With the recent attacks and seizures of tanker vessels in the Persian Gulf, we are now entering a period of heightened war exposure in the Middle East. This new shipping conflict was set off as a result increased sanctions against Iran and its reaction to the detention of its tanker, Grace 1.

While the Iranians have not officially declared war on any nation, Iran has chosen to embark on a campaign of coercion against the commercial interests of the U.S. and its allies in the Persian Gulf. This campaign has seen deniable sabotage attacks on six merchant vessels in the waters on either side of the Strait of Hormuz, plus the seizure of four more, two (Tehran claimed) for oil smuggling. While I would not qualify this as a guerrilla war or a “hot” war, one could say this is a “warm” war conflict. Recently this maritime conflict widened into the Red Sea with a missile attack against an Iranian tanker thought to have been fired by Saudi Arabia. As with other recent attacks, despite evidence leading to the likely culprits, the attacks are made without acknowledgment from their sponsored governments.

Tanker War
Using the shipping industry as a pawn in a war is not a new concept. The Tanker War, as it came to be known during the Iran–Iraq War (1980–1988), started when Iraq began attacking ships to weaken Iran’s ability to fight. While initially attacking ships carrying military supplies, the scope of the attacks soon expanded to attacking Iran’s exports. Iran of course retaliated by attacking ships belonging to Iraq’s trading partners and to countries that loaned Iraq money to support its war effort. Early in the war, Iraq had the upper hand and utilized French Exocet missiles to attack Iran. Later in the Tanker War, Iran leveled the playing field by deploying anti-ship missiles known as the Silkworm, bought from China.

In total, 61% of the ships attacked during the Tanker War were oil tankers. Only 55 of the 239 tankers (23%) were completely sunk or declared a constructive total loss—not bad when compared with the percentage of total losses among bulk carriers (39%) and freighters (34%). Interestingly enough, even at its most intense point, the Tanker War failed to disrupt more than 2% of ships passing through the Persian Gulf. Moreover, the real global oil price steadily declined during the 1980s. While the war insurance for vessels spiked significantly, Iran adjusted its price of oil downward to stay competitive in global markets.

While the marine insurance markets suffered dramatic losses during this time period, strategic marine underwriting produced windfall profit for many underwriters.

War Risk Market
War risk underwriting is a specialized area within marine insurance, and the number of underwriters who are willing to undertake such insurance is quite limited. A small number of these underwriters are based in the London market with a few in other marketplaces. In addition to these underwriters, some shipowners have formed war risk associations based on the nationality of their flags, most notably in Norway and Greece. While these owners agree to mutually insure each other in the event of a war loss, reinsurance protection for these associations is purchased from the London market.

The typical war risk policy will provide worldwide coverage for shipowners, except for a few named listed “hot spots” that are excluded from coverage. Provisions within the annual war risk policy make it possible for war risk underwriters to add more listed areas during the course of the policy year should additional hot spots flare up during the policy year. Given the ever-changing conditions within the listed areas, war underwriters traditionally offer blocks of seven days of coverage so they can constantly reassess the evolving risk within these areas. Marine brokers will negotiate with lead war risk underwriters’ seven-day rates, with quotes valid for only 48 hours. Rates from one underwriter to another can vary greatly, so a diligent broker negotiating a favorable risk profile should generate a competitive result. Aside from the new heightened warm war situation in the Persian Gulf, the typical listed war risk areas pose more of a risk of capture and seizure than of physical loss or damage to a vessel. Listed areas that pose this type of exposure have typically been Venezuela, Egypt, Bulgaria, Indonesia, Nigeria, the Philippines, Ukraine and Russia.

