War risk premium on cargo – a case for an increase?

Sanctions against Iran just got tougher.

Four oil tankers attacked in the Gulf of Oman.

An unmanned drone of the US shot down in the region.

Most international airlines flying from South/South-east Asia to Europe taking a circuitous route avoiding the airspace over Iranian waters & some over Iranian land too.

Tension is palpable in the region. War clouds look overhead.Even as we hope and pray that sanity prevails and enormous loss of human lives & severe denting of economies will be avoided, one never knows.

What has this in store for the Marine insurance market, both Hull & Cargo? The Joint War Committee, which comprises members from Lloyds’ markets & company markets in their last meeting has decided to enlarge the ‘listed’ or high-risk areas to include Oman, the Persian Gulf, Gulf of Oman & the United Arab Emirates.

Immediate repercussion has been the steep rise in war-risk premiums on tankers traversing the waters in these listed areas. No mention yet of any increase in the war-risk premium for other types of vessels or for cargo. It must however be remembered that the increase in war-risk premium for hull, will certainly not be borne entirely by the vessel owners/charterers. A good proportion of this will be passed on to the cargo owners which in these cases will be oil companies.

The greatest risk in terms of severity, enormous values and as major cargo shipped in these areas, will undoubtedly be petroleum products in oil tankers. However, in a war or war-like situation, losses can happen to other types of vessels and cargo too. There is extensive container traffic in this part of the world as Jebel Ali ranks among the top ten ports of the world, handling around 16 million TEUs annually. Is there a case then for increase in war-risk premium on cargo too? What about war-risk premium on cargo moving by Air, especially after the drone attack & the wide-berth, commercial airlines seem to be giving to the airspace around here?

Depending on which way the political decisions go, the possibility of a war/war-like situation developing will be bobbing up and down.In the meanwhile, world trade has to go on. Sooner than later, the War Risk Committee could well recommend an across-the-board increase on war-risk premium for cargo moving to/from these listed areas. The Institute War clauses (Cargo)-2009 will be charged a distinct, separate rate of premium & not form part of the already minuscule composite premium.If that happens, it could be a double whammy for shippers  as their freight rates to this disturbed region would also go up.

So what are the options available to a shipper? One, they may decide to pull out of business with this disturbed region altogether. Unlikely. Two, they may grudgingly pay the increased war-risk premium. Three, they may take a chance and take the cargo cover under ICC and opt out of the War Risk cover. Is the third option possible, one may wonder, accustomed as we are to fully-loaded covers at a single premium rate ( which too, is abysmal). Am sure, not too many underwriters would know that out of the total premium charged, a pre-decided percentage is shown as the war-risk premium at the back-end while booking. Thankfully, since wars are not too many, this proportion has kept getting smaller and smaller by the day. So, if an assured opts out of war cover and demands a discount in the consolidated premium chargeable, the reduction will be negligible. On the other hand, if the war-risk premium to be charged for the listed areas is increased, am sure it will be at least 50-100 times the allocated war-risk premium in our books. Sounds strange, but that is the reality. Going back to the days when Marine cargo rates in India were governed by Tariff, the war rates which needed to be shown separately on policies was 0.045% ( 0.05% -10% discount). Mind you, these were rates for any cargo, anywhere in times of peace.

In case of open policies or policies on sales turnover policies which are already in place including War risk cover,what are the options open to an insurer should an increase in war-risk premium come into force? Raise the demand on the assured to pay the enhanced premium to continue the War risk cover  or invoke the provisions of the Institute War Risk Cancellation clause (Cargo) and issue notice of cancellation of War cover:

“The cover against war risks (as defined in the relevant Institute War Clauses) may be cancelled by either the Underwriters or the Assured except in respect of any insurance which shall have attached in accordance with the conditions of the Institute War Clauses before the cancellation becomes effective. Such cancellation shall however only become effective on the expiry of 7 days from midnight of the day on which notice of the cancellation is issued by or to the Underwriters.”

It will be pertinent to note here that ” except in respect of any insurance which shall have attached in accordance with the conditions of the Institute War Clauses” is critical. The Duration clause of ICC and the Institute War clauses( Cargo) are different. For eg. a risk may commence from Pune and terminate at Jebel Ali port. and may be covered as such under the Institute Cargo clauses. Notwithstanding the fact that the cargo has already moved from Pune en route to JNPT/Mumbai port, cancellation of war-risk clause for this transit may be still be effected as war-risk attaches only when the  subject matter is loaded on to the oversea vessel.

Read this, but pray for peace!