The Strait of Hormuz: Insurance insights on war risk and global trade

CHRIS MARO: Welcome to the latest episode of Waves by Willis. Today, we're talking about the Strait of Hormuz and the impact of the Iran conflict on war risk coverage, premium volatility, global trade, vessel security, and crew welfare.

I'm Chris Maro, Managing Director of Marine North America at Willis Marine. And today, I have the pleasure to be joined by Charlie McCammon, Senior Director of Marine North America, and James Reason, Head of Hull Marine GB. Gentlemen, let's get into it. First, can you describe the current risk landscape at sea and how it compares to say, 5 or 10 years ago?

CHARLES MCCAMMON: 5 to 10 years ago, maritime security conversations were dominated by asymmetric piracy, generally around the Horn of Africa or in the Far East. Today, landscape is defined by geopolitical risks. State versus state kinetic aggression, weaponized drone technology, naval mines, and multi-chokepoint volatility are the new threats.

We've really moved from anti-piracy operations on vessels to now vessels at sea are facing anti-ship ballistic missiles, loitering munitions, and electronic warfare, including GPS spoofing. So the other issue now is instead of just a threat in one area, we have threats in multicorridors, including the Red Sea, the Persian Gulf, and the Black Sea. So it's a completely new atmosphere for ship owners.

CHRIS MARO: Yeah, and I'd also say, Charlie, that it's becoming more of an operational and commercial issue. Wouldn't you agree, James?

JAMES REASON: Yeah, absolutely, Chris. I mean, I think the big concern implications here for clients, and more importantly, seafarers, is that there is now heightened risk across multiple regions. So whilst we are all feeling the impact on global trade, we also have to understand and realize that there's a human element to this as well, which has a long-lasting effect on those involved.

CHRIS MARO: Yeah, and just sticking with you, James, in our careers, have you ever seen a period where so many major shipping lanes were simultaneously under threat?

JAMES REASON: In short, no. I think the market and the shipping community is very aware that currently at the moment, we have a number of theaters or regions which are at very acute or severe threat levels, active conflicts, being engaged. Throughout my career, it's been consistent that at least one region, whether it be Middle East or East and West Africa, sometimes parts of Asia, have been hotspots.

And that has attracted increased premium and exposure to ship owners. We absolutely now have a number of very large regions which are key shipping transit points, choke points, and waterways which are under significant threat from open conflict. So yeah, I think the level of activity and military activity on these regions is, I want to use the word "unprecedented," but it is certainly something that many haven't seen in their careers.

CHARLES MCCAMMON: Yeah, and I would say we haven't had anything to this large of a degree since World War II. And for underwriters, this really is a fundamental change when it comes to how they have to price the risk. There's a loss of diversification that happens. Historically, underwriters offset one region where there was crisis with many regions that were peaceful and didn't have as many risks.

And then the underwriters are having to change their modeling. They can't rely on historical actuary data. They're having to be more dynamic with their pricing. And they really have to look more granular exactly where vessels are, where they might be heading, and what the actual risks might be before setting their pricing.

JAMES REASON: Yeah, Charlie, I think you make a really good point, actually. With everything now, the advancement of technology for good and for bad, we've seen it obviously in the Russia-Ukraine conflict used on land and at sea. But the rise in drone technology, autonomous unmanned vehicles, et cetera, that has allowed the bad actors to strike at maritime assets at will with accuracy. And we are seeing a significant uptick in the frequency of attacks and events on shipping assets.

CHRIS MARO: Yeah, and I mean, we all are well aware that Iran has a documented history of vessel seizures and harassment. What would we say is on acts like vessel seizure and state aggression, how are those covered or excluded under standard war policy, James?

JAMES REASON: Well, I mean, the typical coverages available in the market have, and will normally respond to confiscation, detainment. These are all standard marine perils. And I think the market, even some time ago now, when the conflict was starting to get going again through the Strait of Hormuz, and Iran was responsible for what some would consider retaliatory confiscation of vessels.

So that coverage is known. It's tested. We have paid claims on that as a market. The insurance market has moved out some of the trigger points on those contracts. So typically, in a softer market, when claims weren't quite at this level, you were able to secure, typically six months was the trigger point for detainment, confiscation, et cetera. But a lot of that has been moved out now for some years. And that I think is obviously here to stay, given the events that are unfolding in the Middle East.

CHARLES MCCAMMON: Yeah, and I would agree with that. The move to a 12-month constructive total loss, that puts a lot of pressure on the owners. It was a much better market for owners when they could do a six-month constructive total loss.

