War Insurance. Shipowners, cargo owners, and sailors have not been abandoned.

Marine insurers have not abandoned operators of ships stranded in the Persian Gulf following the closure of the Strait of Hormuz passage following the attacks on Iran by Israel and the United States. Reduced ship traffic in the Strait of Hormuz is not due to insurance availability, but rather to safety concerns, the Lloyd’s Market Association (LMA) recently explained in a statement.

AlJazeera’s report that marine insurers are canceling coverage for Gulf War risks has proven untrue. AlJazeera’s Sarah Shamim wrote in early March that “Insurers have announced the cancellation of war risk insurance after the Islamic Revolutionary Guard Corps (IRGC) declared the Strait of Hormuz ‘closed.'”

An Arab news agency reported that the commander of Iran’s Islamic Revolutionary Guard Corps (IRGC) said the strait was “closed” and that any ship attempting to pass through the waterway would be “set on fire.” Concerns about the safety of ships and crews were justified, as at least five tankers were damaged at the beginning of the war, two crew members died, and more than 300 ships were stranded in Persian Gulf anchorages and ports.

Marine Insurance Market. Source: Facts & Factors

Disruptions in ship traffic and fears of further damage to ships have raised concerns about the safety of docking in ports threatened by missile or drone attacks. At the beginning of the conflict, the conditions for navigating sea lanes to the Gulf of Oman and beyond to the Indian Ocean or towards the Red Sea and Suez Canal were also unknown.

Insurance is and will be

The ROI of the marine insurance market in peacetime was estimated at $28 billion and is expected to reach $41 billion in profit by 2028, according to Joel John, editor of the Facts & Factors Blog. During peacetime, the industry was expected to record a compound annual growth rate (CAGR) of almost 4.1% over the next six years.

Insurance companies have demonstrated their responsibility. The Lloyd’s Market Association has denied that insurers have abandoned reinsurance. The LMA stated that three weeks after the outbreak of hostilities in the Middle East, reports continue to suggest that insurance policies are being cancelled or unprofitable, which is why ships are not transiting the Strait of Hormuz. This is untrue.

The LMA emphasized that war insurance is currently available to those insured for war risks and is still available in the London market for ships wishing to transit the Strait of Hormuz. It stated that “third-party liability insurance under P&I Clubs is irrevocable and subject to reinsurance in the London market.” As a result of ships being in a war zone, a small number of fixed-premium third-party liability insurance policies for charterers have been cancelled, and most have been re-priced.

As the situation in the Persian Gulf has intensified, the marine insurance market has also seen changes. The main areas affected are ship, cargo, and third-party liability insurance. Shipowners have received notices terminating their peacetime contracts.

This mechanism allows for the renegotiation of war risk premiums, which are typically very low, when increased risk, such as the war in Ukraine or the conflict in the Red Sea, affects vessels operating in a high-risk zone.

Americans contribute $20 billion

Chubb (NYSE: CB), has developed a special offering of a marine insurance fund, the Gulf Maritime Insurance Facility, in cooperation with DFC – U.S. International Development Finance Corporation. Chubb is the world’s largest publicly traded property and casualty insurer. On March 20, it unveiled the structure and scope of the marine insurance fund. It was established in cooperation with the U.S. government. The business intermediary for the venture is the International Development Finance Corporation (DFC). On March 11, DFC announced that Chubb is the primary financier of $20 billion in marine reinsurance contracts.

Leading Marine Insurance Companies in the US. Source: CaseyInsurance.com

Chubb’s ship and cargo insurance program involves the US insurer acting as the primary insurer, managing the fund, setting prices and terms, assuming risk, and issuing policies for eligible ships and cargo. Chubb will also manage all claims. DFC will help coordinate a consortium of US reinsurers and establish the criteria for ships applying to participate in the program, the insurer explains in a press release.

This initiative is a public-private partnership between DFC, Chubb, and other reputable US insurance companies, which will serve as reinsurers. It emphasizes that “Participating insurers have extensive experience in marine and war insurance.” Marine insurance for ships in the Persian Gulf will include war-related risk insurance, covering ship and third-party liability, as well as cargo.

Chubb explains that the insurance will include war risk insurance, third-party liability insurance, and war cargo insurance. The offer is limited to ships meeting the eligibility criteria established by the U.S. government. Not all ships will be covered, as this insurance will be available only to ships transiting the Strait of Hormuz and only under certain conditions. A list of additional U.S. insurance companies will be released in the coming days.

War Reinsurance Mechanism

When a ship finds itself in a war zone, conflicting reports often appear in the media regarding the exorbitant costs of insurance and its unavailability. The war insurance market for ships is dominated by companies with good risk analysis and experienced analysts.

War risks have been incorporated into marine insurance for years, and marine insurance companies have developed “a well-known notification mechanism, agreed between shipowners and insurers in their wartime contracts, that allows premiums to be kept very low in peacetime,” explains Kassandra Jimenez-Sanchez of Reinsurance News.

In a press release, the Lloyd’s Market Association reassures that in reality, such premiums are little more than theoretical: if applied to an average family car, for example, the cost would be less than £1 per year. This mechanism, however, allows for premiums to be reassessed if risk increases.

The LMA recognizes that incidents involve a wide range of ship types and flag states, with no consistent ownership pattern. Insurers have already confirmed that many victims not covered by sanctions are insured or reinsured in the London market, a number that will inevitably increase as the conflict continues.

Analysts such as Morningstar DBRS have noted that the deteriorating security environment has significantly raised the stakes for merchant shipping. The agency noted that while the market remains open, some insurers have tightened conditions or limited coverage for specific operations in the Persian Gulf, limiting insurance options for some shipowners. Consequently, more ships are anchoring outside the strait as operators assess the risks of fatalities, environmental disasters, and total property loss, reports Reinsurance News. David Osler, financial editor at Lloyd’s List, said that before the fighting, typical rates for the Strait of Hormuz ranged from 0.15% to 0.25% of the hull value for a week-long policy. Since the conflict began, rates have been as high as 5% to 10% of the hull value.

“For a VLCC carrying around $100 million worth of crude oil, this could translate into several million euros in additional costs for a single transit,” Osler calculated. He emphasizes that “Insurance is still available, but often at levels that significantly increase transportation costs.” In his opinion, “If an operator wants to make a voyage—and finds a crew willing to do so—the lack of insurance is not an obstacle,” reports EuroNews.com.

In March, the Additional War Risk Premium (AWRP) reached approximately 2.5% of the value of the hull and equipment of ships in the Persian Gulf. In April, it approached 1%, as reported by numerous marine insurance executives at the Asia Pacific Maritime conference in Singapore, reports Sameer C. Mohindru of S&PGlobal.com.

In the week following the outbreak of hostilities, the LMA conducted a diagnostic survey among the main participants in the Lloyd’s marine insurance market. The responses from the main players indicate that 88% are still interested in insuring international maritime transport, including American and British operators. Respondents declared their willingness to contract insurance for the purpose of securing such insurance.

A week after the outbreak of hostilities, the LMA conducted a diagnostic survey among the main participants in the Lloyd’s marine insurance market. The responses from key players indicated that 88% were still interested in insuring international maritime transport, including American and British operators. Respondents declared their willingness to contract insurance for both ships and cargo. It was emphasized that premiums would be determined individually for each operator or group.