Monday’s attack on the Saudi oil tanker Sidr as it crossed the Strait of Hormuz underscored the dangers of traveling one of the world’s most critical waterways, six months into the Iran war.
Two Filipino sailors were killed in the attack. Riyadh issued a statement condemning the targeting of the tanker.
The attack on Sidr, operated by Saudi shipping company Bahri, was not an isolated incident. A supertanker belonging to the same company was struck in July while crossing the strait near the coast of Oman.
Before that, two other Bahri vessels were attacked in the Red Sea in July and August.
Few companies are now willing to risk operating in the region as Tehran continues to threaten tankers attempting to navigate the narrow waterway without its permission, disrupting energy exports from Gulf states.
With no end to the conflict in sight, another economic problem has been worsening for months: Insurers have raised premiums and restricted the scope of coverage available for ships and cargo.
In response, Saudi Arabia is planning to establish a government-backed insurance program covering vessels and cargo, according to the Financial Times.
The newspaper said Riyadh had already held talks with insurance brokers in London and was considering mechanisms that could provide up to 700 million Saudi riyals, or about $186 million, in coverage per incident, including the seizure or attack of a vessel.
The Saudi program is intended to provide coverage at a lower cost than ships currently face in high-risk areas, helping keep maritime traffic moving.
Eid al-Eid, a former economic adviser to the Saudi Fund for Development, said some insurers had taken advantage of wartime conditions to raise prices while reducing the amount of risk they were willing to assume. That, he said, helped prompt Saudi Arabia to look for a new mechanism to provide essential insurance coverage.
The marine insurance market has undergone major changes since the war began.
On March 2, just hours after the U.S.-Israeli strike began, major marine insurers, including Gard, Skuld, NorthStandard, the London P&I Club and the American Club, announced they were canceling coverage related to Iran, the Gulf and surrounding waters.
Japan’s MS&AD Insurance Group also suspended underwriting for a range of war-risk policies in the region.
The decisions coincided with a decline in shipping through the Strait of Hormuz and the suspension of voyages by shipping and trading companies, while insurance costs climbed sharply for vessels that continued to sail.
Insurance coverage did not disappear entirely, however. A survey conducted by the Lloyd’s Market Association in March found that most insurers remained willing to cover ships and cargo, albeit at higher prices and under revised terms.
Lloyd’s is one of the world’s largest insurance marketplaces, bringing together insurers and brokers that provide coverage against a range of risks, including war.
As Risks Rise, so Do Insurance Costs
Shipping companies rely on several types of insurance, including coverage provided by protection and indemnity clubs, known as P&I clubs, which cover liabilities not typically included in conventional insurance policies.
Insurers themselves also turn to reinsurance companies to spread risk and distribute potentially enormous losses.
As war risks have intensified, reinsurers have pulled back from covering certain exposures, prompting marine clubs to cancel portions of their war-risk coverage or revise their terms.
At the same time, some insurers have continued offering coverage in high-risk areas, but at higher prices and under terms that vary depending on the voyage and the areas a vessel must cross.
Higher premiums typically make a voyage more expensive. But the absence of insurance can have far more serious consequences, potentially forcing shipping companies to suspend voyages altogether.
In June, Lloyd’s announced the creation of a new war-risk insurance facility to provide additional coverage for ships and cargo passing through the Strait of Hormuz, with each case assessed according to its level of risk and the conditions of the voyage.
The cost of insuring ships crossing the Strait of Hormuz reached between 7.5% and 10% of a vessel’s hull value in July, up from between 1% and 3% just weeks earlier, according to S&P Global.
Shipping Pressure Spreads
The pressure has recently spread to the Red Sea as attacks by the Houthis, who are on U.S. terrorism lists, have intensified.
Al-Eid said the program being developed by Saudi Arabia could reduce insurance costs. But he stressed that government involvement in the insurance sector would not mean the state assuming all costs. Instead, the government could absorb part of the risks that insurers are reluctant to take on, while the private sector continues to provide a portion of the coverage.
Under normal conditions, about 20 million barrels a day of crude oil and petroleum products pass through the Strait of Hormuz, making it one of the world’s most important energy corridors.
Oil traffic through the strait has fallen sharply since the war began, forcing Gulf countries to cut production as shipping has been disrupted and alternative export routes remain limited.
The International Energy Agency says adequate insurance mechanisms, alongside protection for ships, are essential to restoring normal oil flows through Hormuz — a development that would, in practice, help bring oil prices down. An increase in insurance costs, however, does not necessarily translate into an equivalent rise in oil prices.
Ali al-Riyami, a former director general at Oman’s Ministry of Energy and Minerals, told MBN that higher insurance premiums add to the cost of transporting oil to markets, while market conditions determine who ultimately bears the additional expense.
When supplies are tight, producers can pass a larger share of the increase on to buyers. When supplies are plentiful, producers may have to absorb part of the added cost themselves.
At the same time, higher insurance costs do not necessarily make voyages economically unviable, particularly when oil prices are elevated.
In most cases, accepting some of the additional shipping risk is less costly than losing export opportunities or seeing supplies halted altogether.
Saudi Plan May Offer Needed Safety Net
Al-Riyami said Gulf government intervention under such circumstances should be viewed as part of the cost of keeping trade flowing and preventing exports from being disrupted because insurance has become prohibitively expensive or unavailable.
Khalid al-Awadhi, an energy adviser at Hawk Energy, said the value of government-backed insurance goes beyond reducing costs. Providing coverage for high-risk areas, he said, can reassure shipping companies, investors and ports, many of which require vessels to carry insurance before doing business with them.
Al-Awadhi suggested that government coverage should focus on the highest-risk sections of a voyage, such as passages through the Strait of Hormuz or Bab al-Mandab, while conventional commercial insurance would remain in place for the rest of the journey.
Gulf states have different options for getting their oil to market under current conditions in the Strait of Hormuz.
Saudi Arabia can transport some of its oil through the East-West pipeline to Yanbu on the Red Sea. The United Arab Emirates can export part of its production through Fujairah without passing through the strait.
Kuwait, Qatar and Bahrain, by contrast, remain heavily dependent on Hormuz for their energy exports.
Awad al-Nasafi, a consultant on financial strategy and decision-making, said a joint Gulf fund could, in theory, distribute the risks among the region’s states. But he said separate national programs were more likely because each country has different needs and faces different levels of risk.
Al-Riyami said government intervention could provide a safety net in exceptional circumstances but should not replace private insurers. Instead, he said, it should serve as a mechanism to keep ships moving and prevent insurance costs from rising to levels that obstruct trade.
Adapted and translated from the original Arabic.
