Marine Insurers At Risk Of Ukraine War Claims, Allianz Warns

Law360, London (May 10, 2022, 2:21 PM BST) -- Marine insurers for the global shipping industry face larger risks of claims as cargo ships are lost or trapped because of the Russian invasion of Ukraine, according to a report published Tuesday by Allianz.

Claims under specialist war policies for ships lost in bombings and destroyed by sea mines and rocket attacks are increasingly likely as the war in Ukraine continues, the report by the German insurance giant found. The risk of non-war claims under hull and cargo insurance for vessels affected by the conflict remains uncertain amid complex legal and policy questions, the report found.

Cargo ships trapped in the Black Sea by naval military operations will face crewing and maintenance problems as time goes on, according to the report. The threat of being hit by sea mines would mean that even ships given safe passage to their port of destination would be at risk.

"We can predict the various scenarios under war cover, but it is much harder to predict how non-war losses could develop for vessels trapped in Ukrainian ports and the Black Sea," Justus Heinrich of Allianz Global Corporate & Specialty SE said. "There are potential issues around safe navigation, crew, maintenance and salvage for these ships if they are unable to leave."

Trapped vessels may face dangers from fires, grounding and collisions as machinery breaks down from lack of maintenance, Allianz warned.

The report found that compliance with continuously evolving sanctions regimes has become a major problem for the shipping industry, creating complex legal problems for shipping contracts, including insurance. It is usually difficult to establish who is the ultimate beneficial owner of a vessel or its cargo, complicating efforts to comply with sanctions.

"The tragic situation in Ukraine has caused widespread disruption in the Black Sea and elsewhere, exacerbating ongoing supply chain, port congestion and crew crisis issues caused by the COVID-19 pandemic," Rahul Khanna, global head of marine risk consulting at Allianz Global Corporate & Specialty, said.

Sanctions affecting banking and insurance companies can also hit shipping companies, as British and EU insurers cannot underwrite policies for strategic Russian industries such as aviation.

The parliamentary Treasury Committee heard in August that the British sanction regime is having a "profound" effect on the U.K. insurance market, particularly in aviation cover. The head of marine and aviation cover at Lloyd's Market Association, a trade group, told MPs, "The volume of the legislation that's been coming out has been very difficult for people to manage."

Allianz said on Tuesday that a prolonged war could cause sanctions on Russian oil to become common around the world, pushing up prices for bunker fuel used in shipping. This could force some companies to switch to alternative fuels, which would increase the number of insurance claims if those fuels cause more frequent malfunction.

State and non-state organizations on both sides of the war also threaten shipping vessels, according to the report. Security agencies are reporting more frequent attacks that jam shipping GPS or interfere with the automatic identification systems used by vessels for navigation. Other forms of attack are being reported too.

Russians make up 10% of the world's 1.89 million crew members, while 4% are Ukrainian and might be unable to return home or rejoin ships at the end of their contracts. This could lead shipping companies to claim for lost working days, reduced maintenance and other losses.

There were 54 reported losses of ships in 2021. Some 27 of those were cargo ships, a significant improvement from the 65 reported losses in 2020, according to the Allianz report. This continues a trend toward improved shipping safety measures, although the number of casualties and incidents in 2021 has risen from 2020.

Britain sanctioned Russia and major Russian banks at the end of February after troops began the invasion of Ukraine. The U.S. has also imposed sanctions on Russian banks and key figures in the country's business and politics. And government officials and Putin himself have been targeted by the U.S.

Companies in the sector are already feeling the pain from the Ukraine conflict. Munich Re said on Tuesday that it has been severely affected by sanctions imposed on Russia as it reported €100 million ($106 million) in expenses connected to the conflict in the first three months of the year.

--Additional reporting by Najiyya Budaly, Daniel Wilson and Lauren Berg. Editing by Ed Harris.

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