<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
SIMON BROWN: I\u2019m chatting with Meryl Pick, portfolio manager at Old Mutual Investment Group. Meryl, appreciate the time. We\u2019ve got the conflict in Iran and obviously the tragedy of lives lost, with market volatility and complexity. The Strait of Hormuz \u2013 you\u2019ve written a great point, saying that this really is what\u2019s stressing the market and, more than anything, it\u2019s about insurance.<\/p>\n
MERYL PICK: Yes, Simon, it\u2019s an interesting point. I think we\u2019re at a point in time when we are being reminded that oil makes the world go round. It\u2019s the invisible thing, with all its derivatives, from plastics to ammonia. We\u2019re being reminded of the full oil\/petrochemical chain and its impact. So if oil makes the world go round, then insurance is the lubricant.<\/p>\n
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.<\/p>\n
There are, broadly speaking, three categories of that insurance, and specifically war insurance categories. So, hull war insurance \u2013 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.<\/p>\n
Then there\u2019s 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 \u2013 not for profit. So it\u2019s like a pooled situation.<\/p>\n
And then there\u2019s separate specialist war underwriters, as well as the clubs that do crew life insurance. It\u2019s quite complex. The unions for the seafarers, for example, have also been advising their members not to sail, which absolutely makes sense.<\/p>\n
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\u2019s terms<\/p>\n
So we\u2019ve seen these war-risk premiums skyrocket \u2013 or coverage just being withdrawn \u2013 since around the 5th of March.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.<\/p>\n
The ship-owners pools for P&I [protection and indemnity] Insurance seem to just be withdrawn, and it\u2019s unclear. Clearly they need the hot conflict phase to be over before they even consider coming back in.<\/p>\n
SIMON BROWN: That\u2019s the key point. It\u2019s not that maybe the insurance is just more expensive. In some cases it is withdrawn. In others I get what the unions are saying: \u2018Don\u2019t put your life at risk so that we can get cheaper petrol\u2019.<\/p>\n
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.<\/p>\n
MERYL PICK: Some of the precedents that we\u2019ve 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.<\/p>\n
I\u2019ve 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 \u2013 mine-clearance vessels going through \u2013 to confirm that there have been no mines laid, or a very definitive stance from the Iranians confirming that there will be no attacks.<\/p>\n
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\u2019t worry. Three weeks later we\u2019re still waiting.<\/p>\n
But interestingly, there is a legal provision for this in the 1936 provision \u2013 yes, he likes to pull laws from quite old law books, so technically it\u2019s possible \u2013 it\u2019s Title 12 of, I think, the Merchant Marine Act, which actually does provide for covering commercial vessels in the event of a war \u2013 US flagged vessels.<\/p>\n
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\u2019m sure there would be ways around that. That seems to be something that could be invoked instead of the DFC. There\u2019s already a mechanism in place, but the problem is why the US would even want to ensure ships that might be [attacked by] missiles.<\/p>\n
So to me it doesn\u2019t 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.<\/p>\n
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<\/p>\n
SIMON BROWN: We are watching ceasefires and negotiations and missiles flying and all the horrors of war. The signal that we\u2019re 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\u2019s the insurers we need to keep an eye on.<\/p>\n
MERYL PICK: Definitely \u2013 those rates. There are several trackers online, particularly the Hull war risk, the Lloyd\u2019s rate, for example. There are many trackers online that are flashing that rate up.<\/p>\n
So something that we\u2019re watching for is, if you see that rate start to come down, it means that insurers are gaining some confidence to go back in.<\/p>\n
But I don\u2019t think we\u2019re going to see that until there\u2019s some sort of sense that there\u2019s genuine buy into a ceasefire.<\/p>\n
Perhaps what we could see here, because the commercial impact is so big, is, instead of waiting for six months for this to normalise \u2013 like the Port of Odessa and the Red Sea \u2013 if the US really wants to fix what they broke, they could use the sovereign balance sheets and invoke this Title 12.<\/p>\n
SIMON BROWN: Yes, we know that the Navy is not going to be helping, because they\u2019re looking at that risk and saying, \u2018We don\u2019t like that risk either\u2019 \u2013 which perhaps sums it up more than anything. Meryl Pick, portfolio manager, Old Mutual Investment Group, appreciate the time \u2026<\/p>\n
Read\/listen:
Nations race to secure enough fertiliser and prevent food crisis
Energy prices can reshape monetary policy decisions<\/p>\n
Listen to the full MoneywebNOW podcast every weekday morning here.<\/p>\n
#Oil #world #insurance #lubricant<\/p>\n","protected":false},"excerpt":{"rendered":"
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