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| An oil tanker is on fire in the Sea of Oman near the Strait of Hormuz in this June 2019 file photo. / AP-Yonhap |
By Park Jae-hyuk
The Korean Reinsurance Company (Korean Re) and marine insurers are keeping a close eye on the ongoing tensions between the United States and Iran as the companies may face worsening profitability if there are any incidents involving vessels sailing through the Strait of Hormuz, according to industry officials, Sunday.
Although the nation's leading reinsurer and marine insurers have yet to raise their premiums, industry officials expect they will consider rate hikes as foreign insurers have done.
"We are monitoring how the political feud unfolds, but we have yet to make a decision as to whether to raise our insurance rates or not," an insurance company official said.
The Strait of Hormuz is one of the main routes for the Middle Eastern oil producers to export their crude oil.
It is used when Korea imports crude from Saudi Arabia, the United Arab Emirates and Kuwait.
Industry officials estimate 21 million barrels of crude and condensate collectively worth $1.26 billion are transported through the strait every day.
A single accident in this area can therefore cause massive losses.
In order to minimize their losses in case of accidents, most shippers hold marine insurance policies which cover the loss or damage of ships, cargo, terminals and any transport by which the property is transferred, acquired or held between the point of origin and the final destination.
Given that this is impossible for an individual insurer to cover such a huge loss, insurers also subscribe to reinsurers like Korean Re, seeking risk diversification.
Reinsurance companies thus face worsening profits in the case of maritime accidents.
In the first half of 2018, for example, the nation's 10 reinsurers suffered a 13.8 percent decline in their collective domestic net profits, due to an oil tanker collision in the East China Sea and a fire that erupted on a vessel at anchor in the Port of Incheon.
"More than 20 insurers worldwide have stopped selling marine insurance over the past three years due to worsening profitability," an insurance company official said.
In general, war is one of the causes exempting insurers from their duty to cover the losses of shippers.
If shippers pay additional war risk premiums, however, they can be reimbursed for damage.
Against this backdrop, foreign companies have begun raising their insurance rates significantly since the Middle East crisis.
According to the Financial Times, insurance underwriters are likely to hike rates to reflect perceptions of greater risk of ships in the Gulf
Neil Roberts, head of marine underwriting at Lloyd's Market Association, said he "anticipated" the Joint War Committee (JWC) would hold a special meeting, the newspaper reported. The JWC evaluates risks to shipping around the world.
Before the conflict intensified between the U.S. and Iran, insurers were moving to drop their rates.
This was because their insurance premiums skyrocketed after a series of attacks on tankers in the Strait of Hormuz in the first half of 2019.
The oil tankers attacked near the strait during the period include two Saudi Arabian ships, one U.A.E. ship, two Norwegian ships and one Japanese ship.
Since then, war risk premiums have jumped by 10 to 20 times.
