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Ukraine crisis causes insurers to stop covering political and trade credit risks

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Ukraine crisis causes insurers to stop covering political and trade credit risks

The crisis in the Republic of Crimea has caused insurance underwriters to virtually stop writing political and trade credit risks in Ukraine, but they are still cautiously writing the coverages in Russia.

Last month, in response to the Russian annexation of Ukraine's Crimean region, the United States and the European Union imposed sanctions against certain interests in Russia and Ukraine, and have threatened to expand them as the crisis intensified.

Experts advise policyholders in both countries with political risk and trade credit coverage to carefully examine their policies, which often are heavily manuscripted.

The situation is “fluid,” experts say, as about 40,000 Russian troops remain poised at the Ukrainian border and pro-Russian protests flared up in several Ukrainian cities last week.

Richard S. Maxwell, New York-based chief underwriting officer and global head of political risk and trade credit for XL Group P.L.C., said, “For both countries, we're operating very cautiously and supporting clients that have been with us for a period of time, and we're looking to see how developments work their way out over the course of the next six months or so,” by which time he said he expects “more political clarity in the political and economic circumstances for both countries.”

“We're still open for business, but not business as usual,” he said.

Equinox Global Ltd., a Lloyd's of London coverholder for trade credit business, is “off cover” in Ukraine, said Alex Paton, head of underwriting and one of the company's founders.

Ms. Paton said that most trade credit underwriters at Lloyd's are currently off-risk for Ukraine and that a small number are writing “very small lines at a very high price.”

Political risk analysts and economists say the possible scenarios of the Crimean crisis are Russia remaining in control of only Crimea, Russia taking over eastern Ukraine and Russia taking over the entire country, said Gabe Mansky, New York-based area executive vice president for trade credit and political risk at Arthur J. Gallagher & Co. It's highly unlikely Russia eventually would take over Ukraine, he said.

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The U.S. sanctions have been designated against 16 Russian government officials — members of the Russian leadership's inner circle, including a Russian bank — according to the U.S. Department of the Treasury's Office of Foreign Assets Control.

The sanctions are unique in light of Russia's major role in the global economy, said Trip MacIntosh, a partner with law firm Holland & Hart L.L.P. in Denver. Previously, sanctions against other countries, including Rwanda, Myanmar and even Iran, have all involved nations that “are on the margins of the global economy,” he said.

Experts say they know of no insurance claims to date related to the crisis, although these may take time to work through the pipeline.

They draw distinctions between the Russian and Ukranian markets. Russia is a big market with a significant amount of exposure to trade and political risks, said Evan Freely, New York-based political risk and trade practice leader for Marsh L.L.C. Ukraine has a much smaller exposure, he said.

According to a 2012 report by the Washington-based World Bank Group's Multilateral Investment Guarantee Agency, foreign direct investment inflows into the Russian Federation totaled $52.88 billion in 2011, and were only $7.21 billion in the Ukraine.

Marsh estimated political risk insurers wrote $324 million in premiums for Russian political risk insurance last year. No comparable data is available for Ukraine.

The Ukrainian economy had been deteriorating for some time before the recent tensions over Crimea, Ms. Paton said, and therefore most underwriters at Lloyd's had come off cover before the crisis or were writing Ukrainian business “very selectively.”

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With regard to Russia, Ms. Paton said, underwriters are exercising caution and not accepting as much business as they were prior to the political unrest in Crimea. She said Equinox is not off cover for Russia and that she is not aware of any underwriters within the Lloyd's market that have stopped writing Russian business altogether.

Although most political risk insurers are not writing business in Ukraine, there are a declining number of insurers still willing to write business in Russia, said Kirk A. Pasich, a partner with law firm Dickstein Shapiro L.L.P. in Los Angeles. However, they are pricing the coverage more carefully “because it's clear it's a greater risk. It's definitely harder to get and more expensive,” which is not unusual in this type of situation, Mr. Pasich said.

Joseph F. Bermudez, a partner with law firm Wilson Elser Moskowitz Edelman & Dicker L.L.P. in Denver, said “because the situation in Ukraine is extremely fluid, ... essentially, everyone has had to put a brake on any type of new business or consideration of new business, because they don't know how this will play out.”

In Russia, though, business is still being considered, he said.

There are distinctions to be made among the different types of insurance within the political and trade credit risk segment. Expropriation insurance, for instance, is easier to obtain than coverages for lack of payment, because the risk is not considered as large, Arthur J. Gallagher's Mr. Mansky said.

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Experts say they anticipate an increased demand for political and trade credit risk coverage, with some drawing the analogy of trying to buy fire insurance while their house is on fire.

“You'll certainly see companies that don't have coverage seeking it out, and the cost, of course, is going to be much more challenging under the current sections situation,” said Kevin L. Petrasic, partner with Paul Hastings L.L.P. in Washington.

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