Multiple profit and indemnity (P&I) insurance clubs have already suspended shipowners' war risk insurance in the Middle East as risks to commercial shipping in the region increase as a result of the escalating conflict between the US and Israel and Iran.
What is war risk insurance?
Shipping insurance is typically split into two parts, Hull and Machinery insurance and War Risk insurance.
The latter covers "physical loss of or damage to the hull and the machinery onboard," as outlined by insurer British Marine. Losses of this kind are usually accidental in nature.
War Risk insurance is a standard part of a shipowner's insurance on its vessel, and allows shipowners to claim against any damage to the vessel resulting from conflict. Definitions of what constitutes conflict-related damage can vary depending on the exact clauses used in the insurance contract, but it would typically include damage from missile or drone attacks, mines, and acts of terrorism or piracy.
War Risk insurance applies, and is indeed required, for ships passing through specific "listed areas", designated by the International Underwriting Association of London and Lloyd's of London insurance market's Joint War Committee (JWC). These listed areas include, among other places, various parts of the Black Sea, Middle East, Africa and South America.
What are Additional War Risk Premiums?
Insurers will require additional payments known as Additional War Risk Premiums (AWRPs) to maintain cover for vessels passing through areas within those JWC-designated "listed areas" that are deemed especially dangerous, and exposing shipping to risks above those covered by standard War Risk insurance.
At present, examples of such areas include the Bab el-Mandeb strait at the southern end of the Red Sea, and the Russian and Ukrainian sectors areas of the Black Sea. Without this extra premium, vessels are not insured to pass through these waters.
AWRP is added to existing cover and is usually calculated as a percentage of a ship's "Hull and Machinery Value", which is the total insured worth of a vessel's physical structure, engines and equipment. Last week, ahead of the US and Israeli strikes on Iran, AWRP in the Mideast Gulf stood at 0.15–0.2pc of hull and machinery value, according to insurance brokers. But regional rates have now surged, to around 1pc, brokers say.
Why is this important in the conflict in the Middle East?
As a result of the escalating conflict in the Middle East, several marine insurers have already decided the area is too risky either for standard War Risk insurance or for AWRP, so they have simply suspended all cover.
Those still willing to offer cover are charging more to do so. This will make it difficult, risky and expensive for shipping to continue to move through Middle East waters, including the Mideast Gulf, the strait of Hormuz and the Red Sea, and some shipowners are now trying to negotiate the reinstatement of war risk insurance for the Middle East, market sources say.
