A timely article in The Economist today.
The lack of war-risk coverage seemed like a big problem last week, when many insurers rushed to renegotiate existing policies. On March 6th America’s International Development Finance Corporation (DFC) earmarked $20bn to insure vessels trying to exit the Gulf, to be renewed when the facility is exhausted. It identified “best-in-class, preferred American insurance partners” to work with shipowners.
The issue with this approach is the probable lack of expertise .Most marine insurance is placed with Londfon based institutions via Lloyds. It's not just hulls and cargoes but also oil spillages and poluition liability.
JPMorgan Chase, a bank, reckons it would require $352bn to cover all oil tankers trapped in the Gulf—more than the DFC’s maximum permitted liability under all its programmes combined. Oil traders are pricing in low confidence that America would reimburse all claims.
In any case, writes The Economist, “war-risk insurance may be less of a problem than Mr Trump makes out. Industry insiders report that policies remain available. Premiums have risen to 1-2% of the value of ships—a three- to six-fold increase on pre-war levels, says Simon Lockwood of WTW, a broker. But shipowners can absorb the cost because freight rates from the Gulf to Asia have more than doubled. Ships are not crossing the Gulf not for want of insurance but because they do not want to get hit by Iran’s indiscriminate attacks.”
Escorting convoys through the Straight of Hormuz is an option, releasing National Reserves of oil to reduce oil prices or seeking alternative sources such as US shale oil extraction. All have downsides not least as no one knows when the war will stop.
Governments are reaching for the last lever at their disposal—protectionism. China has already ordered its refiners to suspend exports of diesel and petrol, sending prices for both rocketing in Singapore, Asia’s oil-trading hub. India may follow. So could America. This would leave some countries in Africa, Asia, Europe and Latin America in dire straits. The world is watching the strait that matters most with bated breath
The most immediate fix would be for more tankers to cross the strait. The lack of war-risk coverage seemed like a big problem last week, when many insurers rushed to renegotiate existing policies. On March 6th America’s International Development Finance Corporation (dfc) earmarked $20bn to insure vessels trying to exit the Gulf, to be renewed when the facility is exhausted. It identified “best-in-class, preferred American insurance partners” to work with shipowners.
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