Mumbai: The US-Iran deal to end the war in West Asia is likely to lead to some immediate correction in insurance pricing as supply chain pressures ease and aviation picks up, industry expert said. However, a broader normalization of pricing could take some time to materialize as marine policy covers are expected to remain under stress, they said.
The immediate correction will largely be a knee-jerk correction as movement resumes through the Strait of Hormuz, but material softening would be dependent on several factors such as the longer term peace conditions, volume of movement through the Strait, and the amount of claims received by insurers till the time the policies come up for renewal, the experts said.
"We will probably see some bit of reaction from international markets, that is on the facultative side, for bigger risk, where you need international support and where the client will probably ask for the lead terms of say, Chubb, Arch or any Lloyd's syndicate,” said Prateek Singhal, executive president and head of reinsurance at Howden Insurance Brokers India.
Uncertainty prevails
"This is a deal, but the fineprint is not yet out. And I think there's still a decent gap between the cup and the lip. So, there's a lot of discussion,” Singhal said, adding that he expects global prices to see “some bit of correction” in the next 15-20 days.
While the US-Iran peace deal has been announced and the signing is set for Friday, similar agreements have fallen through in the past, experts said, adding this is a risk that insurers would want to stay away from till there is more certainty. In such a scenario, insurers are likely to be more cautious and take some time to react while they assess their claims and future risk scenarios.
Hari Radhakrishnan, a sector expert with the Insurance Brokers Association of India (IBAI), believes even the immediate correction could take a few weeks, as currently there is no transit happening in the Strait of Hormuz. “Those that are taking place are clandestine in nature,” he said, adding that such transits are usually not covered by insurers.
"There will be some sort of a waiting period. Even when an agreement is signed, it can still fall apart,” he said, adding that a lot of shipping contracts were cancelled because of the war and insurers are now handling and pricing them on a case-to-case basis now, leading to significantly higher premiums being quoted in several cases.
Trade movement in focus
The prolonged conflict created severe uncertainty regarding both the availability and pricing of war perils insurance and reinsurance for maritime risks, said Hitesh Joshi, executive director with an additional charge of chairman and managing director at General Insurance Corp (GIC Re). This instability triggered an acute escalation in marine cargo and hull premiums, with rates fluctuating in tandem with the varying intensity of regional tensions.
Most cargo ships being directed through other routes, such as those through Africa, which tend to take much longer. This has not just increased cargo disruptions and travel durations but also raised risks for insurers till there is normalization of trade cargo through Hormuz.
"There are a number of covers like marine hull, war, terrorism, where the coverage is not available,” Howden’s Singhal said, adding that this also led to the government-backed marine pool being set up in collaboration with state-owned GIC Re.
In an interview with Mint last week, Joe Peiser, global chief executive of risk capital at Aon Insurance Brokers, said that while insurers are criticized for cancelling insurance when there is a war or conflict, insurers do it to reprice the cover as per current risks. “Insurers tend to reprice the insurance, they don't walk away. That's how the business has been done for 300 years,” he said, adding that the alternative is to pay a higher price all the time, which nobody wants. “The tried and true mechanism is to have the price follow the actual risk.”
Higher claims to hurt
There is also a challenge in the expectation of higher claims for insurers due to supply chain disruptions. This is likely to result in higher claims settlements and outgo and a hit on margins for insurance companies, IBAI’s Radhakrishnan said.
"It's not just pricing, there will also be claims pressure and earnings pressure that will spill over to the rates. They have to balance their books, so they have to collect more money, and they will pass on the cost to the market,” he said.
Aon’s Peiser told Mint that globally, shipping claims have so far been “significant but not dramatic” and manageable for the insurance industry. “The private market is responding. And in London, where most of this insurance is done, is responding,” he said.
As a result, the immediate fallout of this peace deal will likely be a stabilization and gradual easing of premium rates for war perils in the region, according to GIC Re’s Joshi. However, in the longer term, the insurance and reinsurance industries are expected to adopt a “cautious, wait-and-watch approach”.
“Marine underwriters will closely monitor the sustainability and enforcement of the peace process. Consequently, the formal categorization of the region as a high risk area (HRA) is expected to remain in place for some time,” he said.
As such, one of the sectors expected to see some immediate relief in pricing is aviation, which has been hit not just due to travel restrictions but also higher energy prices and fuel constraints.
“Because of drone attacks and such, there are a lot of restrictions. Even if the aircraft is on the ground or stationary, it can also be damaged, which was a huge concern,” said Radhakrishnan, adding that now at least those risks will be reduced.