The impact of the Russia-Ukraine war on SA business insurance

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.

All insurers have war clause exclusions for acts of war – including invasions, insurrections, revolutions, military coups and terrorism – because this protects them from potentially catastrophic losses caused by war-related events.

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. However, because of the nature of the Russia-Ukraine conflict, insurers have cancelled all war cover in Russia and Ukraine.

Local insurance product providers have issued war cancellation notices to all their affected clients, which means there is no alternative solution in place for the Russia-Ukraine conflict.

The direct impact of this is that marine-based businesses that import/export goods to the affected regions around Ukraine and Russia are potentially at risk of suffering substantial losses because of the war clause cancellations, as well as the existing sanction limitation and exclusion clauses.

Sanction limitation and exclusion clauses

Sanction limitation and exclusion clauses in policies state 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, United Kingdom or United States of America.

The UK, USA and EU have implemented strict sanctions against Russia, listed businesses and certain named individuals. Insurers are legally obliged to abide by these restrictions, and as a result, have issued notice to all their clients and advisers where policy contracts are in place.

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.

Risk of invoice interception

Another war-related risk that may affect South Africa businesses relates to cyberwarfare, which historically increases when geopolitical tensions are elevated.

Immediately after the conflict broke out, suspected Russian-sourced cyber-attacks were observed to increase by more than 800% over 48 hours. US intelligence and security services, the FBI and the Department of Homeland Security have shared high alerts covering threat levels, preparedness and response.

Cyber-attacks may not only affect essential infrastructure or services, such as power stations and water treatment plants, but also financial markets and companies linked to opposing governments. This highlights the importance of cybercrime insurance for businesses and how critical it is for business owners to understand the clauses in their policies that relate to compliance.

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 PSG Insure strongly advises 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.

Bertus Visser is the chief executive of distribution at PSG Insure.

Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.

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