What the war with Iran means for Canada's P&C insurance industry

A dramatic digital illustration depicting modern military warfare with silhouettes of missiles launching upward in formation and multiple fighter jets flying in coordinated patterns across a green-tinted battlefield. The scene includes ground tanks positioned at the bottom with a radar grid overlay and targeting crosshairs, creating an intense strategic warfare composition with green and golden tones. — iStock.com/mammuth

Coordinated attacks by the United States and Israel against Iran over the weekend threaten to create instability across many lines of global commercial insurance, industry sources say.

As the attack against Iran intensifies, and Iran’s retaliatory missiles fly towards major international airports in the Middle East, the Straight of Hormuz is essentially blocked to naval traffic carrying oil exports.

Consequently, property and casualty insurance industry observers are warning about re-pricing risks associated with supply chain, marine and cargo, trade credit, and aviation and travel insurance policies. Insurers have already reportedly issued seven-day warnings of cancelling war time coverage offered in commercial insurance policies.

Impact on Canada

What will this mean for Canadian P&C insurers?

“It’s too early to comment on any potential impacts to Canadian supply chains resulting from the current conflict in the Middle East,” the Insurance Bureau of Canada stated in an email to Canadian Underwriter Monday. “Canada’s P&C insurance industry remains strong and stable. Canadians can continue to count on their insurer to protect what’s important to them.”

Marsh Risk is warning Canadian companies concentrated in three critical sectors — high tech manufacturing and defence, oil and gas, and agriculture — will likely be highly exposed.

“According to Sentrisk, Marsh’s supply chain mapping tool, approximately 90% of organizations globally — including many Canadian companies — have at least one critical supplier located in an active conflict zone somewhere in the world,” James Crask, global supply chain practice leader at Marsh Risk, tells Canadian Underwriter in an email.

“Key sectors likely to be impacted by the conflict in the Middle East include high-tech manufacturing and defence and aerospace, which have supply chain exposures in Israel; upstream industrial products associated with oil and gas operations; and agriculture and apparel, many of which are reliant on suppliers in Turkey.”

Marsh Risk says it’s advising its business clients “to take immediate action, including confirming operational status with critical suppliers, monitoring logistics and flight resumptions, and preparing for potential supply chain interruptions.

“We also recommend reviewing insurance coverage, including business interruption policies that may extend to named third-party suppliers in conflict zones. Longer-term resilience strategies include supply chain mapping, alternate sourcing, scenario planning, and contract reviews to mitigate ongoing risks.”

Impact on Global P&C insurers

In the United States, global firms have noted the concern about the impact of a widening Gulf War will have on P&C insurers.

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The U.S. and Israeli air strikes on Feb. 28 killed Iran’s Supreme Leader Ayatollah Ali Khamenei, as well as the country’s head of the Revolutionary Guard and a top security adviser, among others. Iranian civilians have also died in the attacks, with Iranian sources citing more than 200 dead.

In retaliation, Iran responded by launching missiles and drones at U.S. bases and regional allies, leading to temporary shutdowns of airspace over Iran, Iraq, Kuwait, Israel, Bahrain, the UAE, and Qatar. International airports such as Dubai, Abu Dhabi, and Doha have temporarily closed.

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In addition, “the conflict has also prompted maritime authorities and carriers to halt traffic through the Strait of Hormuz, a choke point for roughly one-fifth of global crude oil and seaborne gas flows,” says ratings agency Morningstar DBRS.

“Media reports suggest that war risk underwriters issued seven-day cancellation notices for insurance policies covering ships transiting the Gulf and the Strait of Hormuz and were prepared to increase premiums by up to 50%.”

Cancellation of war time risk policy coverage does not mean the coverage is no longer available, as Morningstar DBRS notes. It just means insurers are able to renegotiate the contract with higher premium pricing.

Global P&C industry commentators are also warning about several other potential risks unfolding from the conflict in the Gulf.

Line by line impacts

“Iran’s strategy appears to be to inflict as much economic damage as possible on the U.S.’s Gulf allies with a view to trying to force the U.S. to de-escalate,” according to commentary by global law firm Kennedys, which advises clients in a variety of sectors including P&C insurance.

The law firm notes Iran has a significant drone force that would be able to avoid “interceptor” missile systems that have thus far shot down a number of Iran’s missile strikes. These drones could be used to damage international companies’ commercial assets in the region, the commentary states.

In marine, shipping and cargo lines, higher premiums may temporarily support underwriting margins for specialist war risk syndicates, Morningstar DBRS notes. But the benefits will likely be offset by greater risk accumulation in the zone.

“About 1.4% of the global container fleet is currently stranded in the [Hormuz] Strait, while tanker owners and traders have suspended shipments,” Morningstar DBRS states. “If a large vessel were attacked and destroyed, insured losses could exceed $200-$300 million when considering hull, cargo and liability claims.

“Reinsurers may respond by raising attachment points or reducing capacity, leaving primary underwriters retaining more risk and potentially pressure solvency levels.”

That could, in turn, introduce supply chain interruptions, sources say.

“For cargo interests, in addition to oil and LNG [liquefied natural gas], it is estimated that there are 135,000 containers in transit in the region with estimated values of US$4 billion,” Kennedys reports. “Cargo owners and charterers will be considering alternative routes (where possible), but using other ports or diverting around the Cape of Good Hope will create additional cost, delay and congestion, further threatening the supply chain.”

And if receivables are disrupted as a result of the supply chain disruption caused by the current conflict in the Gulf, companies may be leaning toward trade credit insurance to protect their bottom lines, as Kennedys notes.

What’s more, travel and aviation policies may be impacted, depending on whether they have exclusions for damage caused during war.

Aviation hull insurers may be seeing more claims related to debris caused by the crossfire in the region. And travel insurers may be seeing elevated claims as well.

“The closure of large swaths of Middle Eastern airspace has triggered widespread flight cancellations and stranded passengers,” Kennedys notes. “More than 20 airlines suspended flights to Tel Aviv, Dubai, Doha, Abu Dhabi, and other hubs, while the airspace in the region remained nearly empty.

“Passengers stranded across global hubs may turn to travel insurance for reimbursement of prepaid expenses when airlines deny refunds under force-majeure clauses, yet acts of war are typically excluded, and coverage depends on policy wording. Travel insurers could see an uptick in claims but may rely on exclusions to limit payouts.”