And also, I would say, the contraband sanctions exclusions, while they're very strict exclusions for these items, underwriters are still scrutinizing whether the vessel was actually seized under a legitimate regulatory pretense or through a political state aggression. So we have these things that are happening where it could be a political act, but it's formatted by the government as a regulatory pretense. So that's causing some issues with underwriters.

CHRIS MARO: Yeah, and Charlie, I think there's an important difference between insurance being available and insurance being commercially viable. And just wondering, could escalation reach a point where insurers can't offer cover at a commercially viable price, as we clearly have been probed by a number of our clients about this aspect of the business?

CHARLES MCCAMMON: I'd say that we could have a systemic failure of the market if the reinsurance capacity were to retreat entirely. However, based on the finances of the reinsurance markets currently, I don't think that would happen unless there was an extreme escalation between more of the major powers in the world.

JAMES REASON: Yeah, I would agree with that, Charlie. I think whilst these losses are coming in very thick and fast at the moment to the marine war market, they are still not what we would consider a catastrophe event for the class.

I genuinely think if we had all of the tonnage that was, shall we say, trapped or blocked in the Strait of Hormuz, originally from the 28th of February, if there had been a market claim for all of that tonnage, then I think that starts to move the dial and become a, then becomes a reinsurance event. At the moment, this is a direct market event and they are dealing with it by the rate increase mechanism, by charging APs for vessels that are calling into those breach areas.

The market continues to function. There is cover. What we have seen throughout both the conflict within the Arabian Gulf and the Strait of Hormuz, as well as the Black Sea and Red Sea as well, when we have upticks in activity and there's multiple vessels struck in a 24 or 48 hour period, understandably, insurers then pause on quoting further vessels going in the next 24 hours because they deem the risk to be too high and the environment just too volatile.

We normally see then a period of inactivity. And then some of the vessels are then fixed to go through, and then we then see some uptick in traffic. But the market still functions, still provides capacity. There is still elements of competition, albeit it's still quite cautious at times, but it is functioning.

CHRIS MARO: It sounds as if, I mean, we lived in a world where war risk was, dare I say, niche and a bit specialized in its nature. Has it become a mainstream commercial necessity, James? It sounds like that's where you were leading to and what we've been seeing.

JAMES REASON: Yeah, absolutely. I think any operator now that is trading vessels in and out of these, what we consider these conflict areas, will not be operating without insurance. There is a small handful of operators that may have tonnage without finance attached to it. We've seen potentially some low-valued vessels in the initial start of the Ukraine conflict, whereby vessels were going in there, sometimes running uninsured because the premiums involved were deemed to be too high.

But I think now, given the exposure and the risk, there is very few, if any, that are actually taking that risk. And it is now an essential part of your marine insurance spend. And I don't think there's any prudent owner or ship owner that wouldn't be engaging and buying full cover for this class of business.

CHARLES MCCAMMON: Yeah, I would agree with that. I mean, really, to be an operational company, you're going to have to purchase the war risk insurance. And there's a lot of requirements in the contracts involved that are requiring it. So most of the counterparties to any of these transactions when it comes to global shipping are going to require the war risk insurance. And unfortunately, the owners are going to have to pay those premiums in order to continue conducting business.

CHRIS MARO: And we clearly have our finger on the pulse of what's going on in the market. The larger question always that comes out is how are war risk premiums being calculated for Hormuz directly? And James, just curious, obviously, with you leading the team and what you're seeing on the ground, what your thoughts are on that.

JAMES REASON: Yeah, I mean, the market, whilst it is a marketplace and everyone rates and operates independently, it's also a subscription marketplace. So quite often, when placing individual risks or contracts for larger portfolios, you have to involve multiple insurers. So everyone has to agree to a set of common rates.

There is an understanding whereby, typically, rates on any particular day, you will obviously get a divergence. And certain underwriters, quite rightly and understandably, will give preferential rates to their larger clients with higher volumes, et cetera.

But for Strait of Hormuz specifically, these rates now are so elevated in comparison to what we've seen in the past. You could argue the risk is obviously reflective of that. And I think at times when we get a real spike in these rates and we're talking about double digit rates for transits, certainly double digit gross rates, we've talked about when does it become cost prohibitive?

Whilst there are terms being quoted and there's cover available, sometimes, you can see the ship owners pausing and waiting until the market improves over the next couple of days before actually going ahead with these calls. Because at that time when you're paying in the single digit millions for a single vessel transit, you have to be getting a very, very good charter rate. And that is available, obviously, out there. But it's a difficult place to operate and fix it.

