The Russia-Ukraine conflict has set in motion a domino effect that continues to have widespread consequences for several sectors, including the local insurance industry.
Bertus Visser, Chief Executive of PSG Insure Distribution explains that all insurers have war clause exclusions for acts of war including invasions, insurrections, revolutions, military coups and terrorism as this protects them from potentially catastrophic losses caused by war-related events. “The unfortunate reality is that most insurance companies will be unable to remain solvent in the event of large-scale conflicts. War-related loss and damage can have devastating financial effects and pose a serious risk to the sustainability of the industry, and therefore also the economy.”
The war clause in insurance policies protects insurers from this calamitous risk which is usually covered by War and Strikes insurers in accordance with the War Damage Insurance and Compensation Act 85, 1976 (No. 85 of 1976). However, due to the nature of Russian/Ukraine conflict, insurers have cancelled all War cover in Russia and Ukraine. Visser explains that local insurance product providers have issued war cancellation notices to all their affected clients, meaning that there is currently no alternative solution in place for the Russia-Ukraine conflict.
The direct impact of this is that marine-based businesses who import/export goods to the affected regions around Ukraine and Russia are potentially at risk of suffering substantial losses due to the war clause cancellations as well as the existing sanction limitation and exclusion clauses.
Visser explains: “Import/export businesses also need to be aware of the sanction limitation and exclusion clauses in their policies. This clause states that no insurer will provide cover or pay any claim or benefit, if doing so exposes them to sanctions, prohibitions or restrictions under United Nations resolutions or the trade of economic sanctions, laws or regulations of the European Union (EU), United Kingdom (UK) or United States of America (USA).
The UK, USA and EU have now implemented strict sanctions against Russia, listed businesses and certain named individuals. Insurers are legally obligated to abide by these restrictions and as a result, have issued notice to all their clients and advisers where there are policy contracts in place.”
Visser has the following advice for businesses who have existing shipments enroute to Russia or Ukraine: “If sanctions are imposed after a shipment commences its voyage and there is a claim, the product provider may not be able to pay the claim, as the payment could be in contravention of the international sanctions by the UN, UK and USA. Affected businesses are urged to speak to their advisers about the potential risks of sending cargo to these war-affected regions, as a loss may no longer be viewed as fortuitous or unforeseen.”
Another war-related risk that may affect South Africa businesses relates to cyberwarfare, which historically, increases when geopolitical tensions are elevated. In fact, immediately after the conflict broke out, suspected Russian-sourced cyber-attacks were observed at an increase of over 800% over a 48-hour period. United States intelligence and security services, the FBI, and the Department of Homeland Security have all shared high alerts covering threat levels, preparedness, and response.
Cyberattacks can stretch far beyond what might be expected, not only including infrastructure or services necessary for survival like power stations and water treatment plants, but also financial markets and companies linked to opposing governments. These events have highlighted the importance of cybercrime insurance for businesses and also, how critical it is for those business owners to understand the clauses in their policies that relate to compliance.”
Visser concludes: “The immediate potential cyber-related risk exposure for anyone doing business in Russia is related to outstanding payments. A business may be requested to make payments on outstanding accounts into a different bank account. It is important that any request for payment on any invoice be verified with the supplier as interception of invoices might become a bigger risk. Furthermore, making payments to a country on a sanction list is another risk, and we strongly advise clients not to make payments of any nature on outstanding accounts for products imported from Russia without obtaining legal consent that the payment can be made.”