorism are generally seen as separate sectors and types of risk, they share some of the same issues in pricing, and as such could result in the same market failure.

In fact, in late 2023, the UK government signed a “Statement of Intent” to help UK companies do business with Ukraine. [11] They’ve stated the lack of existing insurance as “currently a major barrier preventing UK companies trading with and investing in Ukraine to help it rebuild”.

Ukraine

The two largest sectors for war risk insurance (by total value of premiums) are the aviation and maritime sectors. Transport ships and planes often must travel through and to at risk areas or choose to in order to save time and money. Both areas are heavily impacted by the ongoing conflict in Ukraine.

As of June 2023, there has been an estimated $150.5 billion damage to real estate and other infrastructure. [12] With a further $265.5 billion loss estimated from additional costs such as income loss from drop in economic activity. And more projected for the future. The impact this will have on the insurance industry depends on the coverage and penetration.

The main areas of the insurance industry impacted by the conflict are specialty insurance lines. Aviation is chief amongst these (more caused by the sanctions imposed on Russia opposed to directly from the war) but marine, property, trade credit and political risk will also suffer. $20 billion is an estimate for the industry loss. It’s unclear exactly how much war risk policies are worth in the area, but a working estimate was $20.6 billion as of April 2022. [13]

Furthermore, the conflict in Ukraine and ensuing sanctions on Russia brought about rises in food, fuel, and fertilizer prices across the globe in the first half of 2022. In the first two months of the invasion world crude oil, palm oil and wheat prices had all increased by at least a half and fertiliser and natural gas had more than doubled. [14] However, it is difficult to weigh exactly how much of this was due to the conflict and how much by other factors, such as continuing disruptions from the Pandemic and China’s fertilizer export bans.

These increases, especially in fertilizer prices which have a large influence on agriculture prices, resulted in an estimated 20 million people being pushed into poverty and hunger. [15] This is especially significant for countries reliant on agriculture.

This illustrates how the effects of conflict in one area can reach far beyond the borders of the nation(s) directly involved.

Absolutely Something

So, War Risk Insurance, h’uh, what is it good for?

War risk insurance plays a significant role in the economy as it facilitates the running of the economy during times when conflicts occur, and conflicts are always occurring.

This is important for everyday life as many countries rely massively on imports and exports, with the UK alone importing and exporting nearly £900 billion of goods each way in the 12 months leading to November 2023. [16] Meaning even if a war is contained to a very small area, if it’s in a particular region important to trade then the effects can ripple across to countries thousands of miles away.

Furthermore, countries experiencing conflict directly such as Palestine or Sudan require support from other nations, charities (such as 2 of APR’s chosen charities for our 2023 charity day) and supra-national governmental organisations. War risk insurance, especially medical insurance, supports the workers going in there to help those in need.

However, the problems with war risk insurance are many-fold. It can be difficult to predict (as historical data is often scarce and the events involved are not random), and the claims can be severe. Companies can mitigate this by insuring by layers and purchasing reinsurance although this creates another issue for the industry as a whole. For example, when looking at terrorism risk insurance, of the monetary losses from 9/11, companies holding reinsurance policies suffered 2/3rds. Large losses like this may require government intervention as seen post 9/11 with the Terrorism Risk Insurance Program [17] and now with the UK’s statement of intent to supply war risk insurance for companies offering support to Ukraine.

Furthermore, it’s not suited to protect against all financial impacts of war. Conflicts in key economic areas such as around Panama or Suez would cause wide reaching damage that war risk policies are not equipped to prevent. Moreover, these effects might be felt disproportionately in areas where war risk coverage (or indeed many types of insurance coverage) is traditionally sparse.

It is difficult to say what the future holds for UK and Ukrainian business and what specific steps will come from this statement of intent, but we can look at similar initiatives from other countries and their impact. In this article [18] Yulia Svyrydenko, the first deputy prime minister of Ukraine, elaborates on how war risk insurance is critical in fighting the economic front of the war. She sites regulation and support from countries such as Poland, Germany and the USA as a key tool against Russia’s deliberate targeting of businesses and blockading of ports. For example, war risk coverage by Polish insurance companies created a 55% increase in exports to Ukraine in 2022. Strong, reliable coverage helps increase private sector confidence and allows international companies to work in supporting and rebuilding Ukraine. Svyrydenko states, “an expanded war risk insurance architecture will create firm foundations for the coming recovery and will set the stage for Ukraine’s emergence as a modern and progressive European country”.