Marine Insurance and Rising Gas Prices

War in the Middle East has choked the supply of crude oil transported through the Strait of Hormuz to the rest of the world. The resulting drastic reduction in the supply of crude to refineries has sent prices to levels last seen during the summer of 2022. In turn, the price of petroleum-dependent goods from gasoline to fertilizer has spiked, and the impact on food prices can be expected to follow.

In addition to the reduction in the supply of crude oil that has driven up costs for refineries, recent events have also increased costs for shipping companies that own the tankers used to transport the crude. Owners of tankers typically buy separate insurance policies, or layers, to cover ship hulls and machinery, cargo carried, environmental damage, damage to third-party property, and a layer that has hit the news and dramatically increased in price: war risk insurance. Coverage against war risk is more important than ever for slow-moving ships that must leave the Middle East by navigating through a narrow, 100-mile passage that has become high risk due to missiles, drones, and mines.

From the insurance companies’ perspective, exposure for the combined lines can easily exceed $1 billion per voyage. The Economist reported that 46 fuel tankers sailed the Strait of Hormuz every day before the war. That amounted to $46 billion of exposure every day. Any backstop provided by the government to supplement or replace private-market coverage would need to be massive. Compare potential marine-related losses of $46 billion a day to Hurricane Katrina losses that totaled about $100 billion. 

This report provides an overview of the various layers of marine coverage, market share of the insurance companies providing ocean marine business based on ocean marine premiums reported in statutory financials, and guidelines to learn more about marine premiums using footnotes in the statutory financial statements.

A summary of core marine insurance layers, and the risk each layer covers, is presented below. 

Core Marine Insurance Layers

Hull & Machinery (H&M)

• Physical damage to the vessel (hull, engines, onboard equipment)

• Collision damage (to some extent)

• Salvage costs related to the vessel 

Protection & Indemnity (P&I)

• Oil pollution liability (major exposure for tankers)

• Crew injury/death

• Third-party property damage (e.g., ports, docks)

• Wreck removal

• Cargo liabilities (limited, depending on cause)

Cargo Insurance

• Loss or damage to the oil cargo (e.g., crude, refined products)

War Risk Insurance

• War, terrorism, piracy, confiscation, strikes

• Damage or loss due to hostile acts

Excess Liability / Umbrella

• Additional layers above P&I limits

Kidnap & Ransom (K&R)

• Covers ransom payments and crisis response (piracy hotspots)

Environmental / Specialty Pollution Covers

• Supplements P&I in certain jurisdictions

Mortgage Interest Insurance

• Protects lenders financing the vessel if primary insurance fails 

From the statutory financial users’ perspective, a focus to dig into a company’s marine insurance coverage should start with any ocean marine line of business disclosed in NAIC statutory documents. This business is reported as a separate line item, but it aggregates premiums for coverage such as hull, cargo, and limited liability. War risk premiums are also aggregated into ocean marine and are typically co-insured with a Lloyd’s of London syndicate.

Schedule P is another statement that provides clues on the extent a company may write war risk premium as war risk insurance within the ocean marine loss triangle will emerge from the data as patterns of low frequency but high severity losses.

Further clues about war risk premiums can be found in the reinsurance note (marine and specialty risk transfer, cat and geo exposure) and risk and uncertainty disclosures (shipping lanes, conflict regions).

Schedule T may provide geographic clues by reviewing how premiums are allocated to international jurisdictions and where marine hubs are located.

The largest exposure for insurers is the P&I layer, which is not included in ocean marine premiums. Instead, this coverage is provided by member-owned mutual associations, or P&I clubs, made up of mutual insurers that pool liabilities for members. Examples of such clubs include UK P&I Club, and NorthStandard. 

Market Share of Marine Insurance

The companies shown below are the top US-based writers of marine insurance, ranked by premium, and can be surfaced using the FactSet market share functionality found within Sectors & Insights. With two exceptions, all companies in 2024 wrote ocean marine business profitably with similar combined ratios.

Source: FactSet

By far, the largest writer for the 5 years shown below has been AIG. Of note, AIG also maintained an impressive ~75% combined ratio, which compares favorably to other top writers.

Source: FactSet

AIG’s marine insurance business is primarily written within the National Union Fire Company of Pittsburg subsidiary (red box below). 

Source: FactSet

Loss trends for this subsidiary’s ocean marine business can be viewed by selecting the Special Liability line of business from the drop-down menu within the Schedule P functionality found in the left-hand pane below. The ocean marine business is the largest business by premium within special liability business (see above). Loss trends for the special liability business, including ocean marine, are included in Schedule P shown below.

Source: FactSet

For the most recent year reported and not surprisingly, no spikes in claims emerged that would indicate severity associated with war risk insurance. However, if tension in the Middle East escalates and war-related claims emerge, this line of business within Schedule P is one place in the statutory statements where AIG's losses would surface for war-related premiums that have not been reinsured.

How to Access FactSet Insurance Insight Reports

You can view our insurance insight reports using the Document Search function in the FactSet Workstation. As shown in the red box below, within document search use the text string “Insurance Tracker: Event of the Week” to return all reports published.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.