CHARLES MCCAMMON: Yeah, and I would say the global reinsurance capacity also influences the pricing because the reinsurance capacity covers all of the regions with the same capital pool. And if you have repeated losses in one theater, that could reduce global capacity, driving up baseline pricing everywhere else. Sometimes, clients are surprised that their pricing has gone up if they're operating in one theater that's not having as many losses. But the overall reinsurance market dictates those increases.

CHRIS MARO: Yeah, and James made a good point earlier, it's a marketplace. And it's a sophisticated marketplace. And I think underwriters are trying to price not just what happened yesterday but what could happen tomorrow.

And just on that point, I believe we just saw in the press about another tanker incident near Oman, an attack. What drives sudden spikes in war risk premiums, James? Would you say that it's that similar scenario today that we've seen? Or is it more of an evaluated approach?

JAMES REASON: Yeah, so I think in short, when we're talking about the three regions which we have specifically referenced on this call, so we're talking Strait of Hormuz, we're talking Red Sea, Black Sea, there is a direct correlation between events in the preceding, we're talking now 24 hours, 48 hours because it's so active and so fast moving.

So obviously, when there is a number of attacks in any one particular port or region, underwriters are aware that there's an increase in the intent to strike maritime assets in port or in that waterway. So as a result, any future ones that are looking to go in a very short space of time are having to pay an inflated premium.

As I said, where there's a little bit of a lull in activity, whether that's because there's negotiations going on with government level or there's just a general pause, we do then see rates just generally tend to drift down a little bit. A little bit more competition comes into it. But then, unfortunately, as soon as there's another incident, the rates are quite reactive.

CHARLES MCCAMMON: And I say this is a direct correlation to the Joint War Committee listed areas with these additional premiums. They are driven by the key inputs which are, again, perceived intention of capability of the threat actors. So they are looking directly at the immediate threats and looking for a period of time.

Sometimes, you just may want to wait a few days to see if these spikes might come back down. So this makes it very hard for the brokers. But they have to be, they're in the markets every day. And they can understand what the trends are.

CHRIS MARO: Yeah, and I think to that point, Charlie, we're getting a lot of inquiries about how quickly can war risk coverage be withdrawn. And if you have an incident that escalates overnight in the straits, what protections or gaps does a ship owner particularly face in the hours between an event and the insurer's response?

JAMES REASON: Yeah, happy to tell you that, Chris. I mean, I think what I think we've got to be very clear on here is that at the outset of the original Iran conflict, and it's been also, I think, present in previous conflicts, is that when insurers give a notice of cancelation, they're effectively giving notice, it's typically a seven-day notice under the Institute clauses, or sometimes it's shorter on different clauses within the contract.

But they give notice to reinstate cover at a revised areas of enhanced risk. So cover is always maintained. And if you're in the area, you have cover. But obviously, after a significant event or a conflict starting, then insurers have the right under the contract to give notice and revise their rating and AP mechanism. But the important point is that shipowners aren't without cover, the market's not withdrawing cover. It's taking the contractual ability to list and reinstate cover at different terms.

CHRIS MARO: James, are there vessels or cargo types, would you say effectively uninsurable on certain routes? Or is everything still insurable at a price?

JAMES REASON: It's a good question, Chris. I think as a broker, we would say that it's always insurable. There's always a market out there. There's always a solution. But as we talk today, we're very aware that there's a real reluctance from the market to actively quote certainly new tonnage, for example, in the Red Sea, which has very strong Saudi affiliation.

Again, certain Black Sea activity, if you're going in and trying to load cargoes, there's a very real threat there depending on what ports they're going into, who you're engaging with, what cargoes you're loading. So typically, if you're a ship owner, if you purchased your 12-month annual cover, you have cover in place.

If you choose to then put your vessel into a listed area, you obviously have to then negotiate with that insurer and make sure you've got an extension of cover. If a particular pinch point, that insurer feels that port, waterway transit, et cetera, is so volatile that they don't wish to actually extend cover at that point, then obviously you've got to make a decision. And the most prudent ship owners won't send it in without insurance.

But I think your point is a good one is that whilst tonnage types, cargoes, et cetera, I think are accepted by the market, what we are seeing is any one particular nationality, flag, or state, or domicile, depending on where they're trading, can seriously impact availability cover in the current climate.

CHARLES MCCAMMON: And I would say in the cargo market, it's a little bit of a different market than the Hull. And one of the distinguishing features is that the war cargo stays in place until the completion of the voyage. So there's no ability for underwriters to change pricing during a voyage. But we do get a lot of inquiries about pricing prior to a voyage. The cargo market hasn't sustained as many losses. And it's a much larger market than the hull market.

