War Risk Insurance Returns to Strait of Hormuz — at a Price

1. A provisional solution has been reached for war risk insurance on ships transiting the Strait of Hormuz, a vital corridor for global oil shipments. However, with charter rates for oil supertankers skyrocketing fourfold to nearly $800,000 per day in just a week, the outlook for the full resumption of regular shipping traffic through the region remains highly uncertain.[para. 1]

2. International insurers have started issuing new war risk contracts for ships entering the Persian Gulf and Strait of Hormuz at a sharply increased rate of 1% of a vessel’s hull replacement value—renewable every seven days. This marks a significant jump from the pre-conflict rate of just 0.25%.[para. 2]

3. This surge in insurance costs and charter rates stems from a recent military strike by the U.S. and Israel against Iran. The military action prompted insurance consortiums to immediately invalidate existing war risk policies and led to the expansion of the maritime war zone by key industry organizations.[para. 3]

4. The dramatic increase in insurance premiums and freight rates illustrates the immense logistical and financial difficulties faced by the global energy market. While the new insurance arrangements provide some ability for operators to estimate costs, the sustained high premiums and ongoing security risks mean that disruptions at this crucial oil chokepoint are likely to persist.[para. 4]

5. According to industry sources, the rising costs make shipping from the region prohibitively expensive. Port congestion and the need to renew insurance every seven days could drive insurance expenses for a single oil shipment to 2%–3% of a vessel's value. Some shippers with strong safety records may benefit from a No Claim Bonus, potentially cutting rates to 0.8%.[para. 5]

6. For a Very Large Crude Carrier (VLCC) valued at $100 million, the war risk premium for a single voyage from the Persian Gulf now ranges from $2–$3 million—about ten times higher than the pre-conflict cost of $250,000.[para. 6]

7. After the conflict, the London insurance market’s Joint War Committee released a new list, JWLA-033, expanding the official war zone to cover the entirety of the seas surrounding Bahrain, Djibouti, Kuwait, Qatar, and Oman. The International Group of P&I Clubs responded by announcing that existing war risk coverage would lapse as of March 5, requiring new special coverage for ships entering the zone.[para. 7]

8. Following suit, the China Shipowners Mutual Assurance Association notified its members on March 4 that their contracts would also adopt the JWLA-033 designations as of March 8 and warned members to secure the additional required coverage to protect their ships.[para. 8]

9. Lloyd’s of London confirmed on March 5 that it is quoting insurance for ships transiting the region and is in talks with the U.S. International Development Finance Corp. regarding new political risk insurance and guarantees to support maritime trade in the Gulf.[para. 9]

10. Although the revised insurance framework helps shipowners quantify costs and negotiate terms, resumption of full-scale shipping remains complex, since cargo owners must arrange their own war risk insurance as well.[para. 10]

11. Charter rates have reached unprecedented highs, with supertankers like the Adamantios being chartered for $538,000 per day by Indian refiners and another VLCC going for $770,000 per day. Rates are now so high that transportation costs can exceed $20 per barrel, or a quarter of the oil’s value, reflecting extreme market panic rather than regular market forces.[para. 11][para. 12]

12. Consulting firm Drewry pointed out that even an upcoming OPEC supply boost of 206,000 barrels per day will not compensate for disruptions if the Strait remains closed. Limited alternative export routes mean Asian buyers are scrambling for crude from West Africa, Latin America, and North America, raising transport demand and vessel scarcity.[para. 13]

13. Saudi Arabia continues to move oil using its East-West pipeline to transport crude from the Persian Gulf to Yanbu on the Red Sea, where over 10 tankers were loading on March 6, with more than 30 vessels en route.[para. 14]

14. Yet, this workaround is restricted by the pipeline’s limited daily capacity (3–4 million barrels) and the logistical inefficiencies posed by the longer routes, limitations on tanker size through the Suez Canal, and the great distances for shipments to East Asia.[para. 15]