A new report from Moody’s warns that the ongoing conflict involving Iran is exacerbating tail risks for specialty insurers and reinsurers – those who underwrite complex risks such as maritime war risks, aviation and political violence – as the likelihood of large concentrated claims increases if hostilities persist or escalate.
The rating agency’s “baseline scenario” suggests that the conflict will be relatively short-lived, perhaps lasting only a few weeks, and that navigation in the currently blocked Strait of Hormuz, a key transit route for tankers, will resume on a large scale.
“We expect losses for large diversified insurers to be manageable in this scenario, thanks to their prudent risk selection, aggregate claims limits and reinsurance protection,” Moody’s explained.
Meanwhile, it has been reported that war exclusion clauses will provide some insulation, although in some cases these clauses may face legal challenges.
Nonetheless, Moody’s highlights that the potential for protracted hostilities is an additional risk factor that increases the likelihood of more severe and complex loss scenarios.
The rating agency continued, “Relative to other recent episodes of heightened geopolitical tensions, the concentration of high-value assets in the Gulf increases the likelihood of accumulation of losses.
“The conflict has resulted in sustained missile and drone attacks across the Gulf and the effective closure or severe disruption of major transport corridors, including the Strait of Hormuz. This has reduced maritime and air traffic and prompted insurers to reprice or limit coverage.
“The closure of the Strait of Hormuz creates significant uncertainty for insurers. War risk policies often include ‘blockade and entrapment’ clauses, allowing for total loss claims after prolonged detention (usually 12 months).
“Historical precedents, including the Iran-Iraq War and the Russia-Ukraine conflict, indicate that this situation can result in aggregate claims and disputes over aggregation, lost time and policy add-ons.
“Legal uncertainty also arises, for example, when a vessel becomes stranded while insured but suffers physical damage after the insurance is canceled or lapses.”
“Overall, we expect marine losses to be contained in most cases, aided by efforts by insurers to limit exposure.
“There is a risk that ships could be held up in the Gulf for longer, but we believe that given the global strategic importance of the Strait of Hormuz it is unlikely that it will be blocked for up to 12 months.”
It is worth noting that the U.S. International Development Finance Corporation (DFC) recently revealed that Chubb will serve as the lead partner of its US$20 billion maritime reinsurance plan, aiming to restore commercial shipping in the Gulf and help restart energy and trade flows in the Strait of Hormuz.
As we have covered extensively, this rotating insurance product will only be available to vessels that meet the eligibility criteria, with coverage focusing initially on hull and machinery as well as cargo.
Elsewhere in the report, Moody’s discussed the legal uncertainties affecting coverage of political violence and terrorism (PVT) and conflict-induced strikes, riots and civil disturbances (SRCC).
“These policies are typically developed on an annual basis and do not include cancellation provisions,” Moody’s said. While a war exclusion is standard, the distinction between war, terrorism and civil strife is often disputed, particularly where coordinated attacks or proxies are involved.
“Demand for this insurance has been increasing in response to the conflict, and prices have risen significantly. This is positive for business volumes for insurance companies in the region, but it also increases their risk of further escalation of conflict.
“We expect PVT insurance companies to start receiving damage reports in the coming days as they assess damage from various missile and drone attacks. Media reports highlighted one of the first notifications of significant losses from Bahrain-based integrated energy company Bapco Energies, which suffered an attack on its refinery complex earlier this week.
“SRCC coverage is often embedded in property policies and provides coverage for civil unrest even where a war exclusion applies. This may give rise to litigation and aggregation disputes regarding policy triggers, particularly if multiple events are characterized as part of a single event.
“The reinsurance structure adds complexity as many of the major policies written in the Middle East are reinsured internationally, concentrating risk at the reinsurance level.”
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