Oil makes the world go round, insurance is the lubricant

You can also listen to this podcast on iono.fm here.

SIMON BROWN: I’m chatting with Meryl Pick, portfolio manager at Old Mutual Investment Group. Meryl, appreciate the time. We’ve got the conflict in Iran and obviously the tragedy of lives lost, with market volatility and complexity. The Strait of Hormuz – you’ve written a great point, saying that this really is what’s stressing the market and, more than anything, it’s about insurance.

MERYL PICK: Yes, Simon, it’s an interesting point. I think we’re at a point in time when we are being reminded that oil makes the world go round. It’s the invisible thing, with all its derivatives, from plastics to ammonia. We’re being reminded of the full oil/petrochemical chain and its impact. So if oil makes the world go round, then insurance is the lubricant.

It is the invisible lubricant that makes oil go round the world, literally, because what we are seeing and have seen since the 5th of March is vessels unable to sail because they are uninsured.

There are, broadly speaking, three categories of that insurance, and specifically war insurance categories. So, hull war insurance – think of it as the car insurance for the ship, the physical ship, which is mostly covered by the likes of Lloyds and a few specialist war underwriters.

Then there’s protection and indemnity, which is for third-party liabilities arising from the war, crew casualties, the cargo itself, pollution. So there is a club of kind of ship owners that reinsure or self-insure each other – not for profit. So it’s like a pooled situation.

And then there’s separate specialist war underwriters, as well as the clubs that do crew life insurance. It’s quite complex. The unions for the seafarers, for example, have also been advising their members not to sail, which absolutely makes sense.

Read/listen:
Oil drops as Trump pushes back timeline for Iran energy strikes
Sarb ties SA rate path to Iran war timeline
Reinsurers triple ship insurance costs after US torpedo attack
Strait of Hormuz: Is SA missing an opportunity?
Hormuz escape route suggests ships navigate on Iran’s terms

So we’ve seen these war-risk premiums skyrocket – or coverage just being withdrawn – since around the 5th of March. Before this conflict, it was a negligible 0.2% of the cost of the ship, for example. It has now gone anything from 1.5% to 5% just for that car insurance part, the Hull war risk insurance.

The ship-owners pools for P&I [protection and indemnity] Insurance seem to just be withdrawn, and it’s unclear. Clearly they need the hot conflict phase to be over before they even consider coming back in.

SIMON BROWN: That’s the key point. It’s not that maybe the insurance is just more expensive. In some cases it is withdrawn. In others I get what the unions are saying: ‘Don’t put your life at risk so that we can get cheaper petrol’.

This all makes sense. And it does mean that the conflict is important, but the process is going to be slow and painful to get back to normality.

MERYL PICK: Some of the precedents that we’ve seen were insurance on grain ships coming out of the port of Odessa following the attack on Ukraine, and then the Houthi attacks in the Red Sea and the impact that had on insurance premiums for that area in the Red Sea. Well, I think in both instances it took at least six months for shipping rates to normalise once the conflict had abated. So that gives us some indication.

I’ve also seen some research that for them to accurately underwrite the risk here and take the actuarial risk, you might need to see measures like mine sweeping – mine-clearance vessels going through – to confirm that there have been no mines laid, or a very definitive stance from the Iranians confirming that there will be no attacks.

Then Donald Trump in the early days of the conflict said that the US would come in and insure ships. He was saying the DFC, the Development Finance Corporation, will ensure ships, don’t worry. Three weeks later we’re still waiting.

But interestingly, there is a legal provision for this in the 1936 provision – yes, he likes to pull laws from quite old law books, so technically it’s possible – it’s Title 12 of, I think, the Merchant Marine Act, which actually does provide for covering commercial vessels in the event of a war – US flagged vessels.

The US Secretary of Transport apparently can put this in place with a simple signature, but the vessels have to be US-flagged, so I’m sure there would be ways around that. That seems to be something that could be invoked instead of the DFC. There’s already a mechanism in place, but the problem is why the US would even want to ensure ships that might be [attacked by] missiles.

So to me it doesn’t make logical sense to invoke that until the hot phase of the conflict is over. But that could be something that could get the wheels turning if the commercial insurers are not ready to come back in.

Read:
Zombie oil tanker exits Hormuz as Trump and Iran trade threats
Iran war fallout: Risks for the Red Sea and Horn of Africa
Trump signals possible end to war, floats removing oil sanctions

SIMON BROWN: We are watching ceasefires and negotiations and missiles flying and all the horrors of war. The signal that we’re really watching for is from the insurers because, to your point, this is oil; this is LNG, liquefied natural gas; this is urea which is fertiliser; it is plastics. It is what makes our global economy work. It’s the insurers we need to keep an eye on.

MERYL PICK: Definitely – those rates. There are several trackers online, particularly the Hull war risk, the Lloyd’s rate, for example. There are many trackers online that are flashing that rate up.

So something that we’re watching for is, if you see that rate start to come down, it means that insurers are gaining some confidence to go back in.

But I don’t think we’re going to see that until there’s some sort of sense that there’s genuine buy into a ceasefire.

Perhaps what we could see here, because the commercial impact is so big, is, instead of waiting for six months for this to normalise – like the Port of Odessa and the Red Sea – if the US really wants to fix what they broke, they could use the sovereign balance sheets and invoke this Title 12.

SIMON BROWN: Yes, we know that the Navy is not going to be helping, because they’re looking at that risk and saying, ‘We don’t like that risk either’ – which perhaps sums it up more than anything. Meryl Pick, portfolio manager, Old Mutual Investment Group, appreciate the time …

Read/listen:
Nations race to secure enough fertiliser and prevent food crisis
Energy prices can reshape monetary policy decisions

Listen to the full MoneywebNOW podcast every weekday morning here.

#Oil #world #insurance #lubricant