Mutuals have the leeway to pay discretionary claims
Welcome to the most volatile sector in all of marine business, where quotes can vary by the day or even the hour
The Russian invasion of Ukraine and the Hamas attack on Israel underline the crucial contribution insurance makes to allowing seaborne trade to continue when conflicts are in full flow
Hull and machinery insurance renews on January 1 and shipowners know what they are paying in premiums for the year. Protection and indemnity (P&I) cover, which renews on February 20, is theoretically subject to supplementary calls if a marine mutual’s books do not balance at the end of the year, but that is a rare event.
War risk, on the other hand, is the most volatile class in all of marine business. Quotes can vary by the day or even by the hour, as anxious news junkie underwriters think through the implications of battlefield developments for merchant shipping.
The cover extends substantially beyond wars and civil wars, revolutions and rebellions. It also includes capture and seizure, arrest and detainment, labour disturbances and riots and acts of terrorism, piracy and violent theft by people from outside the ship, which makes it entirely worth buying in a troubled world.
Ships pay a low basic premium that covers them for port calls in most of the world during the period of the policy. But a range of riskier places are designated “listed areas” by the joint war committee, made up of Lloyd’s and London company market underwriters. Calls to listed areas attract additional premiums (APs).
With Russia’s invasion of Ukraine last year and the recent fighting between Islamist militants in Gaza and Israel, it has been a long time since the trade has been so busy.
Things move so rapidly any rates quoted are likely to be out of date once this piece appeared in print. But at the time of writing, pricing for calls to Ukraine, which reached an unprecedented 10% or more of hull value in the early weeks of the crisis, had settled down to the 3% to 6% range.
That seems on the high side judged by historical precedent. It compares to the 5% or so asked of tankers during the Iran-Iraq war of 1980-88, when shipping was explicitly targeted.
Israel and neighbouring countries have long been listed areas, with an understanding that fighting is prone to flare up every few years baked into everybody’s calculations.
Before the Hamas insurgency on October 7, underwriters often set the APs at nil or a nominal 0.1% of hull value. At the time of writing, they stood at 0.25% to 0.5% and pushing towards 1% for Israeli ports that are in range of missile strikes. Rates for calls to adjoining Lebanon had doubled to 0.05%.
There is a simple explanation for the differentials between the Black Sea and the Red Sea. Russia has ample naval and sea mine capacity; Hamas does not.
While aggregate premium volumes are not in the public domain, the product unfortunately gives every impression of being a booming business, to such an extent that new players are joining the market.
War risk cover remains a Lloyd’s forte, with providers including Ascot, Axa XL, Beazley, Canopius, Hiscox, Navium and MS Amlin among many others.
The field has always had a strong mutual presence too, including Norway’s Den Norske Krigsforsikring for Skib (DNK) and two Thomas Miller-managed clubs: UK War Risks and Hellenic War Risks. Mutuals have the leeway to pay discretionary claims where boards are agreeable, which commercial insurers would not do.
A number of protection and indemnity (P&I) clubs also offer war risk classes as bolt-ons to basic P&I cover. The London Club and the old North and Standard clubs – now merged into NorthStandard – have long worked together in a pool known as the Combined Group of War Risk Associations.
Joining forces enables them to purchase comprehensive reinsurance from A-rated reinsurers at competitive rates, enabling them to offer higher cover limits.
Norwegian marine insurance giant Gard has recently expanded its existing war risk offer, with lead clients now getting access to intelligence reports produced by DNK, including live monitoring services.
The development underlines the extent to which mutuals are maintaining and even enlarging their foothold in the specialism.
The latest entrant to the niche has been West of England P&I Club, which launched its West War offering in March this year. The line is written commercially, with profits used to subsidise core mutual P&I activity.
Cover for excess liabilities arising from war risk – rather than war risk to the hull per se – comes as standard with International Group club P&I cover. The upper limit is $500m, but reduced to $80m for vessels transiting or calling in Russian waters.
This cover is designed for claims in excess of the proper value of an entered ship or the amount recoverable from war risk underwriters, whichever is greater.
It includes liabilities under the US Terrorism Risk Insurance Act 2002. International Group clubs also provide cover of $30m for risks from biochemical warfare. Like almost all business insurance policies, there is an exclusion for nuclear war.