To the Prime Minister of Ukraine
To the Minister for the Economy and the Environment of Ukraine
To the Minister of Finance of Ukraine
On expanding mechanisms for insuring war risks and providing loans to Ukrainian businesses
Think tanks specialising in economic policy wish to express their respect and make the following points:
Ukrainian businesses continue to operate amidst unprecedented military risks. Regular missile and drone attacks are leading to the destruction and damage of manufacturing, retail, logistics and infrastructure facilities, the loss of stock, the disruption of production cycles and an acute shortage of working capital. For many businesses, the problem lies not in compensation for the losses incurred, but in the ability to quickly resume operations, retain staff, meet credit obligations and pay taxes.
We propose a gradual transition to a model of managing war risks which, using limited budgetary resources, allows for the mobilisation of a significantly larger volume of insurance, banking and international capital than direct compensation for losses from the budget. The state cannot and should not single-handedly compensate private businesses for their losses. Its task is to create conditions under which risk is shared between the budget, businesses, the insurance market, reinsurers, banks and international financial organisations.
That is precisely why we propose that the Cabinet of Ministers focus its immediate decisions on the following interrelated areas of recovery for affected businesses, which are based on scaling up the war risk insurance system and expanding the ‘Affordable Loans 5–7–9 per cent’ programme.
1. EXPANSION OF INSURANCE COVER FOR WAR RISKS
Cabinet of Ministers Resolution No. 1541 has already introduced partial compensation for the cost of damaged or destroyed property and partial compensation for insurance premiums under war risk insurance policies. At the same time, the scale of losses and potential risks significantly exceeds the current capacity of both the state programme and the private insurance market. The key problem lies not only in the cost of the insurance policy, but above all in the market’s insufficient capacity to underwrite catastrophically large war risks.
It is therefore necessary to substantially increase the scale of the insurance premium compensation programme, make it predictable and long-term, and ensure sufficient resources for enterprises that meet the specified risk criteria. An enterprise that takes out an insurance policy at the end of the year should not risk being left without compensation simply because the annual budgetary limit has been formally exhausted. The scheme must provide for the possibility of moving from fixed limits to differentiated compensation depending on the level of risk, the value of assets, geography and other objective factors.
At the same time, simply increasing compensation for insurance premiums will not solve the problem of market capacity. The current mechanism needs to be supplemented by state reinsurance of the catastrophic layer of war risks — the M3 model. Its principle lies in the distribution of risk across several levels:
Tier 1 – business:
a excess of approximately 5–10 per cent of the property’s value per location (address), which ensures the owner’s participation in the risk and reduces moral hazard.
Layer 2 – primary insurance market:
commercial insurance cover within the available capacity of Ukrainian and international insurers.
Layer 3 – reinsurance:
the consolidated capacity of the ECA and the international reinsurance market.
Tier 4 – State stop-loss:
a state guarantee or reinsurance mechanism at a specified amount, share or proportion for the catastrophic tier of losses (where aggregate losses exceed aggregate payments), which cannot be absorbed by the market.
Public resources should be directed primarily towards the final, highest-risk tier, rather than towards replacing private insurance capital. Simply increasing premium compensation without genuine reinsurance yields no results. A uniform set of terminology for risks and exclusions, as well as principles for settling claims, is required for all participants in the model.
According to current calculations, the M3 model allows for up to 1.59 UAH of insurance cover for every 1 UAH of budgetary resources, whilst the direct compensation model delivers a significantly lower return.
The final parameters of the model must be determined on the basis of actuarial calculations, business surveys to determine PML (potential maximum loss), the geographical distribution of properties, the value of fixed assets, the sectors of economic activity of enterprises, and so on.
The state must also ensure the possibility of partial reinsurance of insurers’ war risks through the ECA within differentiated limits, uniform approaches to the definition of risks and exclusions, as well as uniform principles for the settlement of claims. This will enable the formation of a standardised and diversified insurance portfolio, which will be more attractive to international reinsurers.
