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Strait of Hormuz tensions hardening marine war insurance market

The seizure of British-flagged ship Stena Impero near the Strait of Hormuz in the Persian Gulf in July has kept pressure on marine hull war insurance prices, reversing years of falling rates.

Andrew Ward, managing director of Thomas Miller War Risks Services, part of insurance management services provider Thomas Miller & Co Ltd, told S&P Global Market Intelligence that the Hormuz situation "has had the biggest impact on the marine war risks market since Somali piracy was at its peak," which was in 2011.

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Two armed members of Iran's Revolutionary Guard inspect the British-flagged oil tanker Stena Impero on July 21, after it was seized in the Strait of Hormuz by the Guard

Source: Associated Press

Prices for hull war insurance, which covers damage to a vessel's hull from war or war-like activity, rose sharply for ships traveling to the Persian Gulf, Strait of Hormuz and the Gulf of Oman following attacks on six vessels in May and June.

The high risk list

The attacks and seizures are of particular concern because the Strait of Hormuz is a critically important conduit for trade in oil, among other goods. According to S&P Global Platts, 30% of the world's seaborne oil transits go through the strait.

Marine hull and machinery war policies exclude territories listed as areas of "perceived enhanced risk" by the Joint War Committee — a group of underwriting representatives from the Lloyd's of London and non-Lloyd's of London company market — and so vessels traveling to these territories need specific per-journey war cover.

Following an attack on four ships at the United Arab Emirates port of Fujairah on May 12, the Joint War Committee added Oman, the Persian Gulf and adjacent waters, including the Gulf of Oman, and the UAE to the list.

Attacks on two more ships — the Front Altair and Kokuka Courageous — on June 13 in the Gulf of Oman exacerbated the situation. A shipping insurance source told S&P Global Platts in a June 14 report that insurance rates had increased to between 0.1% and 0.4% of the hull value from 0.02% before the attacks.

The attacks came amid heightened tensions between the U.S. and Iran, following the U.S. withdrawal from the Joint Comprehensive Plan of Action, which lifted certain nuclear sanctions on Iran on the condition that the country did not try to develop nuclear weapons. U.S. Secretary of State Mike Pompeo blamed Iran for the Fujairah and Gulf of Oman ship attacks at a June 13 news conference.

Iran seizing the Stena Impero, in apparent retaliation for Gibraltar's seizure of the Iranian tanker Grace 1 in Gibraltar, has kept tensions, and rates, high — although there are signs that the situation is easing, with news Aug. 15 that Gibraltar released the Grace 1, which could in turn trigger the release of the Stena Impero.

SNL Image

Ward at Thomas Miller said via email: "It is possible that rates would have started to ameliorate somewhat but for the Stena Impero seizure; rates having increased by a factor of 10 in mid-June."

He said the market was considering British-flagged ships as a higher risk, but added that Hellenic War Risks and UK War Risks, marine mutual insurers writing war risks that Thomas Miller manages, "do not currently differentiate between flag states in terms of rates and this policy remains in place following the Stena Impero seizure."

He also said there had been talks of charging more for tankers than other ships but that "this is not [yet] widespread practice."

While noting that no official loss figures exist, Neil Roberts, head of marine underwriting at Lloyd's underwriter trade body the Lloyd's Market Association, said he had heard that insured losses from the actions in the Strait of Hormuz and surrounding waters were between $50 million and $100 million.

He pointed out that insured losses could emanate from seized vessels as well as those damaged by attacks.

"If a vessel is held for a period of time it becomes a total loss," Roberts told S&P Global Market Intelligence. Historically the period had been 12 months but was now more often six months, he said, but added that people might revise that in light of what's going on in the Gulf and elsewhere.

Terms and conditions for coverage, as well as prices, could also change. Jonathan Moss, partner and head of marine and trade at law firm DWF, said he thought conditions would get more stringent, and that underwriters would be seeking endorsements that limit their exposure.

Reversing the fall

Hull war cover may not be the only insurance line affected by the Hormuz tensions.

Cargo war cover is typically included in standard cargo cover without additional charge. But this has started to change. Roberts said cargo underwriters have put out a modification that allows them to cancel cover and re-rate vessels going through the problem area.

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British navy vessel HMS Montrose escorts another ship during a mission to remove chemical weapons from Syria, in February 2014

Source: UK Ministry of Defence via Associated Press

"Invariably rates will go up for cargo insurance and for other covers," Moss said in an interview.

Because of the importance of Hormuz as a shipping channel, and the number of high-value ships that pass through there, the price increases could generate "large volumes" of premium income for the marine war risks market, which in turn will "reverse the steady decline in premiums seen in the last few years," said Thomas Miller's Ward.

And while sending ships to the Gulf is risky, and now more expensive because of rising insurance prices, shipowners seem undeterred for now.

"If things escalate and more vessels are attacked, damaged or seized, there will be a point at which owners say: 'this isn't economic'," Roberts said. "But I don't think they are very close to that point."