Insurance freeze in the "Strait of Hormuz": New trade risks for companies

The current conflict in Iran is increasingly becoming a global economic risk, with immediate economic consequences for all companies involved along the supply chain. A key sign of this is the recent suspension of war risk coverage for voyages through the Strait of Hormuz by numerous international insurers. 

We are facing a turning point in the insurability of major geopolitical risks. When insurers covering a large part of the global merchant fleet withdraw their war risk coverage, a regional crisis very quickly becomes a global supply chain problem. Companies are suddenly faced not only with the question of transport costs or transit times, but also with whether key trade routes are still insurable at all.

The current development bears the hallmarks of a classic black swan scenario. Black swans are events that seem so unlikely in advance that they are beyond our imagination, but whose economic impact is enormous. Many companies, especially German ones, see the failure of global supply chains as a possible scenario in the coming years. The current situation in the Strait of Hormuz shows that they are right in their prediction and that such scenarios can become reality faster than many market participants have assumed so far.

The conflict was triggered by military escalation between Iran, the US and Israel. As a result, more than half of the members of the International Group of P&I Clubs, which together insure around 90 per cent of the global deep-sea fleet, have suspended their war risk cover for certain routes in the Gulf region. The Strait of Hormuz is one of the most sensitive energy and trade routes in the world. Around one-fifth of global oil trade passes through this passage.

Global implications for insurers and supply chains

The economic consequences are already being felt. Shipping companies are stopping transit or accepting long detours. Transport times are increasing significantly, while costs are rising sharply. Hapag-Lloyd, for example, is charging a war risk surcharge of up to 3,500 US dollars per container, in some cases even for goods that are already at sea. The insurance decision thus has a direct impact on trade flows and production planning. For export-oriented industries, rising transport costs and longer transit times can quickly become a competitive factor.

For companies, this means that supply chains are not only becoming more expensive, but also less predictable. If central sea routes suddenly become high-risk areas in terms of insurance, this has an impact along the entire value chain – from energy imports and raw materials to industrial intermediate products.

Insurance law issues take centre stage

As the situation escalates, fundamental questions of insurance contract law are also coming into focus. Under what circumstances are insurers permitted to suspend their coverage? Is this a case of force majeure or a calculable market price risk? And who bears the additional costs when ships are diverted or transport times are significantly extended? 

The interpretation of war exclusion clauses and contractual suspension rights is now becoming a key issue for many market participants. In such situations, unclear contractual clauses can quickly lead to considerable financial burdens.

New risk dimensions due to modern forms of conflict

In addition, modern conflicts are increasingly taking on unconventional forms. Targeted disruptions of maritime transport routes, hybrid attacks or coordinated cyber operations with global reach make risk assessment considerably more difficult. 

This significantly increases the so-called accumulation risks for insurers and reinsurers. A single major loss, such as an attack on an LNG tanker in a strategically central passage, could cause damage in the high three-digit million range. Rating agencies are already pointing to increasing capital pressure and heightened volatility in these specialised lines of business. 

This development is therefore not just an underwriting issue, but also a question of solvency. We are not experiencing a short-term market fluctuation, but possibly a structural turning point in dealing with geopolitical risks.

Concrete need for action for insurers and companies

The current developments have clear practical consequences for market participants. Insurers are required to define war clauses and suspension mechanisms more precisely in order to avoid protracted coverage disputes. Equally important is better control of risks that can become highly concentrated in the event of a claim, as well as a critical review of reinsurance protection and capacity limits.

Companies, for their part, should carefully review the scope of coverage of existing war risk policies and reassess their supply chains and geopolitical exposures. Those who continue to rely on globally integrated trade structures need to know whether and to what extent key transport risks are actually covered.

The insurability of major geopolitical risks is being put to the test

Essentially, current developments are calling into question a model that has worked well up to now: the combination of affordable transport insurance with a war exclusion clause and separately covered war risk insurance.

The more geopolitical risks take on systemic dimensions, the more fragile their insurability becomes. Companies that want to continue to benefit from globally integrated supply chains need to fundamentally rethink their risk transfer strategies.

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