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Marine Insurance
Uncharted Waters

A series of attacks on oil tankers near the Persian Gulf is driving up war risk premiums.
  • Lori Chordas
  • December 2019
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DANGEROUS WATERS: Anchored off of Fujairah, United Arab Emirates, the oil tanker Kokuka Courageous was damaged by a limpet mine near the Strait of Hormuz in June. Marine insurers have reportedly paid more than $100 million in damages from similar attacks.
AP Photo/Fay Abuelgasim

 

Key Points

  • Danger Zone: Strikes on tankers just outside the Persian Gulf are driving up oil prices and war risk premiums.
  • Up in Arms: Shipowners face spiraling insurance costs to sail through the Persian Gulf and surrounding areas, which are now designated additional premium areas.
  • Abandon Ship: The rising threat of maritime attacks may soon drive some carriers out of the marine insurance market or create the need for more endorsements or riders on existing policies.

 

An Iranian oil tanker traversing the Red Sea near the Saudi port city of Jeddah allegedly was struck Oct. 11 by two missiles, damaging two of its main storage tanks and causing oil to spill into the sea.

The attack, the latest in a string of vessel strikes off the coast of Saudi Arabia this year, could cause a further spike in war risk premiums.

Rates in the war risk market rose tenfold this past summer following a series of tanker attacks and seizures in the Persian Gulf, according to the Norwegian Shipowners' Mutual War Risks Insurance Association, known as DNK.

War risk policies insure the value of ships damaged or destroyed by acts of invasion, insurrection, rebellion, hijacking and terrorism.

In May, four commercial ships were attacked off the coast of the United Arab Emirates near the Fujairah port. The following month, the Norwegian-owned Front Altair and the Japanese tanker Kokuka Courageous were attacked near the Strait of Hormuz.

Insurers reportedly have already paid more than $100 million in damages from those attacks, and industry experts expect payouts could rise even higher as a result of the latest incident and future attacks.

Shipowners also are being forced to dig deeper into their pockets.

Ships crossing the Strait of Hormuz, the narrow passage that links the Persian Gulf with the Arabian Sea and the Gulf of Oman, are now paying up to $400,000 per sailing in war risk premiums, according to DNK, which insures more than 3,000 ships against the risks of war.

Every day about 19 million barrels of crude oil pass through the Strait of Hormuz—a critical passageway for more than 20% of the world's oil, according to the International Association of Independent Tanker Owners.

Rough Seas

Jonathan Moss DWF Law LLP

Whether the latest attacks were an act of terrorism or a breach of international sanctions is of crucial significance in determining whether and how cover might respond, if at all.

Jonathan Moss
DWF Law LLP


Accusations continue to swirl around who is behind the recent attacks.

The United States called this summer's maritime incidents in the Gulf, along with a September drone attack on Saudi Arabia's largest oil processing facility, “unprovoked attacks” by Iran, which denies involvement in the events.

Iran, in turn, pointed the finger at Saudi Arabia for the Oct. 11 attack on one of Iran's own vessels in the Red Sea.

As investigations into that attack continue, what's already discernible is the impact that incident and other similar attacks are having on war risk insurance.

“We're now seeing a kind of microcosm of the hardening of the market, along with rising premiums,” said Jonathan Moss, head of marine and trade at DWF Law LLP, a multinational law firm based in London.

He expects rates to continue pushing upward with the ongoing threat of attacks and the fallout from the Joint War Committee's decision in May to designate the entire Persian Gulf and waters outside the area, including the Strait of Hormuz, as a so-called “listed area” under risk of “Hull War, Piracy, Terrorism and related perils.” Listed areas are regions that pose a significant risk for shipping.

The Joint War Committee, which is made up of underwriting representatives from Lloyd's and the International Underwriting Association of London company markets, represents the interests of marine hull war business writers in the London market.

The last time the entire Persian Gulf was in a listed area was in 2005 during the Iraq war, according to reports.

