The Russia-Ukraine War has created multiple impacts across the globe, effecting not only your business operations but potentially also your insurance coverage. The Russian invasion has already brought repercussions to inflation, supply chains and cybersecurity and could mean higher commercial insurance premiums and decreased capacity across all lines. Companies directly operating with the Russian government or businesses could see further concerns as additional sanctions may affect their ability to secure or make claims against existing policies.

Regardless of where your business conducts business, numerous risks from the Russia-Ukraine War could have repercussions for the insurance market.

Political Risk

When conducting business abroad, most companies focus on overall strategy — how to increase sales and market share while limiting costs. One aspect of doing business abroad that often goes overlooked is political risk. This exposure can be financially devastating and bring foreign operations to a halt if your organization is not properly prepared.

In general, a political risk is any action taken by a foreign party, such as a governmental body, that could, or potentially could, affect the local business climate. These actions can cause companies and investors to suffer financial losses as a result of sweeping political changes or instability in the country. Common political risks and impacts for investors and exporters include:

Legal & Regulation Changes

When governments introduce new laws or change their existing regulatory framework, business operations may be negatively impacted. Governments often target foreign businesses or certain industries with unfavorable restrictions that could potentially eliminate the viability of conducting business abroad altogether.

Import & Export Restrictions

Sudden changes in import and export restrictions can greatly increase the cost of doing business abroad. Countries often center their tariff and trade barrier strategies on protecting consumers and domestic companies. Further, an embargo or the cancellation of an import license can spell disaster for a business operating abroad.

Transfer Risk

In some instances, businesses may not be able to convert the local currency into dollars. When this happens, foreign buyers may not be able to pay exporters. Worse still, if currency restrictions are in place, the value of cash held in a foreign market may depreciate relative to the dollar.

Foreign Government Breach of Contract

When a contract breach occurs (e.g., non-payment, unwarranted contract termination), it can create losses for businesses. This can happen without warning, and the financial loss can be difficult to recover.

Expropriation

This occurs when a government or other public agency seizes, sometimes unlawfully, private property in the name of public interest. Your business can lose both physical assets and revenue.

Political Turmoil

Unsafe conditions due to war, terrorism, civil strife or other forms of political violence can force your business to completely abandon its investment.

The type and potential impact of political risk varies by country. It’s important to remember that stability varies by country. Political risk tends to be greater in developing regions. The U.S. Department of Commerce provides a general overview of various risks of conducting business internationally.

Mitigating Risks

While political risk is nearly unavoidable in some cases, there are ways to prepare before conducting business abroad. Best practices that businesses can leverage include:

• Identify risk exposures that may be encountered based on several factors, one being geopolitical. Your risk manager can inventory these political risks and rank them based on their impact to your business. Examining political trends can help anticipate future events and government action.
• Quantify potential risks using common measurement tools, including discounted cash flow analysis, organizational network evaluations and enterprise risk management. These tools will help your company predict maximum probable losses, market share changes and potential customer loss. Based on this information, your business can appraise if the risk of doing business abroad is still profitable following a major political risk.
• An effective course of action can reduce a risk’s probability and its potential effects. While political risk is difficult to eliminate entirely, your business can utilize previously gathered data to implement preventive tactics. Approaches can include reevaluating your investment type, seeking new in-country relationships, revising your operational setup and redistributing capital allocations.
• When conducting business abroad you must consistently monitor political risks and integrate any data and findings into a formal risk management process.
• Speak with your broker to initiate political risk insurance to counteract any gaps in protection. This security can safeguard your physical assets, foreign funds, contracts and much more.

Supply Chain & Inflation Risks

Currently, many merchant shipping vessels near Ukraine have been targeted by the Russian military. Insurers are either refusing coverage for vessels sailing in the Black Sea or demanding enormous premiums. These interruptions will continue to cause problems for the already suffering supply chain. Forbes recently reported nearly 400,000 businesses worldwide (90% U.S.-based) rely on Russian suppliers while another 250,000 businesses (90% U.S.-based) rely on Ukrainian suppliers.

