The NBU will land all planes in Ukraine

Nuclear power plants in Ukraine cannot operate without re-insurance of their risks abroad

Photo: Reuters

Two weeks from now Ukrainian passenger planes will not fly if the National Bank of Ukraine does not cancel its ban on settlements in hard currency in cases of re-insurance, Chairman of the Oversight Committee of the Busin insurance company Larysa Nepochatova told Capital.

Nepochatova is well versed in her profession as Busin has more than 20 years of experience specializing in aviation risks. “Insuring civilian aviation is compulsory all over the world. But the amounts of insurance are so large that no country is ready, willing and able to carry the burden independently, which is why risks are distributed all around the world through the mechanism of re-insurance,” Nepochatova explained. She says the company can cover the insurance and risk of Ukraine’s civil aviation sector for another two weeks. “After that, planes will simply not hit the skies as they will not be insured,” she assures.

NBU Resolution No. 540 banning transactions in foreign currency excluding the supply of goods and services to Ukraine created a major problem for insurers. The NBU already gave two explanations for allowing the payment of transport, tourist expenses, medical treatment abroad, etc. but re-insurance was not one of the exceptions that rendered impossible the purchase of hard currency for this purpose.

Some sources assure that the NBU did this consciously as re-insurance is considered the most schematic form of the insurance business that allows for taking money out of the country. “The ban may be introduced because of the schemes, though all contracts on foreign re-insurance are registered with the National Financial Services Regulation Committee (NFSRC) according to the committee’s Resolution No. 54 of January 8, 2013.

As it turns out, the NBU does not only trust insurers, but also the NFSRC, says Chair of the Commission on the Insurance of the Ukrainian Society of Financial Analysts Vyacheslav Chernyakhovskiy.

The League of Insurance Organizations of Ukraine (LIOU) claims that the result of such distrust was the loss of nearly UAH 600 mn in premiums that insurers incurred, which by the end of Q4 could exceed UAH 3 bn. Ukrainian insurers will not receive this amount from their foreign partners as they themselves do not pay them out in hard currency pursuant to insurance contracts.

“Ukrainian insurance companies must transfer another UAH 400 mn (or more than US $30 mn) to foreign insurers in re-insurance premiums. For the hard currency market of Ukraine this sum is insignificant, however by economizing on such money the country loses nearly UAH 3 bn of incoming payments from foreign companies and more than UAH 150 mn in proceeds to the state budget,” President of the League of Insurance Organizations of Ukraine (LIOU) Oleksandr Zaletov. Comments of the NBU were not available at the time the article was drafted.

Nuclear risk

Nuclear risks, civil aviation and maritime property insurance are suffering the most from the decision of the NBU. The burden of responsibility for these types of insurance is quite heavy, which is why Ukrainian insurers cannot and do not want to take it on their shoulders. After all, there are no companies in Ukraine capable of covering major losses in the nuclear power sector.

For this very reason, companies re-insure a part of the accepted risks abroad. “If the ban of the central bank is not lifted soon, re-insurers may refuse to fulfill their obligations of covering major losses in Ukraine on the grounds that a Ukrainian insurance company failed to transfer the re-insurance premium on time,” says Director of the Underrating and Product Management of Companies Department at AXA Insurance Natalia Chernova.

“Aside from the fact that re-insurance has basically come to a standstill, the NBU ban does not allow insurers to transfer hard currency abroad for the medical treatment of Ukrainian tourists,” General Director of the Ukrainian Insurance Federation (UIF) Halyna Tretyakova added. But this is not the end of the story.

According to the International Venice Convention of 1963 and Ukrainian law, the Nuclear Pool of Ukraine (NPU) consisting of 26 insurers does not have the right to insure nuclear risks. “Without financial protection nuclear power plants cannot function,” says General Director of NPU Oleksandr Babenko says. They can buy bank guarantees, but while the rates for such guarantees are 5-8%, for insurance policies they are 0.2-0.3%.

No response

Every year Ukraine receives more than US $3 mn from foreign insurers to cover nuclear risks. “Does the country have no need for hard currency?” Babenko queries. He says that by the end of the year the international agreement on re-insurance of the NPU is in effect, but payments must be made on a quarterly basis. In September, this did not work out as banks refused to sell hard currency.

“The national bank does not need to make any changes to the harmful ban on the purchase of hard currency as re-insurance abroad is already regulated by the NBU Resolution No. 135 of April 11, 2014. All that is required is to give an official explanation to banks that today do not know which resolution they should be guided by,” says Zaletov. Insurers are ringing all the alarm bells, writing to the president, the government, the NFSRC and the NBU. “All of these institutions are silent. The NBU promised to respond within a month,” Tretyakova complains.