Global conflicts drive demand for war risk insurance

With conflict continuing in Ukraine and the Middle East, a little-explored global industry has never been more in demand – the war risk insurance market.

When a Russian missile damaged Natalia Grishko’s apartment in a tower block on the outskirts of Kyiv last November she thankfully was not injured.

Mrs Grishko’s daughter, Alina Kalcheva, says the missile fell about 100m (328ft) from the building. “The blast wave damaged my mother’s balcony, windows, doors, and the interior of the apartment.”

While her mum was “of course very upset and cried” to begin with, Mrs Kalcheva says she ultimately felt calm because they had insured the flat against such an attack.

For while general household insurance doesn’t cover conflict damage – whether you live in Ukraine or a country not under attack – Mrs Kalcheva had had the foresight to take out specialist war risk insurance cover for her mother. And the insurer paid out $1,000 (£740) to help cover the repairs.

The annual premium or cost was $52, and the 33-year-old says she “didn’t hesitate to buy it. And as it turned out it was obviously the right decision.”

Fellow Ukrainian Ekaterina Vasylieva even took out a war risk policy for her car in April 2024. That was particularly timely, because only a day later her vehicle was damaged by Russian shrapnel when it was parked in a street in the coastal city of Odesa.

“Only the day before I extended the comprehensive insurance on the car, and the manager offered for me to get insurance against military risks,” she says. “The cover saved me a lot because after the Russian attack the car looked like a sieve.”

War risk insurance is the general term for a sector that also offers cover against terrorism. Industry experts say it has grown exponentially since the September 11 attacks in the US back in 2001.

And while individuals can take out war risk cover, the vast majority of policies are bought by companies who wish to insure their operations, facilities and staff around the world. Especially in high-risk countries and regions.

Although data is hard to come by for an industry that doesn’t seek the limelight, one trade publication this year estimated that the global amount spent on taking out war risk insurance now totals about $1bn (£800m) per annum.

And £621m, or nearly 80%, of that figure is said to go to specialist insurers in the City of London, which is the centre of the international war risk insurance market.

Joanna Cousins heads a nine-person political violence and war team at one such London-based insurer – Westfield Speciality.

She cites the example of a large energy facility in Iraq, owned by a Western company, which has been attacked multiple times in recent years.

Mrs Cousins says that the owner ultimately bought more than £100m of war risk cover, without which it would have “ceased or greatly reduced” the operation of the site.

People in the war risk market are not normally very keen to talk about how much a policy costs. But for a British or American company operating in Lebanon or Israel, “currently, premiums are priced between 0.5% and 2% of the total cover they buy,” says a senior London war risk insurance underwriter who asked not to be named.

An underwriter is a finance professional who determines the level of risk of an insurance application, and then calculates what the cost of the cover will be.

The 0.5% to 2% range means that if a business wants £100m of annual cover it has to pay between £500,000 and £2m. However, these rates will “fluctuate significantly as the situation in different countries in the Middle East is volatile”, adds the unnamed underwriter.

Premiums in stable Gulf states are said to be much lower, from 0.025% to 0.05% of the total amount covered.

What is actually covered by a policy can vary. For example, a company can get cover for kidnappings and ransoms, treating serious injuries, or the cost of dealing with an “active assailant” situation.

“The market is growing in capacity and demand, ” says Daniel Hiller, underwriter, and group head of terrorism and political violence at insurer Munich Re Specialty.

“There are more perils customers can buy coverage for, especially around the active shooter product, but also strikes and riots.”

War risk cover is organised in seven “buckets” spanning different severities of conflict. Sabotage and terrorism are considered to be the lowest, while civil and interstate war are the highest.

“Many insurers try to offer all this coverage, since often it’s not clear where a situation has moved from risk of terrorism, to civil war, to even interstate war,” says Raveem Ismail, founder of specialist insurance firm London-based Trigger Parametric.

The war risk sector is centred on London due to the continuing strength of Lloyds of London, which has been a specialist insurance market since 1689.

Lloyds is also home to war risk insurance reinsurers – firms who buy and sell the cover.

Ms Cousins says this spreads out the possible exposure. “Each [reinsurer] covers a certain percentage of the risk, of anywhere between one and 10%,” she says.

Constantin Gurdgiev, a finance professor at the University of Northern Colorado, and an expert in the study of risk and conflict finance, says the challenge for the war risk sector is to work out what premium to charge for cover.

“Wars and conflicts more generally represent black swan [very rare] events,” he says. Because of this rarity, he adds that “historical data tends to be a weak basis for establishing any priceable insights”.

Yet Mr Ismail points out that war risk insurance can be very profitable, something he contrasts with the car insurance sector.

“As a car insurer, for every £1 of premiums you take in, you pay back almost £1.05 in claims,” he says. You might think that the maths doesn’t add up there, but Dr Ismail says that the car insurers make the 5p and more from investment income.

By contrast, war risk insurance funds can pay out as little as 2%. Put simply, car crashes remain far more common than war damage.