It is also important to expand the list of assets that can be insured. This includes not only buildings and equipment, but also stock, raw materials, finished goods, goods in transit and in production, transport and leased property. For the retail, pharmaceutical, logistics and manufacturing sectors, it is precisely these assets that are often critical to the continuation of operational activities. They can be insured using digital data from cash registers, accounting records, consignment notes and other verification systems.
Separately, it is necessary to ensure the speed and transparency of loss recording. It would be advisable to establish a single point of contact where the fact of war damage is recorded in a single registry entry within 72 hours, using photographic and video evidence. Loss assessment should be carried out by independent qualified valuers or emergency commissioners, rather than by the body directly responsible for disbursing payments. The single register should simultaneously prevent double compensation and allow a single set of verified data to be used in insurance, budgetary, tax and credit procedures.
2. EXPANSION OF THE ‘AFFORDABLE LOANS 5–7–9 per cent’ SCHEME TO SUPPORT BUSINESS RECOVERY
An insurance payout alone does not ensure the recovery of a business. Even in the event of full compensation for the cost of destroyed equipment, a business still requires funds to repair its premises, purchase new equipment, replenish working capital, pay wages, restore logistics, relocate and restart production. This problem is particularly acute for businesses that have lost their collateral or, following damage to their assets, have temporarily lost the ability to service existing loans.
We therefore propose expanding the recovery component of the ‘Affordable Loans 5–7–9 per cent’ programme, increasing the loan limits and establishing a special lending mechanism for businesses affected by military attacks. This should be based on a state portfolio guarantee covering approximately 70–80 per cent of the credit risk, whilst the bank retains its own share of the risk. This will allow bank capital to be used as the main source of funding for recovery, and state resources as a risk-sharing instrument.
The programme should provide for three interlinked products: short-term loans for routine repairs and the replacement of equipment; loans to replenish working capital, including funding for wages, procurement and other critical expenditure; and long-term investment loans for modernisation, relocation and the creation of backup production capacity.
For such loans, it is necessary to maintain a preferential interest rate of 5–7 per cent in hryvnia, provide for a loan term of up to 10 years for property loans with a 12–18-month deferral of principal repayment, include large borrowers and groups of related parties in the programme with separate limits, and prevent bank fees that effectively negate the effect of the preferential rate. In cases where a business loses its collateral, its function should be partially replaced by a state portfolio guarantee.
It is of fundamental importance to combine lending with insurance. A bank loan, an insurance policy, reinsurance and a state recovery guarantee must function as a single package. The existence of adequate insurance cover must be taken into account by the bank when assessing credit risk, taking into account the policy’s liquidity, its exclusions and excess. This will reduce banks’ credit risk, increase the volume of available financing and, at the same time, reduce the need for budgetary compensation of the interest rate.
A separate mechanism is required for businesses that had loans prior to the attack but, due to damage to their assets, have lost the ability to service them. A new loan without restructuring the old debt will only increase the debt burden. It is therefore advisable to introduce the option of extending the loan term, deferring repayment of the principal, granting a grace period, restructuring interest payments and providing a partial state guarantee for the restructured portfolio.
Thus, insurance should become a prerequisite for large-scale lending, whilst a state guarantee should serve as a tool for multiplying bank capital, rather than a substitute for private financing.
3. ADDITIONAL MEASURES FOR RAPID BUSINESS RECOVERY
Alongside these two key areas, it is necessary to remove the administrative and financial barriers that hinder a swift recovery.
First and foremost, it is essential to ensure rapid liquidity following an attack. Insurance should not mean having to wait months for all assessment procedures to be completed. It would be advisable to establish a Claims-Liquidity Facility, which would allow advance payments to be made on the basis of a preliminary assessment using the Unified Register of Damage (based on materials provided for rapid registration), with subsequent final settlement of the claim. The indicative volume of such a mechanism in the proposed model is 3 billion UAH, and the target median timeframe from the submission of a claim to the first payment is 30 days.
