Marine Insurers May Ban Payments to Iran for Hormuz Transits

The Iranian-controlled routes in and out of the Strait of Hormuz (PGSA)

Getting insured for a Strait of Hormuz transit is getting more expensive, and there are more strings attached to staying insured as well. Underwriters at Lloyd's Market Association have come up with an additional, optional clause that can be inserted into policies for passages through the waterway; it allows the insurer to cancel the policy if it turns out that the shipowner has paid a toll to Iran. Meant to protect the insurer from compliance risks, in future it could prevent neutral shipowners from using the route through Iranian waters, where Iran does not attack shipping.

For the insurer, the hazard is clear. The Islamic Revolutionary Guard Corps Navy oversees Iran's section of the strait, and the IRGC is a U.S.-designated foreign terrorist organization. The administrative transactions for passage are handled through Iran's so-called Persian Gulf Strait Authority (PGSA), not itself part of the IRGC but still a division of Iran's government.

Iran is not currently charging for transits of the strait, but its leaders have expressed a clear interest in turning the waterway's operations into a revenue stream in the long term. As tolling is questionably legal in an international strait, the charges could be presented as a "fee" structure, linked to some form of services rendered for safe transits. At least one prominent shipowner has suggested that it would be a good business decision to accept Iranian control and simply pay the fee as a cost of operations.

Payments to the PGSA might be rendered in bitcoin or yuan to keep a low profile, but the funds would ultimately end in the hands of the Iranian banking system and government - and quite possibly the IRGC. Any payment would be a U.S. sanctions violation, and might have other compliance ramifications as well.

For an insurer, this would be a reputational and legal risk. A spokesperson for the LMA told Insurance Business that the new tolling clause sets out "a clear contractual position for insurers and insureds" on the acceptability of such payments. If they are discovered, the ship's cover would be canceled.

Meanwhile, costs of cover are escalating. Reuters reports war risk premiums for Gulf coverage at 3 percent of hull value in early July, and after more recent attacks, some sources indicated that pricing would likely be quoted at 5 percent or more. Prices in this range are a deterrent for trade, as they raise the cost of shipping and can effectively price some commodity trades out of the market.

Per Insurance Business, in the southern sector of the Red Sea - where Houthi rebels have initiated a campaign against Saudi shipping - premiums have risen to 1 percent of hull value. This is north of $1 million per transit for a newer VLCC.

The costs are human, as well. On Thursday, IMO Secretary General Arsenio Dominguez asked vessel operators to put the safety of crewmembers at the forefront when weighing the business decision to transit through conflict zones.

"Seafarers are civilians performing essential work that sustains economies and communities worldwide.?Ship operators must?thoroughly?assess risks?before?transiting the?region.?Seafarers?must never be placed in harm’s way or targeted in situations of conflict or instability," Dominguez said.