Managing geopolitical risk in unprecedented times

The past five years have been a tumultuous time for hull and cargo underwriters.

There has always been a geopolitical edge to shipping, but the sabotage attacks on four commercial ships off the United Arab Emirates in May 2019 helped create a situation insurance markets have not had to face for many years.

On top of a number of active hotspots – including the ongoing war in Ukraine and Houthi attacks on ships in the Red Sea – there are others that threaten global trade. Iran could still block the Strait of Hormuz, one of the narrowest yet most important shipping choke points; China could potentially escalate tensions with Taiwan; and US president-elect Trump has promised to impose high international tariffs.

Escalating global tensions

“It’s fair to say that, from a geopolitical perspective, we haven’t seen a dynamic like the one we see today, certainly in my career and I’ve been in the market for 27 years,” says Dan McCarthy, director of marine at Markel. His is a sentiment shared by many in the market.

Dan McCarthy, director of marine, Markel International

The turning point for McCarthy was the 2019 attacks in the Gulf of Oman. The region has been a flashpoint ever since, with marine attacks, vessel detainments, drone attacks and aviation incidents. This has been exacerbated by the outbreak of war in Ukraine and later in Israel. The past few years have been “a very difficult dynamic for our clients to get their heads around” both the business and human impact of conflict, he says.

Gary Brice, head of marine and space at Brit Insurance, says of Russia’s invasion of Ukraine: “It’s fair to say no one anticipated an event in continental Europe that would result in the immediate closure of multiple ports.” The possibility of another similar event “has to form part of our considerations,” he adds.

Russia’s aggression and the Houthi attacks have led to tangible changes in the way war risks are written, says Andreas Bisbas, chairman of marine mutual re­insurance and head of mutual war at Miller. 

Some of the biggest losses in recent years were from ships trapped in Ukraine’s waters, he notes. “Even though you could see Russian assets building up on the Ukrainian border, no one could be sure of what was going to happen, so ships continued plying their trade,” he adds.

“It’s fair to say no one anticipated an event in continental Europe that would result in the immediate closure of multiple ports. [Another similar event] has to form part of our considerations”

^{Gary Brice
Brit Insurance}

In the past, marine writers would write war risk as “bonus premium”, Bisbas continues. “Nobody really expected to pay a war risk claim, but you had to have the cover and it was always cheap.” 

This all changed with the enormous detention claims resulting from the war in Ukraine. Russia’s invasion also saw a lot of treaty reinsurers withdraw their cover, meaning primary insurers who continued to provide cover in the region “were running net lines”, he adds.

Selective risks

Whereas war rates used to be strictly linked to the regions a ship was travelling through, now underwriters are taking into account warnings issued by the Houthis – often sent via email – of plans to attack a ship with links to the US or Israel. Insurers will often increase pricing or decide not to provide cover if a ship travelling through the Red Sea has been to Israel earlier in its journey.

“Ships that have connections to democratically elected governments, carrying legal cargos; lawful, non-sanctioned trade, is being told, sorry, you can’t have insurance because the Houthis tell us you’ve been to Israel. That, as far as I know, has never happened before,” says Bisbas.

Many shippers are self-selecting their own risks and avoiding the Red Sea altogether, choosing to take the longer route around the Cape of Good Hope, says Scott Heeley, lead underwriter for cargo at IQUW. This decision is not without its own risks, with the longer voyage potentially increasing other losses such as perishable goods. “It’s fair to say we’ve seen an increase in hull claims as a result of rerouting,” adds McCarthy.

Scott Heeley, lead underwriter, marine cargo, IQUW IQUW

However, Heeley says with bigger cargo portfolios such as commodity trading and oil and gas where customers tend to be more global, underwriters need to pay more attention to where ships are coming from and going to.

“We found if we were writing a global trader, part of their portfolio was always going to be coming out of Russia or the Middle East, so they’re the areas where we’d be more involved and making sure that – if you’re leading or if you’re following – you’re comfortable with the checks that are in place and the vessels are acceptable,” he says.

