On March 6, shortly after the outbreak of the U.S.-Iran conflict, the U.S. International Development Finance Corporation (DFC) announced a $20 billion reinsurance support package designed to back crude oil and gas maritime shipments through the Middle East. Under the framework, the DFC sequentially covers losses when insured vessels are damaged or suffer harm. Underwriting and rate calculation are led by U.S. insurer Chubb.
The support package grew to $40 billion earlier this month as other private insurers, including AIG and Berkshire Hathaway, joined the program and pledged an additional $20 billion.
Korea's financial authorities are said to be drawing substantially on the DFC's reinsurance support program as a reference. The aim is to provide reinsurance for vessels seeking to transit the Strait of Hormuz.
Under the plan being considered, domestic insurers would jointly establish an "insurance pool" for vessels operating in the Middle East, with the government then covering part of the losses through fiscal support. The government would effectively act as a partial guarantor. "In banking terms, it would be similar to serving as a lender of last resort," a financial industry official said Sunday.
Notably, the financial authorities and the Ministry of Oceans and Fisheries are said to be considering a national disaster insurance scheme that would cover partial losses in crisis situations such as a blockade of the Strait of Hormuz.
Kwon Dae-young, vice chairman of the Financial Services Commission (FSC), said at a cabinet meeting held jointly with the emergency economic headquarters meeting at the Government Complex Seoul on Saturday, "Insurance needed for transit through the Strait of Hormuz cannot be obtained through global insurers." He added, "We have jointly requested cooperation with the Ministry of Oceans and Fisheries so that reinsurance products can be easily obtained through a specialized disaster insurance provider in Korea." He continued, "In a national crisis such as the Hormuz situation, we need to build a system in which the state can provide disaster insurance."
Within Korea's insurance industry, discussions on forming a ship insurance pool have been continuing. One option under discussion is creating a pool centered on small and mid-sized shipping companies. "We understand that the financial authorities have been mentioning a war insurance pool recently," an insurance industry official said. "Nuclear insurance is also operated on a pool basis, and war insurance will likely be organized in a similar way."
Other countries are also developing schemes that link insurance pools with government loss coverage to help their own vessels transit the Strait of Hormuz. The Indian government recently launched an insurance pool called the Bharat Maritime Insurance Pool together with domestic insurers in preparation for the Iran situation. The Indian government is providing 130 billion rupees (about 2 trillion won) in guarantees for the pool.
"An issue like a blockade of the Strait of Hormuz is something we have never experienced before," a financial industry official said. "Because there is a lack of statistics to serve as a basis for rate calculation, private insurers inevitably feel burdened in providing coverage, so the government has no choice but to bear the ultimate losses."
The market expects that if shipping companies make use of joint reinsurance from domestic insurers and the government, they will be able to reduce the burden of Hormuz ship insurance premiums, which have surged more than tenfold. According to the Korea Insurance Research Institute, the war risk premium rate for vessels transiting the Strait of Hormuz, which stood at 0.125% to 0.2% of vessel value before the conflict, has now soared to 3% to 5%.
When a vessel is damaged or lost, the insurer covers the loss, and the insurer in turn takes out reinsurance to diversify the risk. But with conditions fluctuating sharply in the region near Hormuz, obtaining reinsurance itself is not easy. If an insurer cannot secure reinsurance, it becomes difficult for shipping companies to obtain coverage.
However, the financial authorities say specific methods of fiscal support require further discussion. It also needs to be reviewed which agency would cover disaster insurance losses. "With regard to disaster insurance, we are only now beginning consultations with the relevant ministries," a financial authority official said. "Nothing has been decided yet on specific support measures."
