Vital shipments of grain to support the global food market have been backed by the insurance sector, but a treaty is now under threat

The insurance industry’s involvement in facilitating shipments of grain to leave Ukraine as part of a treaty is “a great example of the fact that the insurance industry has saved lives”.

This was according to Marcus Baker, global head of marine and cargo at broker Marsh, who spoke exclusively to Insurance Times this week as reports hit the national press that Russia was only prepared to extend the existing shipping treaty for a further 60 days.

The treaty between Russia and Ukraine was brokered by the United Nations and Turkey in July 2022 to allow grain and fertiliser shipments from certain Ukraine Black Sea ports – including Odesa, Chornomorsk and Pivdennyi – to be safely exported.

Under the terms of the treaty, Ukrainian vessels guide cargo ships past mined areas and into international waters before the ships proceed along an agreed humanitarian maritime corridor towards Istanbul.

In a November 2022 Allianz Global Corporate and Specialty report, entitled Global claims trends to watch in marine insurance, the insurer praised the treaty as a “positive development” that had “enabled a large volume of grain and fertiliser to be shipped out from key ports in Ukraine”.

It added: “As a result of this initiative, some vessels trapped in these ports have also moved out of the conflict zone, but tankers and other vessels not carrying grain or fertiliser did not benefit.”

Ukraine is one of the world’s largest grain exporters and many nations rely on its exports for food security. In May 2022, the European Commission confirmed that Ukraine accounted for 10% of the world wheat market, 13% of the barley market and 15% of the maize market, for example.

When the Russian Federation invaded Ukraine in February 2022, it therefore had the knock-on effect of increasing grain prices to record highs as the global supply was constricted.

The Food and Agricultural Organization of the United Nations stated in April 2022 that cereal prices had increased 17% month-on-month, while world wheat prices rose 19.7% in March 2022. Global maize prices, meanwhile, grew 19.1% over the same reporting period, as reported by The Guardian

The original treaty between Ukraine and Russia provided a degree of confidence to insurers and in August last year, Marsh secured its first insurance placement for a new marine cargo and war facility that covered shipments of Ukrainian grain alongside specialty (re)insurer Ascot Group.

Baker explained that, at the end of February 2023, the facility had provided insurance to protect over 100 shipments of grain leaving Ukrainian ports covered by the treaty.

“That’s about $1.5bn (£1.24bn) worth of grain that has come out of Ukraine,” he explained.

Treaty wrangling

Despite the confidence the treaty has provided to insurers to underwrite and facilitate this vital global trade, Moscow this week (13 March 2023) suggested that it would only renew the treaty for 60 days, rather than the previously agreed extension period of 120 days.

The treaty was last extended in November 2022 and is set to expire this Saturday (18 March 2023).

Ukrainian infrastructure minister Oleksandr Kubrakov has rejected this shortened proposal, saying that it violates the terms of the original treaty, which mandated an extension of four months.

Russia has also cited concerns over sanctions that restrict its own ability to export grain and fertiliser – this includes the high costs of insurance caused by sanctions.

While these issues will not be solved by the insurance sector alone, Baker said Russian willingness to extend the treaty at all was “partially reassuring”.

He added: “There’s a degree of comfort within the underwriting community that this is fine – if [the treaty] wasn’t in place, then would it still be possible to insure the grain trade?

“It’s debatable, but I’d say yes. [If the treaty wasn’t in place], rates would go up because it would become a more challenging territory to insure, but fundamentally some [underwriters] would still take that risk.”

While the treaty does remove a degree of risk, Baker noted that the dangers of a war zone were fundamentally risky – this is why a war risk insurance market exists to navigate these waters.

He finished by emphasising the positive role that insurance had played in facilitating trade during a full-blown war: “It’s rare that insurance is talked about as a force for good, but when this sort of thing happens, it’s a huge positive boost for the community.

“We should be bringing it up more because we’re a fundamental enabler for global trade.”