The most recent Russian and Ukrainian trade figures (2019) from the Office of the United States Trade Representative include:

Mineral Fuels ($13 billion)

The top import commodity from Russia to the U.S. includes fossil fuels, such as crude oil and natural gas. As Europe relies on Russia for nearly 40% of their natural gas and crude oil consumption, additional sanctions to the country could cause significant impacts to an already weak global supply chain and inflation implications.

Industrial Metals ($3.6 billion)

Russia and Ukraine lead the global production of metals such as aluminum, nickel, copper and iron ore. The conflict could significantly cause difficulties for the U.S. construction and manufacturing industries that are already suffering from supply shortages and inflation.

Agri-Commodities ($1.5 billion)

Russia and Ukraine exports account for more than 25% of the world’s trade in wheat, 20% of corn sales and 80% of sunflower oil. U.S. total imports of agricultural products from Russia totaled $69 million in 2019. As the struggle continues, companies should expect prices for these commodities to continue to increase, as well as supplies from Ukraine depleting.

Trade Credit Insurance

In today’s business climate, most organizations are expected to extend credit to their customers, as it enhances purchasing power and creates opportunities that may not have been available otherwise. However, offering credit is a balancing act, as late payments or customer insolvency can put stress on your organization’s cash flow and profitability. Organizations collaborating with foreign governments and businesses have additional risk as foreign companies and laws are not as protective as in the U.S.

Fortunately, your business can secure trade credit insurance to protect your investment. Trade credit insurance, also known as credit insurance or export credit insurance, is a form of insurance that transfers risk for businesses seeking to protect their accounts receivable against nonpayment.

Trade credit insurance is designed to protect businesses against the risk of nonpayment of goods or services by their domestic or international buyers. In essence, policies protect against nonpayment as a result of buyer insolvency or nonpayment after an agreed number of months following the due date.

Risks that can be insured under trade credit insurance include:

• Nonpayment or late payment
• Customer bankruptcy, insolvency or similar legal status
• Nonpayment following an event outside the buyer’s or seller’s control

It should be noted that insured risks must have a direct link with the delivery of goods or services, otherwise they are uninsurable.

For insurers, the goal of a trade credit insurance policy is not only to indemnify losses as they arise but also help businesses prevent foreseeable losses from occurring in the first place. This may be a viable option for any organization conducting business overseas, not just in Ukraine or Russia, to protect their investments.

The current conflict’s negative implications on the supply chain and inflation will not only cost your organization more money initially but also will affect your insurance policies. As the cost for supplies and services continue to increase, insurers will be forced to pay more toward claims. In addition, your current policies could be underfunded and cost you if you were to need protection.

Cybersecurity Risks

The Russia-Ukraine War could raise the risks of cyberattacks and lead to already higher cyber liability premiums. Nation-state attacks, a common Russian tactic, have become a global concern. This trend sees cybercriminals work on behalf of a nation-state. They traditionally direct their criminal activities toward critical infrastructures. As the United Nations and the North Atlantic Treaty Organization (NATO) continue to support the Ukrainian government, the risk for U.S. companies is real. Along with cyber liability coverage, your organization should implement recommended cyber procedures and policies, including:

• Minimizing cyber intrusions by implementing multi-factor authentication, updating your cyber prevention software and utilizing cloud services for backups.
• Increase your capability to detect breaches by empowering your cyber or IT personnel to quickly identify unusual network behavior.
• Establish a crisis-response team to quickly respond to potential cybersecurity incidents.
• Conduct tabletop exercises and penetration testing.

We’re Here to Help

The Russia-Ukraine War is just one of many international incidents and conditions that could affect your business, regardless if you conduct business internationally or domestically only. The world has become a global market that provides many opportunities for businesses to expand and generate additional revenue. Unfortunately, these expansions can also provide additional risks that are beyond your control.

Fortunately there are several coverage opportunities that will provide protection to your business against international risks. We also recommend your company stay diligent and proactive to potential domestic implications from foreign influences. If you have questions about your current property & casualty insurance coverage or additional protection you may need to do business overseas, connect with a member of our team.