The latest designation allows underwriters to change the terms and conditions of policies and offers them more room to charge higher rates, Moss said.

While he said the Joint War Committee's decisions aren't binding, they are typically followed by global insurers.

Ships entering listed or breach areas are required to pay additional premiums for the time spent there. Premiums vary per vessel and are not automatically added to existing policies, according to the Joint War Committee.

Shipowners who fail to pay additional premiums aren't covered, said Catherine Thomas, senior director of analytics at AM Best Europe-Rating Services Ltd. “And once the Joint War Committee lists a location as a war breach zone, policies covering those areas are excluded on war risk policies,” she said.

War risk underwriters such as the Hellenic Mutual War Risks Association (Bermuda) Ltd. require ships to declare to the association's underwriting team when entering or breaching the geographical limits of additional premium areas. Bespoke short-term coverage is then provided for the duration of the ship's visit. The association protects Greek ships against loss or malicious damages caused by a third party.

Even before recent attacks broke out near the Persian Gulf, shipowners trading in countries such as Libya, Iraq and Yemen were requested to make payment of additional premiums to transit through those high-risk areas.

But the October attack pushed those breach premium rates even higher from about 0.35% of the value of a vessel to about 0.5%, which means additional costs of about $100,000 for large crude carriers on a seven-day voyage, Moss said. 

Market Conditions

Catherine Thomas AM Best Europe-Rating Services Ltd.

Once the Joint War Committee lists a location as a war breach zone, policies covering those areas are excluded on war risk policies.

Catherine Thomas
AM Best Europe-Rating Services Ltd.


The gross written premium of the war risk market is between $100 million and $200 million, said Luca Patron, a financial analyst at AM Best Europe-Rating Services Ltd.

Claims reportedly involved in the May and June attacks in the Persian Gulf were approximately $100 million, which at that time represented the majority of the global annual war risk premium income, he said.

“Therefore, we'd expect the total premiums to have increased substantially during 2019,” Patron said. “We would also expect the premiums to revert to previous years' figures going forward if the number of large claims should diminish.”

Despite the recent and expected rise in war risks for additional premiums, rates for war annual cover, which covers ships when in geographical areas other than additional premium areas, remain relatively low compared to other lines, “at typically around a few hundred dollars even for ships valued at tens of millions,” said Rod Lingard, joint managing director at Thomas Miller War Risks Services Ltd., which acts as consultants to the managers of the Hellenic Mutual War Risks Association (Bermuda) Ltd. and manages the UK War Risks Club.

Today, the bulk of war risk coverage in the market is underwritten by those and other global mutual war risk associations including the Swedish Club and DNK. Coverage is largely reinsured by Lloyd's.

Singapore is the latest nation to offer war risk insurance for ships. The Singapore War Risk Insurance Conditions launched in January with coverage for nearly 800 Singapore-registered ships.

Soon after this year's maritime and land-based attacks near Saudi Arabia, several mutuals began pushing up their war risk premiums. In July, the Swedish Club amended its war risk insurance clauses and increased the rate for all calls in the Persian Gulf area from 0.25% to 0.5%, according to reports.

DNK also announced after the June dual attacks that it planned to increase rates for war insurance. The mutual insurer reportedly covered one of the ships damaged in those attacks.

Others such as the Hellenic and UK war risk clubs, however, have been able to hold prices steady partly because they haven't been directly impacted by losses from those incidents, Lingard said.

However, they and their global mutual association counterparts continue to face rising reinsurance rates.

“War risk underwriters or clubs tend to buy reinsurance to spread the risk. Most war risk business ultimately finds its way back to London, so reinsurance becomes more expensive for everyone,” Lingard said.

Changing Course

In addition to pricing premiums, heated geopolitical tensions between Iran and its American and Saudi Arabian rivals are also driving other changes, including rising oil prices.

After the October attack in the Red Sea, global oil prices soared nearly 6%, DWF's Moss said.

