War cover available for Hormuz trades but transit challenges remain: insurers

War coverage is readily available for shipping companies seeking to transit the Strait of Hormuz, according to insurance industry participants, but obstacles remain for normal maritime traffic to return due to security and legal issues.

On June 18, Iran and the US signed a preliminary peace agreement aiming to restore cargo flows via Hormuz -- which handles 20% of global oil and LNG trades in normal times -- after 30 days of demining operations.

Chubb on June 19 partnered with Lloyd's syndicates and specialists to launch a war risk consortium, which would provide up to $200 million for hull and third-party liabilities coverage and $200 million for cargo.

"Chubb is actively working to provide coverage and organize needed capacity as vessels begin moving through the Strait of Hormuz," CEO Evan Greenberg said in a statement.

The insurance capacity expansion came after the New York-listed insurer had agreed to manage a $40 billion reinsurance capacity backed by the US International Development Finance Corp. to cover Hormuz maritime trades, though the program did not take off rapidly.

The Lloyd's Market Association, which represents underwriters in the world's largest marine insurance market, said shipping companies would only be able to return to the Persian Gulf in droves if some operational challenges are addressed.

Iran, Oman and the US should cooperate on navigational safety and ship passage, while mine clearance and a full resumption of port services and provision of emergency support are also essential, according to an LMA web notice June 18.

"The main requirement for recovery is stability and certainty for shipowners and insurers. The road to recovery in the Gulf will be a long and complicated one," said the association, adding that "it will take months for some sort of normality to return."

Traffic

Daily ship transits via Hormuz collapsed from an average of 135 in February to less than 10 in early March, according to S&P Global Commodities at Sea, as marine war insurers canceled their policies and reoffered at higher rates after the US-Iran war broke out. The number has recovered to 35 on June 22.

Dorothea Ioannou, CEO of American P&I Club, said underwriters tend to keep the premiums relatively low in peacetime but retain the right to re-rate their coverage during a conflict.

"Cancellation does not mean insurers pull out of the market," Ioannou recently told Platts, part of S&P Global Energy. "Cancellations give underwriters time to reassess and re-rate."

The additional war-risk premium was around 3%-4% of hull value after the peace deal was signed, down from 4.5%-6% before, according to Marcus Baker, global head of marine, cargo and logistics at Marsh. This compared with the prewar level of 0.25%.

Daniel Tadros, chief operating officer of American Club, said the rate was still lower than the level of 5%-7.5% seen during the tanker war in the 1980s.

Sanction regimes

Insurance industry participants have expressed concerns over fragmenting Western sanctions regimes. The US has issued a sanctions waiver allowing Iranian oil sales until Aug. 21, but the EU and the UN have not provided similar relief.

"There must be clear advice and consistency of approach from the UK, EU and US on the extent to which sanctions and designations of Iranian entities have been amended," the LMA said.

Another example is that the US has kept its price cap for Russian seaborne crude exports at $60 per barrel, while the EU, the UK and Canada lowered the threshold to $44.10/b.

"Because we are reinsured into UK market and the European market, we follow the UK and Europe's sanctions regulations on price cap," Tadros said. "The conflicting nature of the regulations on the price cap has increased our workload."

A member of the London-based International Group of Protection and Indemnity Clubs, American Club has reinsurance arrangements with other IG members that have direct exposure to the EU and UK jurisdictions, according to the club executives.

"We would like to see a lot more coordination and cooperation between the regulatory bodies ... [And] there should be a lot more communication between the regulators and the private sector, so that we can hope for more consistency," Ioannou said.