Aggregation tools

The outbreak of war in Ukraine, and the subsequent pulling back of reinsurance capacity has forced innovation in the hull and cargo markets, says McCarthy, most notably the development of aggregation tools. These were already in the works at Markel before Russia’s invasion; however, as soon as conflict broke out in the region, McCarthy said it was clear a pulling back of reinsurance cover was on the cards.

“Reinsurers didn’t have comfort; they imposed exclusionary language on reinsurance contracts and therefore companies like ours had to get our heads around making sure we knew exactly what those aggregations could look like,” he says. Monitoring aggregations has been reasonably standard in the property market for years, but in commercial maritime and movable asset portfolios it has only existed in its current format in the past two or three years, he adds.

“It was a real differentiator for us in the market and now that technology lives on,” he continues. “It’s something we’re investing in all the time to make sure that, not only are we offering a best-in-class product, but we’re doing that safely knowing what sort of aggregations we have at any one time all around the world.”

US policy changes

As well as these tangible threats, the market is also wary of emerging geopolitical risks. US tariffs on China at the scale promised by Trump could have unexpected impacts on international trade, says Julian Kirkman-Page, head of business development at Russell Group.

Goods intended for the US market will either be shipped elsewhere or end up stockpiled in ports – which increases port exposure for underwriters. The difficulty is there is no easy way for an underwriter to understand how these changes lead to risks elsewhere.

“Let’s say half-a-trillion [dollars] of goods doesn’t move from China to the US, where are those goods going? Are they all sitting in a port in Singapore or Mumbai? And therefore, what’s the exposure? We’ve seen recently the Chinese are dumping cars in a lot of these ports,” says Kirkman-Page. “This is how the market works; it only finds out what’s where and what’s been on what vessel and how much is in a port when a loss occurs.”

“Let’s say half-a-trillion [dollars] of goods doesn’t move from China to the US, where are those goods going? Are they all sitting in a port in Singapore or Mumbai? And therefore, what’s the exposure?"

^{Julian Kirkman-Page
Russell Group}

Project cargo lines – specifically large infrastructure projects that include nuclear, solar and offshore wing power – could also be affected by a change in US policy. “Trump has already said he wants to retrench from all of that and start pumping oil again. That could have a huge impact on the project cargo market by taking a huge percentage of that market away from underwriters,” says Kirkman-Page.

Any policy changes could happen within a week of Trump coming into power. Unlike his first term, where Trump did not expect to win and was therefore largely unprepared and reliant on the incumbent Republican leadership to fill his cabinet, this time, says Kirkman-Page, he will likely hit the ground running with a hand-picked team ready to follow his agenda. “I think we’ll know straight away,” he says on the likelihood of increased tariffs. “The impact and how people will react to that is a bit unknown,” he says. 
Kirkman-Page is optimistic, however, that China does not want a global trade confrontation.

Andreas Bisbas, chairman, marine mutual reinsurance, Miller

If something does happen between China and Taiwan, “there will quite possibly be a lot more to worry about than insurance rates”, says Bisbas, drawing “quite a response from many corners of the world”.

Low-probability scenarios

Bisbas says the Strait of Hormuz is a particularly important chokepoint since, if Iran chooses to block it, that could cause huge problems for oil and gas shipments. This is not an event he believes to be likely, however. “I find it inconceivable. Would the world let it happen?” he says.

He continues: “Insurance companies and markets are here to provide so that ships have a ticket to trade. It would be counterintuitive to say that they’re going to withdraw cover or charge premiums that are not commensurate with the risk.” Even too much talk and emphasis on these types of scenarios run the risk of making the market seem more concerned about low-probability scenarios than it really is, he adds.

Whatever the geopolitical risk, capacity remains a key factor, says Bisbas. “The market has ample capacity, there are a lot of people that have invested heavily in the market, and that capacity needs to be fed with premium income,” he says. Instability creates opportunities for shippers, and therefore opportunities for the insurance market too, he adds.

McCarthy shares that optimism. “There have been several challenges over the past five or six years for carriers writing marine war products. But the way I see it, if there was ever a time to lean in and offer the product, underwriting leadership, and claims leadership, to support the demand from our clients, during this period, this has been it,” he says.