Trump takes from Putin playbook with state-backed Hormuz maritime insurance

It wasn’t missiles that closed the straits of Hormuz. It was insurance companies. As bne IntelliNews reported, the mere threat of an attack on a tanker is enough for international insurance companies, concentrated in London, to cancel war-risk insurance and force them to drop anchor or leave the Gulf. After the Iranian Revolutionary Guard Corps (IRGC) threatened to sink any tanker in the straits on March 2 that is exactly what happened.

In an attempt to restart the traffic through the straits US President Donald Trump has offered two solutions: he promised to provide battleship escorts for any tanker making the trip, but more radically, he ordered the US government to provide the ships with insurance to allow them to sail again.

“Effective IMMEDIATELY, I have ordered the US Development Finance Corporation (DFC) to provide, at a very reasonable price, political risk insurance and guarantees for the Financial Security of ALL Maritime Trade, especially Energy, traveling through the Gulf. This will be available to all Shipping Lines,” Trump said in a post on social media.

“If necessary, the US Navy will begin escorting tankers through the Strait of Hormuz, as soon as possible. No matter what, the US will ensure the FREE FLOW of ENERGY to the WORLD. The US’ ECONOMIC and MILITARY MIGHT is the GREATEST ON EARTH,” he added.

Ironically, Trump is taking a page out of Russian President Vladimir Putin’s playbook by ordering the government to take over the job of insuring oil tankers.

Following the introduction of the oil price cap sanctions at the end of 2022, the method of enforcement of the rule to bar international tankers from transporting Russian oil that was valued at over $60 per barrel was by cancelling their insurance: at the time 95% of all maritime insurance deals were concentrated in Lloyds of London which was subject to EU regulation.

What the Kremlin did was to recapitalise its largest insurance companies, which replaced Lloyd's. Within a year  the London-based broker share of the business fell to 65% of global maritime insurance policies. Today it has fallen again to 60% and following Trump's order for the US to take over, that share will likely fall again as the business shifts first to Russian insurance companies and now to the US. 

Other insurance agencies that are part of the Protection and Indemnity (P&I) club, a mutual insurance association that provides liability coverage for shipowners, operators and charterers, such as those in India also refused to impose the $60 rule. They accepted the switch by tankers in Russia’s shadow fleet to Russian, not English, insurance policies.

Benefits for the US

There are several benefits to the switch. The first is that billions of dollars of insurance premiums will be switched overnight from flowing to privately-owned insurance companies in London to US state coffers.

As reported by bne IntelliNews, under EU rules, the Solvency II rules, the EU’s insurance capital framework enacted in 2016, companies must hold enough capital to withstand a “once-in-200-year” loss event. The UK retained the regime after Brexit as part of the Withdrawal Agreement in 2018, meaning Lloyd’s syndicates and the International Group of P&I Clubs continue to operate under largely identical rules.

The problem for insurance companies is when war actually breaks out the potential losses soar and they have put aside fresh capital that can run into the hundreds of millions of dollars. As war-risk policies usually carry a week’s notification for cancellation in the event of war, for a Lloyd’s syndicate or P&I club with concentrated Gulf exposure, insurance companies have universally chosen to cancel policies rather than raise this capital.

War risk premiums in the Gulf were running at extreme multiples just last week — three- to five-times pre-conflict rates. Those premiums were flowing to London reinsurers, but they then pulled coverage anyway when the shooting actually started.

Trump ordered the US Development Finance Corporation (DFC) to step in with political risk insurance and guarantees to all maritime trade through the Gulf. Especially energy.

The upshot is shipping companies regain access to insurance at similar premiums, but the DFC, backed by the federal budget, doesn’t need to recapitalise and is not subject to the EU’s rules.

Russian insurance companies into the breach

Cut off from London insurance, Russia turned to its own insurance companies to provide cover for its own ships. Russian state-controlled Russian National Reinsurance Company (RNRC) became the main reinsurer of Russian ships, including Russia’s biggest ship operator Sovcomflot's fleet. RNRC is controlled by the Central Bank of Russia (CBR), which recapitalised the company to RUB300bn ($6bn), up from RUB71bn, and hiked its guaranteed capital to RUB750bn so the firm had adequate resources to provide reinsurance.

It seems that Trump has rushed his plan to insure Gulf tankers. While the Russians took the time to recapitalise their insurance companies, research from JPMorgan released on March 65 shows the DFC has access to just $154bn of the $352bn needed to underwrite the 329 oil vessels in the region, according to reports.

Following the imposition of the 2022 EU oil sanctions, the Kremlin managed to reorientate all its oil exports to Asia in just four months. But for that to work, the new customers in “friendly countries” had to accept the Russian maritime insurance as valid.

India blew a big hole in the EU sanctions regime after an Indian insurance company agreed to offer Russian tankers safety certification to a Dubai-registered subsidiary of Sovcomflot on June 23 of that year. It allowed Russia to export oil to India even if the Western insurance sanctions were implemented. That was followed by the Indian branch of the P&I club opting out of the EU sanctions, the demands to use insurance to enforce the $60 per barrel rule.

Indian authorities also accredited the privately owned Russian insurance giant Ingosstrakh as an insurance company for shipping oil, which means vessels the company insures can enter Indian ports as well.

The result was the whole insurance-based enforcement of the $60 per barrel rule collapsed and since then not a single barrel of Russian crude oil has been sold below the oil price cap.

US takes over control

Now Lloyd's is losing even more market share, this time to the US, not Russia. No sovereign has attempted to replace the global marine war risk market in real time during an active conflict according to experts.

The new arrangement will also give the US de facto control over the use of the straits. If the US is both insurer and naval escort necessary to transit the narrow waterway, America ends up controlling access to one of the world’s key navigation routes at two levels: physical security and financial coverage.

The DCF takeover could break the actuarial blockade on Hormuz, but it remains to be seen if any shipping companies, assured by a fresh insurance policy, will be willing to actually put their tanker on the line.

To reassure those companies, Trump promised a convoy of warships to escort the tankers through the Straits, but at 34km wide, not only will those ships become vulnerable to Iranian missiles, they will also be in easy range of Iranian drone swarms launched from land – an attack even the powerful US battleships will struggle to repel.

Another leaf Trump has taken out of the Putin playbook is to call the operation in Iran a "special military operation." The White House has yet to call Operation Epic Fury a "war" as without a UN mandate, invading or attacking another country is illegal under international law - the same motivation Putin has for avoiding calling the conflict in Ukraine a "war."