War risk insurance premiums for the shipping sector have surged this week as escalating tensions between the United States and Iran continue to disrupt vessel movements through the Strait of Hormuz, increasing uncertainty and operational risks for global maritime trade.
The US and Iran have been carrying out tit-for-tat attacks in the past week, putting tankers at the strait at higher risk.
“War rates have been on a roller coaster mirroring the development of the price of oil,” said Marcus Baker, global head of marine, cargo and logistics at insurance broking and risk management company Marsh. “Rising significantly at first then dropping back with the signing of the MoU [memorandum of understanding] before rising again in the past few days.
“The attacks on shipping in the region have further served to create concern in the industry. Rates can be anywhere between 3 per cent and 10 per cent on hull value – the range reflecting the concerns,” he said.
Those rates mean a $100 million tanker faces a war risk premium ranging from $3 million to $10 million. Before the war, the premium stood at roughly 0.25 per cent of the hull value, totalling about $250,000 for the same tanker.
Earlier this month, the head of the UN's International Maritime Organisation also called out the high cost of insurance. IMO secretary general Arsenio Dominguez said the “continued high cost of maritime insurance in the region, which is itself compounding the strain on ship owners and operators”, was a matter of “great concern”.
“This tells us that market pricing is not adjusting as conditions improve. Governments with influence over the insurance and reinsurance markets have a role to play in engaging with insurers to ensure premiums reflect current realities, rather than continuing to reflect the peak of the crisis,” Mr Dominguez said.
“It does not help the reduction on the cost of freight and it affects, in particular, countries in those regions which have already suffered the consequences of these conflicts and are in need of assistance and the resumption of maritime trade.”
His comments came before regional tensions escalated again.
However, the International Union of Marine Insurers, a global body representing the industry, criticised his remarks as unfairly singling out the sector.
“Marine insurance is part of the solution, not part of the problem as it has provided cover throughout the crisis, despite the continuing volatility,” the IUMI said in a statement. “It is disappointing that insurance has been singled out when the problems are kinetic, navigational and very definitely legal.”
Prices reflect risk as ships continue being attacked in the strait, it stressed. “The marine insurance market is international and highly competitive, so it is difficult to see why governments would or could have a role when the market is working to support owners where legally permissible and is already reacting to current realities.”
Rising risks
The start of the Iran war on February 28 led to a near total blockade of the Strait of Hormuz, the waterway through which about a fifth of the world’s oil and gas normally flows. The US and Iran signed an MoU on June 17 for both sides to negotiate a durable arrangement in 60 days.
However, Iran last week resumed attacks on tankers using routes through Omani waters, and the US responded with strikes on Iran. Late on Saturday, Iran announced the vital waterway had once again been closed.
On Tuesday, Tehran also struck two UAE supertankers in the strait, killing one sailor and injuring eight. The tankers, Mombasa and Al Bahyah, both operated by Adnoc Logistics and Services, were struck by two Iranian cruise missiles in the southern part of the waterway.
Hostilities between the two sides have intensified. Thursday was the fifth consecutive day of US strikes on targets in Iran. The number of ships crossing through the strait has dropped sharply.
The IMO in its update on July 8 said approximately 6,000 seafarers were trapped in the region and that it was working to evacuate the stranded ships through safe routes.
“One of the keys to ensuring continued shipping trade through the region is safety of crew and assets,” said Mr Baker from Marsh. “With both sides of this conflict acting and operating inconsistently this has led to continued concern amongst the ship owning community regarding the safe passage through the [Strait of Hormuz].”
While there remains plentiful insurance capacity for the region, the escalation has led to an inconsistent response from the insuring markets, he said. “Rates have see-sawed and many markets are incompatible with each other leading to differing views on the appropriateness of rating.”
Particular focus is also being paid to routing through the strait, since there is a change in risk profile depending on whether a ship is to transit via the northern, Iranian passage or the southern, Omani passage.
“Whilst both routes are theoretically permissible, the northern passage presents a potential compliance exposure, with emphasis placed on both brokers and underwriters to ensure that the ship owners’ operations are compliant with all pertinent sanctions and the southern passage presenting a material risk with enhanced possibility of interdiction or attack by the IRGC,” Mr Baker added.
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