Between mines and missiles: How businesses insure and transport cargo across the Black Sea.

The transportation of goods in the Black Sea is crucial for Ukraine's economy. Due to military risks, this route requires insurance. The government has already taken initial steps, and private insurers are at work, but this is not enough. What does the business community think about this and what should be done next – in the article by RBC-Ukraine journalist Dmitry Sidorov.

The significance of the maritime corridor for Ukraine's economy is very important. Last year, the maritime route facilitated the export of 87.2 million tons of goods out of a total volume of 129 million tons. "This means that about 70% of exports are carried out via the sea route because it is the cheapest logistics option for distant markets," explained RBC-Ukraine Deputy Minister of Economy Andrey Telyupa.

Shelling of port infrastructure and mines in Ukraine's territorial waters pose serious challenges to the operation of the maritime corridor. A business solution to mitigate these risks is the insurance of cargo and vessels. However, how can one insure against an event that has a significant likelihood of occurring in the context of a full-scale war, with devastating consequences?

"Insurance and war do not mix well; it is a classic exclusion. War involves enormous risks, and we never know what this person (Vladimir Putin - ed.) will come up with, or what missile will strike next. Insurance works with clear, predictable events," said RBC-Ukraine CEO of the National Association of Insurers of Ukraine Denis Yastreb.

According to him, at the beginning of the war, Ukrainian insurance companies did not know how to properly assess military risks and set insurance prices at 100% of the asset's value.

"This hardly resembled insurance. Then, when statistics became available, we realized that certain assets are not completely destroyed (as a result of a drone or missile strike - ed.), and we could calculate specific percentages, thereby reducing the insurance price," Yastreb explained.

Currently, cargo in the Black Sea is insured by "INGO", ARX, Colonnade, and several others. There is significant demand for their services within the real sector.

The "Unity" Mechanism

The military risks in the Black Sea waters are too great for private companies to undertake insurance on a market basis alone. Structures are needed that can assume some of the risks. This issue became particularly pressing following Russia's withdrawal from the "grain" deal in July 2023. Consequently, in November 2023, the Cabinet created a special insurance mechanism - "Unity" (Unity Insurance Facility).

A pool of 14 leading British insurance and reinsurance companies was involved in the "Unity" mechanism, including Marsh McLennan and representatives from the world's largest insurance market, Lloyd's of London. This pool provided insurance for commercial vessels, but not for cargo, from December 2023 to December 2024, and also facilitated reinsurance - ensuring payments to insurance companies if they incurred expenses exceeding their limits and expected risks. British financial firms provided the first level of the "Unity" mechanism and enabled the implementation of vessel insurance in the Black Sea corridor.

The second level involves reinsurance from the Ukrainian government. For this, the Cabinet allocated separate funds to compensate British companies for their services in case of insurance incidents. In early November 2023, the government directed $20 million from the state budget's reserve fund to the "Export Credit Agency" so that it could deposit this amount in accounts at "Ukrgasbank" and "Ukreximbank" (10 million each).

With these funds, state banks issued letters of credit to British companies, granting them the right to receive compensation from the government in case of insurance incidents. The second level of the "Unity" mechanism absorbed some of the risks of British financial companies, thereby reducing the cost of their insurance services, and consequently, the freight rates for commercial vessels in the Black Sea.

At the beginning of 2024, only vessels transporting grain were insured. Minister of Economy Yulia Svyrydenko stated that thanks to the "Unity" mechanism, insurance rates for vessels in the commercial market had halved. For agricultural products, this indicator dropped to 0.75% of the cargo value. Since March of last year, the mechanism has been expanded to include other goods – iron ore, steel, containers, electrical equipment, and animal feed.

There have been no insurance incidents under the "Unity" mechanism, says Andrey Telyupa. However, there are known instances of Ukrainian commercial vessels being shelled in the Black Sea (September 2024), as well as the port of "Yuzhny" and the port of Odessa (October 2024), resulting in damage to vessels loaded with grain. Commenting on these cases, the Ministry of Economy noted that they were not insurance cases because those vessels (their owners) did not join the "Unity" mechanism.

Photo: Commercial vessels in the Black Sea carrying Ukrainian goods to the global market were hit by missile strikes (Getty Images)

"The damaged vessels did not have Unity insurance, therefore, under this military risk insurance program, no payments were made to them. The state merely provided the opportunity to insure vessels, and whether to use this opportunity was up to the owners. Obtaining military risk insurance was not an unconditional requirement for going to sea; it was a voluntary decision by the vessel owners," explained RBC-Ukraine's Andrey Telyupa.

Since the "Unity" program was set to operate until December 21, 2024, the government is currently considering its extension. "We consider this insurance project successful because it has allowed the maritime corridor to operate effectively. We see the need to expand this practice and are discussing with international partners how best to implement it further," said the Deputy Minister of Economy in a comment to RBC-Ukraine.

The private market does not entirely share the positive assessment of the "Unity" mechanism by the state. In the mining and metallurgical group "Metinvest", which transports large volumes of metal products, iron ore, and coal across the Black Sea, they noted in a comment to RBC-Ukraine that this mechanism did not gain popularity among either international or domestic shipowners. "According to the information we have, the "Unity" mechanism did not impact the reduction of insurance costs," stated Metinvest.

A similar opinion was expressed by Alexey Yanovsky, the procurement and logistics director of Interpipe, 40% of whose products (railway products, pipes) are exported through the ports of Greater Odessa. "Unfortunately, we do not feel the real impact of these initiatives and mechanisms. Today, we can only rely on our resources to cover the cost of military risk insurance," added Yanovsky.

Marine Cargo Insurance

Ship owners handle the insurance of vessels, while exporters and importers insure their cargo. According to Interpipe, standard insurance costs 0.06% of the invoice value of the cargo, while military risk insurance is 20 times more expensive at 1.25%, applicable on routes from the ports of Odessa to the Romanian city of Sulina.

"The cost of military insurance has not significantly changed since the launch of the so-called "temporary corridor" and remains excessively high. In my opinion, it will not change until a legally significant ceasefire regime is established. The fact that at some point the shelling is less systematic and destructive does not guarantee that a strike will not occur at any convenient moment for the aggressor. Therefore, risks do not disappear, and thus the high cost of insurance remains," explained RBC-Ukraine's Alexey Yanovsky.

Each new episode of shelling of port infrastructure or vessels puts pressure on reinsurers to increase rates or withdraw from the market, delaying the next opportunity to reduce rates, noted the company "Nibulon", one of the largest exporters of grain and oilseeds.

"In fact, rates do not change (at least under general annual insurance contracts) or have a slow tendency to decrease. The panic and confusion in the market have already passed, although at any moment, especially in the case of significant attacks, pessimistic sentiments may prevail," says Sergey Kalkutin, logistics director of "Nibulon."

In the insurance company "INGO", which provides military insurance for cargo in Ukraine's territorial waters, they indicate that there is currently a steady increase in the number of cargo transportation insurance contracts with a maritime component. This applies to both container shipments and vessel consignments. There is also demand among businesses for insurance of cargo during their interim storage in ports.

Photo: Businesses are interested in insuring cargo both at sea and in Ukraine's ports (Getty Images)