Oil firms shop for separate war risk cover as premium on cargo transiting Strait of Hormuz spikes up

Indian entities importing crude oil, petroleum products, chemicals and fertilisers from the tension-ridden Arabian Gulf are paying “phenomenally higher” cargo insurance premium to cover war and strikes, after global marine underwriters imposed extra premium to insure cargo transiting through the Strait of Hormuz -- the world’s busiest oil shipping lane -- in the wake of tough measures taken by the US on Iran over its nuclear programme.

Typically, cargo insurance clauses exclude war and strikes, but by attaching the war and the strikes clause, they get restored. Before tensions built up in the region, full-fledged cargo cover was available at about 0.0006 per cent of the cargo value, as competition among global underwriters to grab “more market share and volumes” drove down premium costs substantially.

Since then, marine insurers have issued notice of cancellation to withdraw the war and strikes cover on cargo transiting though the High-Risk Area, including the Strait of Hormuz.

India’s state-owned re-insurer, GIC, has issued such withdrawal notices and is quoting an extra premium of 0.15 per cent on the cargo value, to re-instate the cover for cargo such as crude oil, petroleum products, chemicals and fertilisers, industry sources said.

“West Asia is where India gets most of its crude and petroleum products from. Each ship carries on average Rs 300 to Rs 1,000 crore worth of cargo. Suddenly, when the war and strikes risk cover is withdrawn, they are in a jam,” said R Balasundaram, Executive Vice-President, Global Insurance Brokers Pvt Ltd.

“A couple of our clients have paid up. But, the larger sufferer is going to be the oil companies. Their premiums are going to shoot through the roof. They buy phenomenal quantities from that region,” he said.

To deal with the situation, oil companies have started asking for war risk cover separately and are scouring the international re-insurance markets for a better/ cheaper deal.

“I believe some of them have been able to get better deals. Certain brokers in London markets have quoted almost half the rate - instead of 0.15 per cent - they have quoted 0.8/9 per cent, which again is some 500 times higher than what it used to be,” he added.

The 0.0006 per cent rate charged earlier, included war, strikes and cargo risk. But now insurers are withdrawing the war risk cover and asking for an extra premium of 0.15 per cent to restore it. People are in for a shock, it is phenomenally higher, Balasundaram said.

India imports more than 80 per cent of its oil and around two-thirds of that comes from West Asia. Every 10 per cent increase in the price of a barrel of crude widens the nation’s current-account deficit by about 0.4 per cent of gross domestic product. “Ultimately, price impact is there; the price of petrol could go up,” he noted.

In the case of fertilisers, prices are subsidised by the government. The subsidy is not going to increase, but your premium costs go up substantially. And, you may not be able to pass on everything to the customers.

The only saving grace is that not all of India’s fertiliser imports come from the Gulf region. You can get it from other sources as well, he added.

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