Investing in Ukraine

UKRAINIAN INSURANCE INDUSTRY: Insuring your investment in Ukraine

International investors must ensure to insure against multiple risks if they want to succeed in Ukraine

Alexander Saus
Tuesday, 08 December 2015 23:33

Post-revolutionary Ukraine is increasingly appearing on international investment radars. After two years of political upheavals and conflict, there are signs that the country’s economy is finally on the road to recovery, with the promise of a new European-style business environment helping to make Ukraine one of the most potentially attractive destinations for investment in the region. At present, the majority of potential investors continue to adopt a wait-and-see attitude, monitoring the situation for indications that the ambitious government reform programme will enjoy the requisite political backing to genuinely transform the Ukrainian business climate.

There are already indications that the Ukrainian economy has turned the corner and that structural reforms are beginning to bear fruit. The country jumped 13 places in the influential annual World Bank ‘Doing Business’ report this year, while a range of international financial bodies and ratings agencies are predicting a return to Ukrainian GDP growth in 2016. These positive trends are certainly welcome, but investors who choose to develop a presence on the Ukrainian market will continue to face a range of potential threats that could upset their calculations.


Risks facing investors

International investors entering the Ukrainian market face three major risks: physical loss of property, financial losses, and the loss of title to the object of investment. Insuring against these risks is possible but it requires a tailored approach that will cover the specific needs of each individual investor. A wide variety of insurance instruments is available to cover the risk of physical damage. These instruments include property damage insurance for all kinds of real estate, industrial facilities, equipment and so on. You will also find cargo insurance options, insurance for construction sites, and special coverage for crops and cattle. The common feature in all these cases is that the risks covering physical damage are impartial in terms of the host country.


Limited options on the Ukrainian market

Financial losses call for much more complicated types of coverage. Contrary to the situation in more developed economies, the Ukrainian insurance market does not boast a wide range of options. The most common policies are business interruption insurance (BI) and advanced loss of profit insurance (ALOP), with the latter being requested by investors far more rarely than BI coverage. Both products are tailored to cover losses of income and neither is sold separately by insurers. BI policy covers an investor for the loss of income incurred due the shutdown of the insured facility caused by unforeseen circumstances as stated under the principal property damage agreement, while ALOP policies cover similar losses due to delays in completing construction projects caused by unforeseen circumstances insured under a principal CAR (contractors’ all risks) agreement.

Crop-yield insurance cannot be ignored in this regard, as it provides an indirect way of insuring against financial losses. As an essential tool for agribusiness investors, its gist lies in the obligation of the insurer to cover the difference between insured and actual crop yield, this way indemnifying the investor for the loss of profit subsequent to insufficient yields.


Theory and practice

All the other financial and commercial insurance products offered by Ukrainian insurers tend to resemble nothing so much as demo versions of similar insurance coverage actively working in Europe, the USA, and other mature markets. In practice, this means that a number of companies have terms and conditions written for policies such as trade credit or debtors insurance, but actual coverage is either refused outright, if we are talking about reputable insurers of international standing, or its wording eliminates the possibility of indemnification altogether. The latter is often applicable to small insurance companies issuing such policies within packages requested by lending institutions. Title insurance is not immune to the same issues. Actual coverage can only be purchased in Ukraine for mortgaged apartment owners, as contract value can only be covered by the insurer without transferring risk to reinsurers.


Insuring against political violence

From the point of view of international investors interested in entering the Ukrainian market, all of the abovementioned insurance products share one common flaw. They do not normally cover any damage caused by terrorism, military actions, riots, nationalization, confiscation and other civil instability. While no coverage can be found in Ukraine for the unilateral actions of the government aimed at nationalizing, confiscating or expropriating property owned by foreign investors, there is still a silver lining. Recent events in Crimea and east Ukraine have facilitated the drawing up of an insurance product called Full Political Violence. This insurance agreement protects against aggressive actions resulting in war, mass riots, revolutions, strikes, or sabotage. It goes without saying that this is not the cheapest coverage available on the market, with insurance rates equaling around 1 % of the insured property’s value. Moreover, the logic runs, such coverage can only be provided in regions that do not currently suffer from the risks in question.

Finally, it should be added that fear has a hundred eyes. Wary investors won’t line up to offer the Ukrainian economy significant cash inflows until both the government and parliament secure peace within the country, implement effective reforms to eliminate corruption, and maintain a stable currency exchange rate. Ukraine needs to become a truly investor-friendly nation before it can expect to develop along modern European lines. There is evidence that the political classes are finally steering the country in the right direction, but investors would nevertheless be wise to ensure they are insured before entering this exciting but high-risk emerging market.


About the author:  Alexander Saus is a Managing Partner at BritMark, a national insurance broker operating in the Ukrainian market since 2004 which is currently working with over 180 companies and organizations in Ukraine.

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