CHRIS MARO: So that's a great segue, Charlie, into the next question that's thinking about what's the interplay between war risk and standard P&I coverage. I mean, at the end of the day, clients don't just experience a hull claim, a P&I claim, or a war claim. I mean, for them, there's a significant problem at hand, and they define it from there. Just curious about both of your thoughts on that interplay between war and P&I.

CHARLES MCCAMMON: Well, I'd say that the war risk policies include the standard seven-day notice of cancelation. P&I is really a different animal. It's a liability-based coverage. So it generally stays in place. And there is cover. But P&I clubs are taking into consideration trading patterns of vessels when they are doing their pricing for the P&I.

JAMES REASON: Yeah, just to follow up on that, I think if you look at the Institute War and Strikes Clauses and the typical covers available in the market, you've obviously got physical loss or damage to the vessels from a war-like peril. But they also include war P&I because war is excluded under your standard P&I clauses. And therefore, it's typically covered under the direct war market. So there's coverage there for pollution, removal of wreck, et cetera, and accrued liabilities as a result of a war-like peril.

CHARLES MCCAMMON: Yeah, and I would just say that there is a vulnerability with vessel schedules when they're entering into one of the Joint War Committee zones. If they're going to enter within 24 to 48 hours, there could be a gap in coverage if there is a notice of cancelation. So ship owners and operators just have to be aware of these different timing mechanisms involved with the cancelations.

CHRIS MARO: So is that to say, are certain trade lanes or commodity flows being structurally reshaped as a result of that?

CHARLES MCCAMMON: I would say, yeah, there's been a lot of reshaping over the last few years. There's talk of bringing them back. But a lot of ship owners over the last year have been avoiding the Persian Gulf. They've been avoiding the Red Sea. They've been diverting and not using the Suez Canal. So I think some of those operators are reconsidering, but it has been a dramatic change in operations.

JAMES REASON: Yeah, I'd agree with that. I think we're seeing, we've already seen, as Charlie's mentioned, way back 12, 18 months ago, maybe more now, the larger liner container operators have completely avoided the Red Sea. So most of them are transiting around the Cape of Good Hope, which obviously increased costs and time.

But I think given the prolonged nature of this conflict in the Persian Gulf and what is playing out with the new regional alliances, I think people accept that this conflict isn't going to go away in the short term. And unfortunately, there is a possibility further deterioration.

So the flow of not only oil and gas that's coming out of the Persian Gulf, but also the dry bulk commodities, there's got to be another way that produce or goods comes out. Otherwise, the world will have to then start to look at a world where they trade to different areas. And they source these from different locations.

We know the Gulf states are already considering and trying to look at investment into pipelines, which would take the oil flow away from the Strait of Hormuz. That isn't an overnight solution and will require significant long-term investment. But it's the reality of now where we live and sit. So these are all considerations now that are being wrestled with by those operators in the Gulf states.

CHRIS MARO: And because of those considerations, you're potentially adding days to voyages, burning more fuel, cargo transit times, contracts are affected. And costs are adjusted, not in the way that owners and operators necessarily want to see. So how are insurers working with the likes of traders, freight forwarders, vessel owners, and operators on the routing decisions, James?

JAMES REASON: Well, I think first and foremost, when we're talking about marine war, so insurers are looking at routing from a, is the voyage viable? What is the risk profile? And what is their exposure? Obviously, as brokers, we try and partner with the right insurers to ensure that our clients, ship owners, have the best available insurance coverage, service, et cetera. So we try and work in a partnership to ensure and facilitate their trade.

But at the same time, insurers in these situations, because it's so volatile, are looking to protect their own exposure as well. So they rely heavily on security assessments and security advisors. And the routing is very much determined whether the voyage is safe to go ahead.

But also, if you look at what's happening in the Strait of Hormuz, there is a, up until recently, there was a difference in opinion about what's the best route to go, whether it be the northern route, or the Iranian route, or the southern route, the Omani route. Because of some of the legislation and compliance and sanctions issues that are coming out now, it's getting harder and harder to navigate via the northern route because of the implied nature of dealings with Iran.

So the Omani route is really the only one that's available. And therefore, ship owners rely on insurers and brokers to be able to provide them with really clear, up-to-date analysis and information as to the viability of transiting at any one particular time.

CHARLES MCCAMMON: Yeah, and I would agree with that. Marine insurers have evolved into maritime intelligence partners to some degree. Underwriters are now deploying more and more technology, including satellite AIS tracking, threat analysis, and AI modeling. And they're doing real-time scoring for specific coordinates and transit windows, and even offering advice on safe anchorage locations and optimal corridor speeds to mitigate the risks.

