Insurance rates have spiked for vessels transiting the Strait of Hormuz

There are at least 2,000 ships and 20,000 crew members trapped on the waters of the Persian Gulf as one of the world’s largest shipping lanes remains clogged. Around 800 are stuck in the Strait of Hormuz itself.

If they want to get out, they’re going to need safe passage. But they’re also going to need insurance.

Ships can technically move without insurance — they just can’t go anywhere.

“They will not be accepted at any port,” said Rahul Kapoor, vice president and global head of shipping and metals with S&P Global Energy.

Bad things happen to ships. Remember the Carnival cruise ship that hit another Carnival ship in Mexico six years ago? There weren’t any major injuries in that incident.

No port in its right mind would let a ship that doesn’t have liability insurance pull up. But ships also need to insure themselves.

“What’s called hull and machinery, so that covers damage to the vessel itself. These are the two core insurances which a ship needs,” Kapoor said.

Small issue: None of them apply in a war. “And this is typical of insurance policies, right?” said Brandan Holmes, VP senior credit officer at Moody’s Ratings. “‘We cover a range of things except this,’ and war is excluded.”

So, ships have to get war insurance. But one more small issue: The war insurance gets canceled if there’s an actual war. Not immediately, but pretty darn fast.

“Seventy-two hours to seven days, but we’ve heard cases where it can be done in 24-48 hours,” Holmes said.

So, there’s this organization in London called the Joint War Committee — it’s a bunch of insurance companies, and they decide when an area or region is suddenly high risk. When they decide that, insurance companies can cancel and reprice their plans, and the clock on those policies starts to run out.

“The intent there is that if a ship is caught up in an unforeseen war, it gives them some time to remove themselves from the situation and get to safety before the insurance is canceled,” Holmes said.

This system lets insurers offer cheap war insurance in case a war breaks out. But then once fighting begins to ramp up, they can create special, expensive insurance if firms want to go into a war zone on purpose.

Of course, in the Iran war, there’s a small issue: The ships can’t just zip out of the way. They’re literally stuck. So, they need to get the new, much more expensive war insurance.

“Rates were around about 0.25% of the value of the ship to transit in and out of Hormuz prior to the events of the 28th of February,” said Dylan Saunders-Mortimer, the UK war leader at Marsh Risk, an insurance broker and risk advisor. “Since then, rates have increased to what we’ve observed as a limit of around about 10%.”

That’s an increase of almost 4,000%. That was a maximum, though; Saunders-Mortimer said rates have come down recently to just 2% to 6% of the value of a ship — still high and a contributing factor to oil prices. But the rates for a trip through Hormuz can fluctuate on a case-by-case basis.

“Insurers basically told us that the ship would need to be sort of pointed at the Strait with its engines on and ready to go, and then they’d give them a price,” said Brandan Holmes at Moody’s. “And then once that price was given, they’d have 48 hours to complete the transit.”

Analysts say insurers are almost always willing to insure a tanker for the right price, but that is being tested right now for U.S. or Israeli-flagged ships that want to cross the strait.

“Underwriters struggle to price risk where there is involvement from the United States or Israel on the basis that it almost removes the fortuity of the risk,” explained Marsh’s Saunders-Mortimer — as in, Iran is almost certainly going to attack them outside of a ceasefire.

The U.S. is creating guarantees to back up insurers who would insure such ships. Analysts say it’s still being worked out, but should help.

But Rahul Kapoor with S&P Global warned not to get too caught up in the insurance part of things. “The Strait of Hormuz is not seeing those transits because of insurance challenges. It’s not seeing those transits because of the safety of the crew, safety of the cargo, and the vessel.”

Insurance puts a price tag on risk, but insurance doesn’t make that risk go away.