It is also necessary to adapt tax rules to the reality of war-related losses. For affected enterprises, it would be advisable to provide for the possibility of carrying forward confirmed losses from the destruction of assets to future profit periods within specified limits, accelerated depreciation of new equipment, exemption of targeted funding from taxation, and controlled deferral of certain tax payments. Separately, the mechanisms for document restoration and the suspension of audits – which are currently largely tied to the status of the territory – should be extended to all areas where a business has suffered actual damage.
The state should also encourage businesses to invest in reducing their own military risk. This involves co-funding passive protection of equipment, backup power sources, contingency sites, the partial relocation of critical operations, and backup storage capacity. Businesses that invest in resilience should receive more favourable terms for state support and guarantees.
Finally, Ukraine should be more proactive in attracting international capital to help share the war risk — including international reinsurers, export credit agencies, international financial organisations, donor funding and investment guarantee schemes. The state’s participation in such schemes should serve as an ‘anchor’ or ‘risk absorber’, enabling the mobilisation of significantly greater private and international resources.
4. FISCAL LOGIC AND PRINCIPLES OF IMPLEMENTATION
The proposed approach allows for a shift from direct compensation for losses to a risk-sharing system. According to the calculations set out in the proposal, direct compensation for a similar amount of losses could require around 78 billion hryvnias in budgetary resources, whereas the model proposed above envisages estimated net budgetary expenditure of between 8 and 14 billion hryvnias per year, whilst enabling the mobilisation of around 30 billion hryvnias in business insurance premiums, international reinsurance capacity and additional bank capital through state guarantees.
It is precisely this fiscal logic that should form the basis of state policy: public funds should be used primarily to share risk and mobilise private capital, rather than to substitute for it.
At the same time, uniform rules must apply to all instruments: each loss is compensated once; a single register and automatic reconciliation are used; loss assessment is carried out independently; transparency and public monitoring are ensured; and each instrument must contain clear criteria for additionality, budgetary limits and a mechanism for regular review.
Proposals from think tanks
The Ukrainian economy cannot wait for the war to end before it can begin to fully insure, lend and invest in reconstruction. Every business that has not resumed operations following an attack represents lost jobs, lost tax revenue, disrupted supply chains and a loss of the economy’s creditworthiness.
We therefore call on the Cabinet of Ministers of Ukraine to scale up the war risk insurance programme without delay, to introduce a mechanism for state reinsurance of catastrophic risk, and to expand the ‘Affordable Loans 5-7-9%’ programme to support the recovery of affected businesses, using state portfolio guarantees.
We consider it necessary to establish a joint working group involving the Cabinet of Ministers, the NBU, the ECA, the banking and insurance sectors, think tanks, business associations and international financial organisations to prepare the relevant regulatory decisions.
Priority procedural changes can be implemented within 0–30 days, limited pilot schemes within 31–90 days, and the necessary legislative changes within 3–6 months following a full fiscal analysis.
Ukraine does not need a system of permanent compensation for losses. Ukraine needs a system that allows businesses to continue operating, investing, insuring against risks and securing loans even during wartime.
Yours faithfully,
Think tanks
Centre for Social and Economic Research – CASE Ukraine
Institute for Social and Economic Transformation
Ukrainian Institute for Legal Policy
Institute for Tax Reforms
Association of Tax Advisers
Advanter Group Think Tank
Office of the Chief Economist of the Coalition of Business Communities for the Modernisation of Ukraine
Centre for Economic Strategy (excluding verification of calculations)
Institute of Finance and Law
Financial Sector Group of the Economic Expert Platform
‘Technologies of Progress’ Analytical Centre
FinPulse Analytical Centre
Technologies of Progress
‘ANTS’ Network for the Protection of National Interests