JAMES REASON: What we see now is actually there's been a emergence of a new type of marine war risk insurer that is far more hands on, far more service driven, and far more involved in the actual decision-making process around some of these voyages, transits, et cetera.

And that is now becoming a differentiator in the market, where you've got clear lead capacity that's able to provide a very specialized service. And that's very different to some of the following market that's available in the marine market.

CHRIS MARO: Yeah, it's that geopolitical intelligence that the insurance market has become more sophisticated at providing to their insureds. And obviously, these costs, speaking about costs, marine insurance costs are ultimately passed on through the supply chain. And how significant would you both say the insurance premium component and the cost increase that consumers and businesses are now experiencing on imported goods is?

CHARLES MCCAMMON: So I would say it's pretty significant by trade route and commodity. So with bulk energy and raw commodities, you can see the adjusted premiums jumping from 0.05% to 1% of $100 million of hull value. So that would increase the premiums by $750,000 to $1 million for a seven-day transit. So that's pretty significant.

And with containerized goods, we're seeing probably a surcharge being included with some containerized cargo of between $50 to $150 per container. So while this is pretty modest, it adds up for large shippers. Can significantly increase the cost of shipping. And ultimately, again, it's all passed on to the consumer.

CHRIS MARO: Obviously, crew livelihood and crew well-being is first and foremost in the eyes of an owner and operator. And Charlie, you being an ex-mariner as well know that. Curious about what your thoughts are, to kick this off, is what is the insurance industry doing to keep crew welfare high on the agenda?

CHARLES MCCAMMON: Well, I'd say first, seafarer welfare is covered under the P&I with the specialized P&I war risk policy. So that would cover like a crew death, permanent disability, repatriation, and medical expenses if there's a hostile or warlike action.

And then the other area that comes into play is maritime kidnap and ransom, which could handle ransom negotiations, delivery of funds, post-release medical psychiatric care in a hijacking scenario. Another area is with the International Bargaining Forum agreements. When ships are transiting high-risk areas, the crews are entitled to receive additional hazard pay if their contract includes this, which most international contracts do.

So in the area of being compensated, there are some protections. With the general welfare of the crews, I do think that the owners do generally want to make sure that their crews are, their welfare is taken care of aboard the ships, although it's sometimes difficult to do that when they might be stuck in a port for long periods of time.

JAMES REASON: Yeah, and just to add on one of your points there, Charles, I think historically, the marine war market has responded to crew claims from war perils, whether it's through physical injury, or death, or disablement. And it's always been around almost like on a scale. There's a recognized scale of benefits, et cetera.

But I think one of the points you referenced on there now, there's much more awareness of the ongoing care and some of the additional costs and expenses involved for crew well-being on the mental health side and some of the medical expenses that are needed for people that have suffered an extreme event. So I think that's the way I think the insurance market is also now looking far more at just the physical aspect of it.

CHRIS MARO: Were any one of our vessel owner operators or cargo owner clients listening today to this, what would you both say is the single most important thing that they should be doing or asking their broker that they may be neglecting?

CHARLES MCCAMMON: I'll take that one. So I think that it's important to audit your policy's sanction clauses, the notice of cancelation timelines, and make sure that any charter parties you have are aligned with these provisions.

Often, operators discover too late that their charter party terms do not mirror the insurance policy conditions. So that could be problematic. And your brokers are here to help you review the interplay between your insurance terms and your commercial charter agreements. So we always recommend that the owners and operators work with their brokers to understand the war clauses, because it is a very complex and not everyday occurrence.

JAMES REASON: Yeah, and I think just to echo those comments, I think whether you’re a ship owner, you have operators that are actively trading to any of these volatile areas, you need your broker to be in the market, have his finger on the pulse regarding rating, terms, conditions, availability of capacity and coverage, but also, as we've touched on, the ability to be able to provide accurate, timely information on these areas and give real insight as into the viability of being able to go forward with a particular operation, port of call transit, I think is really critical.

So many of our clients now are very advanced and developed in this area as well. So they have their own information. But I think that's a real additional part of the service now that any broker of any merit should be looking at.

CHRIS MARO: Traditional role of the broker is long gone. And clients should be expecting us to do more than just give them a price. Tell me what you're seeing. Tell me what the market is doing and dictating. Tell me what other options I should be considering, and where there may be pitfalls. And that goes back, Charlie, to your comments about the contractual review.

Gentlemen, this was great. And thank you both for sharing the insights on today's episode. No doubt, it's a challenging time out there, but not one without solutions when you partner with the marine insurance experts. Until next time, thank you all for listening.

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