War Risk Premium
Underwriters in London state that war risks are by their nature low frequency but high severity. They also believe that it is nearly impossible to build an algorithm or model to price for war risk. Market sources have indicated that annual war rates have reduced by approximately 90% since 2002. The annual war rate covers worldwide navigation, and the additional premium mechanism, in theory, covers the increased risk arising from trade to a listed area. To provide context and an example, a typical Suezmax tanker valued at $65 million will pay $130,000 (a .2% rate) rate for its annual hull and machinery cover. The same tanker will pay just $9,750 (.015%) for its annual war cover. However, given the current state of affairs in the Persian Gulf, a shipowner could face an additional war risk premium of $195,000 (.3%) for just seven days of cover. With an average of 14 tankers traversing the Strait of Hormuz on any given day, war premium dollars will quickly accumulate.

Often the additional premium for these listed war risk areas’ coverage will be reimbursed by the charterer. For shipowners operating in the spot market, the war risk premium quoted for a Persian Gulf transit can make all the difference in winning a charter’s business. To complicate matters for the charterer, it is rumored that premium credits, no claims bonuses and commissions are often manipulated to favor the shipowner at the expense of the charterer. That said, it is always a good practice for a charterer to request full transparency from the shipowner when reimbursing war risk premiums.

Risk Exposure and War Policy Coverages

Standard War Risk Coverage

The biggest war risk exposures a shipowner faces today are physical loss or damage to its vessel and the risk of capture and seizure. Both of these risks are commonly covered under   a standard war hull and machinery risk policy. The recent limpet mine attacks on tankers off the coast of the United Arab Emirates are good examples of physical damages that may occur. Also, the recent detention by the Iranians of the British tanker Stena Impero serves    as a good example of why capture and seizure coverage plays a crucial role in a   shipowners’ war risk cover.

Typically these standard war polices are further endorsed to include protection and indemnity coverage for liability claims that may arise in connection with a war peril. Although recent tanker attacks have not produced much by way of loss of life or personal injury, this coverage would respond should the crew seek recovery for damages from the owner.

Enhancements to War Risk Coverage

Blocking and Trapping
Further enhancements to the war risk cover should be requested to cover the blocking and trapping exposure. This exposure has become pronounced following the Iranians threat to shut down the Strait of Hormuz. Should this occur, owners with vessels in the strait would effectively be blocked from leaving the Persian Gulf. The endorsement is designed to pay a shipowner for a total loss of his or her vessel should the vessel be blocked or trapped for 12 continuous months (typically reduced to six months).

Confiscation and Expropriation
Similar coverage enhancements should also be requested from the underwriter to cover the shipowners’ confiscation and expropriation exposure. To trigger this coverage, a shipowner must be deprived of the free use and disposal of its vessel for a continuous period of 12 months (typically reduced to six).

Additional Expenses
An often forgotten enhancement to war risk coverage is additional expenses incurred following a covered war risk peril. This enhancement typically considers claims for daily running expenses in case of detention or diversion that were not contemplated in the original voyage. Bottom cleaning of a vessel that has been sitting idle for months due to a capture or seizure may also be entertained as an additional expense.

Additional War Risk Policies

War Loss of Hire
An additional policy that may be considered by an owner is a war loss of hire policy. This policy protects the shipowner from a daily loss of income (hire) arising from physical damage to the vessel following a war loss. It would not respond should the vessel be declared a total loss. Limit of cover is often based on the number of indemnity days multiplied by the agreed- upon daily indemnity (i.e., average hire rate the vessel would have earned).

Trade Disruption/Deviation Expense Policies
Bespoke trade disruption polices should be explored for clients with particular sensitivity to disruption in their supply chain. Shipowners, charterers and cargo owners could conceivably incur unanticipated increased costs or lost revenue in the event of the closure of the Strait of Hormuz, the Suez Canal or other ports. The risk management response would be to mitigate the effects without losing business. This insurance provides protection for extra costs of deviation to another route to continue the voyage. Careful tailoring of this type of policy is required to ensure the proper trigger mechanisms of coverage are in place to respond to a client’s particular business.

With Gallagher Marine practice as your trusted war risk advisor, shipowners can rest assured that they are ready to enter the troubled waters that lie ahead.