A protracted Iran war spells trouble for Canada’s insurers

So far, U.S. and Israeli attacks on Iran, and Iranian counterattacks against its Mideast neighbours, are having only limited impacts on Canada’s insurance sector.

But that could change, says Marcos Alvarez, managing director for Global Financial Institution Ratings at Morningstar DBRS.

“The escalation around Iran primarily affects insurance through pricing, availability and contract mechanics, rather than through immediate balance sheet shocks, at least at this stage,” he tells Canadian Underwriter.

“However, a prolonged conflict in the Middle East can end up affecting domestic insurers in Canada via higher reinsurance pricing and lower capacity.”

He adds the ratings agency also expects “some unrealized investment losses in the next quarter or two given the volatility of financial markets.”

For brokers working with understandably nervous marine clients, proactively contacting them and advising around the right products would likely be welcome. “There might be some benefits in securing coverage upfront at this time, but underwriters probably have already incorporated higher rates at this point,” says Alvarez.

Related: What the war with Iran means for Canada’s P&C insurance industry

He notes marine hull and war risk policies taken out by shipowners and charterers are impacted more directly. Already, some underwriters have taken off war risk, cancelling coverage and repricing based on the unfolding circumstances.

“If a ship needs to be redirected and transit through a war zone, I expect higher insurance charges for that vessel,” he adds.

Meanwhile, the length of the conflict will influence how capacity limitations emerge within the insurance market.

“I am more concerned about the sinking of vessels in the conflict zone. The challenge here is that most ships are waiting in a risky zone – the entire Gulf – to transit the Strait of Hormuz,” he says.  

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In recent television interviews, Helima Croft, head of global commodity strategy and Middle East and North Africa research at RBC Capital Markets, has called the Strait “an effective parking lot.” With tanker traffic widely curtailed, she adds Iraq has slowed its oil production because they currently don’t have capacity to store extracted crude prior to transit.

In a Mar. 4 commentary, she calls the Strait “effectively closed,” adding Iran’s drone fleets “may provide it bandwidth to continue asymmetric attacks and move the conflict up the escalation ladder.”

For businesses dependent on marine coverages, Alvarez adds, “If the closing of the Strait goes beyond a couple of weeks, we can see underwriters restricting capacity in the most critical jurisdictions.”  

Global goods trouble

Beyond crude oil transport, the conflict could also impact movement of other goods. Shippers and cargo carriers could look to re-route vessel traffic to avoid the conflict zone, thereby lengthening transit times and creating different risks. 

Whether those re-routings lead to losses that trigger existing policies will depend on the lines of business and policy wordings, says Alvarez. While most marine cargo policies are ‘all risk,’ war, strikes, and terrorism are generally excluded or covered under separate war risk extensions.

“If a vessel transits a listed high-risk area, as defined by the Lloyd’s Market Association’s Joint War Committee, additional war risk premiums can be charged voyage by voyage,” he tells CU. “Rerouting itself does not automatically trigger a claim or a different rate.”

But if transit slows significantly, that can become more expensive from an insurance perspective.

“Longer voyages, particularly if [they’re] decided last minute, can increase exposure to delay, spoilage or physical damage, and those would be covered if they arise from an insured peril,” Alvarez says. “Pure economic loss from delay alone is usually excluded unless specific delay or trade disruption cover has been purchased.”

In the States, the U.S. International Development Finance Corp., a lesser-known federal agency that invests in companies and projects overseas issued a notice saying it “is ready to mobilize its Political Risk Insurance and Guaranty products to stabilize international commerce and support American and allied businesses operating in the Middle East during this period of conflict with the Iranian regime.”

In her broadcast commentary, RBC’s Croft questioned whether the administration’s promises of political risk insurance would be sufficient to incentivize tankers to “go through the Strait in significant numbers.”

Phil Porado

Phil, an award-winning journalist with over 30 years of experience in financial topics, has been managing editor of Canadian Underwriter for more than three years.