Those prices have since eased back a bit.

Rising oil rates create other concerns in the market, including the threat of pirate attacks on crude oil tankers in areas such as the Gulf of Guinea near Africa. Industry experts fear those events could push war risk premiums in that area even higher.

Shipowners are reacting to rising threat levels in the Persian Gulf and other areas by tightening security measures and taking added precautions such as ordering vessels to sail through the Strait of Hormuz only during daylight hours and at high speed rather than slowing down to conserve fuel costs.

Others are altering their routes or scaling back the purchase of marine fuels from Fujairah and turning instead to bunkering hubs such as Singapore and India. Companies such as Frontline Ltd., which owns and operates one of the largest fleets of crude oil and refined products in the industry, have temporarily paused trading from the Persian Gulf, according to reports.

Not all ships, however, can avoid sailing through the Strait of Hormuz, and industry experts expect other shipowners to continue visiting Fujairah despite higher insurance premiums.

Rising maritime threats are driving another concern in the war risk market.

There's speculation that future attacks could eventually drive some marine insurers out of the market, Moss said.

“So far we haven't seen much of that movement but fears about being exposed to too much risk could make underwriters less willing to cover these exposures,” he said.

Other carriers, however, see war risk as a new market or growth opportunity. “However, we'll likely see many of those new entrants and existing companies begin adding endorsements, riders and exclusions to their policies to impose constraints on where vessels can navigate,” Moss said.

Turning the Tide

DNK warns the threat of more attacks on commercial shipping in the Strait of Hormuz remains highly likely.

A representative for the company said at a recent seminar in Singapore that continuing U.S. sanctions against Iran's oil exports may spur some of those attacks.

Also, tensions between the two nations continue to escalate after President Donald Trump announced last year that he was pulling the United States out of the international nuclear deal with Iran.

DWF's Moss said marine insurance, cargo and hull &machinery cover incorporating war risks, is inextricably linked with geopolitical conflict.

As a result, shipping companies operating in the region will continually be forced to absorb those added costs with “affordable insurance in this high-risk zone becoming harder to find,” he said, adding that could lead to cost-cutting measures in other areas of maritime trade.

“Whether the latest attacks were an act of terrorism or a breach of international sanctions is of crucial significance in determining whether and how cover might respond, if at all,” Moss said.

He said what is certain, however, is that continued instability in the region will adversely impact sea trade, and will reinforce the argument that the United Kingdom doesn't have enough naval assets to protect its interests in the area.

Ongoing investigations into the latest attack in October have so far not shown what financial toll the incident will have on insurance and reinsurance markets.

However, AM Best's Patron said insurers and reinsurers are well positioned to quickly recover from those losses.

“In high-traffic areas they'll be able to recover in just a few months. When the recent attack occurred, premiums likely were already high enough to cover claims arising in the Gulf,” he said.

Rapid recovery of losses, along with growing competition in the market, could soon begin driving down war risk rates, Patron said.

Mutuals will remain a stronghold in the market.

“Insurance at cost, the service mentality of a mutual and other benefits such as better cover that you get with a mutual are very appealing to shipowners. The way that they buy their war risk insurance will likely be the same for many years,” Thomas Miller's Lingard said.

Rising threat levels and climbing premiums have driven some positive changes in the market, including forcing shipowners to review their existing war risk cover and examine available alternatives—something some shipowners have failed to do in the past, he said.

Moss said market changes are bringing attention to individual exposures.

“The insurance market is comprised of insurers, coinsurers, reinsurers, retrocessionaires, all of whom share risk. In a market like war risk there will be more of a demand for lead underwriters to scrutinize the risk, and we'll see a closer look at individual risks going forward,” he said.

Moss also expects to see the addition of more riders and endorsements onto existing war risk contracts, and added costs in the market from ships' crew members demanding higher salaries to enter high-risk areas.


Lori Chordas is a senior associate editor. She can be reached at lori.chordas@ambest.com.


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