Escalating US / Iran tensions bring further premium hikes across multiple lines

Insurance premiums are expected to escalate further across numerous lines on the back of rising tensions between the US and Iran.

The US drone strike that killed Iranian general Qasem Soleimani in Iraq on Friday January 3, 2020, caused social media to light up with the hashtag #WWIII, while Iran promised severe revenge and warned that it will no longer abide by agreed restrictions on its nuclear development.

“Lines likely to be most affected are hull, war, any insurance relating to piracy and terrorism, cargo, marine in general, and constructional risks,” said Jonathan Moss, partner, head of transport sector at DWF Law. Construction insurance prices will be affected because of oil installations, the tank facilities, in the areas around the ports, he added.

Speaking to II before news broke of Iran's retaliatory missile attacks on bases housing US forces in Iraq, Moss said: “We will see increases in insurance prices and they have [already] been noticeable since May. On May 12, 2019, two Saudi tankers and Norwegian and UAE flagged ships were attacked, potentially by the Iranians, so there has been an upward escalation in insurance premiums since that date in marine lines by an average of 10 percent.

“What we also saw that there were additional premiums that were being levied on tankers for transiting the Strait of Hormuz. The transit was costing $500,000 a go.”

He said that ultimately this will prompt some marine insurers to pull out of the market, but others will stay in the market where they see an opportunity to increase profitability and revenue.

Moss said that in the past six to nine months, as tensions have escalated between Qatar and UAE, and Iran and the US, hostilities have manifested as attacks on vessels. "If history is going to repeat itself, you would expect we might see more of the same or an increased amount of attacks."

General insurance is expected to feel the impact of trouble in the region as people check contracts and terms and conditions, he added. “So anything to do with the transportation of goods, retail, food, metals, commodities in general. Everybody will be crawling over their insurance policy to see what constitutes force majeure, for when insurers say it is an act of god. People will also be contacting their broker to see whether they can obtain an indemnity and in what situation if a container vessel is delayed.”

Commenting on the situation on Tuesday (January 7), Jeremy Shallow, head of specialty at ArgoGlobal, with experience in underwriting credit and political risk business said: “Our clients are not going to be lending money and investing in countries [in the Middle East region] where there’s escalation, and we tend to follow them as our interests are aligned. There are areas, of course, where we will not align, such as when assets are already on the books and credit committees are looking to reduce exposure, we then have to decide if we are going to take a contrarian position.”

He said that nobody knows whether we are really on the brink of WWIII, adding: “[President Donald] Trump tends to make bold statements and then backs away from them. He often plays off the unpredictability, but someone may call his bluff and there is then a potential for escalation.”

However, Shallow added: “We had no risk appetite to write anything in Iran since the sanctions came into force. So, there will be no change there.”

Commenting on the region more broadly, he said: “When there’s an event flare up it curtails appetite for risk in the region.

“There are, of course, those who, during the Gulf War in the 90s, saw an opportunity in covering ships going through the Strait of Hormuz, but it’s a risk as you could be wiped out. Situations like those can make people take risks and become aggressive market players. However, the old days of Lloyd’s when people could take big stands without any oversight are gone.”

Shallow added that it appears the Iranians are unlikely to take direct action against US military assets as it’s not in their interests. “They may interfere in the Strait of Hormuz as it offers a level of deniability… and we may also see attacks on neighbouring countries like Saudi Arabia, where we previously saw a drone attack”.

Shallow will be watching for a spike in the severity of incidents. He added: “Although this event was not expected, it was not surprising, it’s a pattern of behaviour, so I don’t see it totally dissipating. It could take decades to unwind. However, I’m hopeful that it won’t develop as a full-scale war. Politicians still have a chance to act to de-escalate.”

Jason Herriott, global product leader - war, terrorism, political risks and allied perils at MS Amlin, also speaking to II on Tuesday (January 7), said the situation is quite unpredictable now. “The threat to commercial shipping in the Gulf has not been this elevated since the end of the Iran/Iraq war and far surpasses the threat experienced during the Iraqi war in 2003.”

He described the assasination of general Qasem Soleimani as the “most significant event in the past decade” adding that if the US and Iran don’t temper their reactions we could see a dangerous escalation that could impact the Middle East region for a considerable period.

“It is difficult to defend against war incidents because commercial shipping isn’t equipped or capable of responding. As we saw with the Somali pirate problems, it is almost impossible for even coalition navies to fully protect commercial shipping because the Arabian/Persian Gulf is an enormous body of water.”

Herriott agreed that pricing has been affected since last year, as he also referenced the attacks on ships in the region in 2019. “The market probably just took the shine off the rates between summer last year and now. I think the market will be looking to charge the right price. Here every vessel represents a different and unique risk and it is important that insurers charge the appropriate price for each operation. Insurers must have a firm understanding of their correct level of net retained premium to take the enhanced risk of insuring voyages into the Arabian/Persian Gulf. They also need to be able to explain this rationale to ship owners.”

The insurance sector's Joint War Committee (JWC) in the UK met yesterday morning to discuss developments. Later the same day, it released this statement: “Based on current information, JWC considers that there is no dramatic change to the strategic maritime picture. There are clearly increased tensions in the Gulf region, with American assets now referenced, but the underlying maritime threat remains heightened with an ongoing possibility of escalation.

“The London insurance market has been operating with these strategic factors in mind since last May and underwriters will continue to ask appropriate questions of assureds in order to ascertain the risk dynamics of individual sailings seeking war-risk cover.”

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