War & SRCC risks coverage — Confusion

In the Indian marine cargo market premium rates are abysmally low, no doubt and the loss ratios are high. Are the high loss ratios solely on account of low rates? The answer is No. The two standout factors are 1) Poor underwriting or cross subsidizing enhanced Property insurance rates by dirt-cheap cargo insurance rates to provide greater balance to portfolios of demanding clients. 2) Inadequate focus on risk management. Artificially fixed premium rates, driven by the demands of the national reinsurer GIC Re have done little to improve the loss ratios, a clear sign that we are missing the wood for the trees.

This post is not about the ills that plague marine cargo insurance in India but more focused on the War & SRCC risk coverage cancellation notified by GIC Re, with effect from 15th October 2021. So what is it all about? The threat of war/armed conflicts/war-like actions in the Middle-East have been a major cause of worry to marine underwriters the world over for the last couple of years. A belligerent Iran carrying out some stray attacks, Qatar facing some sort of ostracization by its neighbours, Iraq with its internal and external issues……… the concern is quite justified. More so, when we see billions of dollars worth petroleum products and crude afloat on very large crude carriers in the area. In this connection you may read my earlier posts War & SRCC risks under Marine cargo policies – Notice of Cancellation & War risk premium on cargo – a case for an increase? Thankfully, there has been no reported or settled claim caused by any of the war group of perils.

GIC Re had issued Notices of cancellation to underwriters who had treaties with them in July 2019 on specified cargo transiting from, to or through the High-Risk areas as defined and bound by longitudinal and latitudinal boundaries. The ‘specified cargo included 1) Crude 2) Petroleum products 3) LNG 4) LPG 5) Fertilisers 6) Chemicals. It was also clarified that cancellation of War and SRCC risks will be on bulk movements of the above-specified cargo. The War & SRCC cover could be restored on payment of additional premium at 0.15% which was subsequently brought down. What was the result? Bulk importers of the specified products, mainly the Government-owned petroleum companies were able to arrange cheaper war & SRCC cover from abroad (the prices keep going down, since there are no claims) & GIC Re did not garner much additional premium.

Although discussions were on for quite a while, GIC Re has now come out with a stunner effective October 15th 2021 — No War & SRCC cover for ANY CARGO ( including containerized cargo) in the treaties insurers have with them. Cover can be reinstated or restored if the clients declare and pay to the direct insurers separate war & SRCC premium for transits to/from the high risk areas at the rate of 0.05%. As a commercial organization, GIC Re is free to decide at what terms & rates it would accept risks. Nothing wrong with that. The whole market jumping at it as an opportunity to reap increased premiums without considering the practicability, the logic and above all customer-centricity is sad to see.

Let us examine a few of the factors why this is ill-conceived and impractical:

First, GIC Re has stated that no insurer can cede to their ( GIC Re) treaties if a rate of 0.05% is not charged on transits to and from High-Risk areas. Most of the Indian insurers who have their cargo treaties led by GIC Re have it on Excess of Loss basis only. They are not surplus treaties. Premiums are ceded based on GNPI and NOT at the policy level. Also considering the high thresholds some insurers have for the XOL to trigger, sufficiently high limits on war & SRCC covers to high-risk areas can be retained by insurers to their net account, without charging the suggested higher rate to their clients.

Secondly, even if the insurers were to charge this additional premium to their clients, question is how will they make policy-wise cessions to GIC Re when their treaties are on XOL basis? Only in the remotest chance of there being a war claim exceeding the XOL trigger limit, GIC Re would come into play and can seek details of the premium charged for the particular transit in which the loss occurred. As said earlier there have been NIL claims on war risks in the last so many years. When the whole world has moved to a seamless coverage based on total verifiable turnovers , expecting large corporates to monitor each and every shipment to high-risk areas and declare it to insurers and the insurers to maintain a repository of all such transits sounds retrograde and impractical. Clients would gravitate towards reinsurers who provide War & SRCC covers seamlessly and at much lower rates. So the aim of garnering higher premiums under the guise of War & SRCC could come to nought.

Third, those insurers who do not have their treaties with GIC Re will not be bound by this limitation and can provide better solutions on War & SRCC to their clients.

Last but perhaps the most important fact is the irrational manner in which the War & SRCC risk has been perceived and the decision implemented. I for one am totally baffled. The GIC re notification states that War & SRCC cover for shipments transiting High Risk areas will be covered under the insurers’ treaty with GIC Re subject to a minimum additional Gross Rate of 0.05% for the final sum insured under value of shipment purely to cover War/SRCC coverage during vessel being in High Risk Area. For the purpose of common understanding, transits through HRA have been defined as shipments that are either commencing from and/or destined for ports as per Annexure . The annexure lists out around 37 ports in Saudi Arabia, UAE, Iraq, Kuwait, Qatar, Bahrain & Oman.

The above definition of High-risk area devoid of longitudinal or latitudinal limitations or mention of specific named areas at sea creates ‘contract uncertainty’ and should any war claim arise, there could be diverse, interesting interpretations. It must be remembered that consequent to the Waterborne Agreement, War cover will be available under cargo insurance only when the cargo is on the vessel. Now, looking at the definition of HRA, two consignments belonging to two different insured on the same vessel can meet with different fates. Assume cargo ” A” is on vessel MAX moving from Mumbai to Jebel Ali. Another cargo ” B” on the same vessel MAX moving from Mumbai to Antwerp with transshipment at Jebel Ali. Let us say, both the cargo owners have taken open policies from Indian insurers including War & SRCC but both have not paid the additional 0.05% rate of premium for restoring War & SRCC cover to HRA. If there is a loss due to a war peril, claim for cargo ‘A’ will not be tenable as it was destined for Jebel Ali ( listed in the HRA ports), but claim for cargo ‘B’ should be admissible as the cargo was NOT DESTINED for Jebel Ali but Antwerp, though transshipment was to be done at Jebel Ali. Another point crops up — if there had been no loss and the transshipped cargo ‘B’ moves out of Jebel Ali, does it fall within the ambit of HRA? If yes, how is an Indian insured expected to know and monitor transshipment ports to conclude if he is covered for War risks or not? Problem will be severe in case of Indian importers insured with Indian insurers on ICC+ War+ Strikes basis and importing from other parts of the west and passing through the Middle East. Question which GIC Re would ask is whether there was transshipment at any of the named ports? How is a small-time importer importing cargo in a LCL container expect to track this, be aware of this circular sent to insurers and know whether he is covered against War & SRCC risks or not? The perceived risk has not been defined properly. A hasty step which confuses insureds even more and possibly goes to increase the ‘trust deficit’ between insureds & insurers.

Will GIC Re & the Indian insurers come out with better logic and communication to the insuring public?