War risk costs spill over into oil prices

The pricing of war risk in shipping has now shifted from freight rates to insurance, translating into a tangible cost per barrel — a development of critical importance for the oil market.

Amid the escalation in the Middle East and the stressing situation around the Strait of Hormuz, war risk premiums for a single transit have surged to rates reminiscent of acute crisis periods.

According to Federal Reserve data, for a typical VLCC carrying approximately 2 million barrels, a 2% war risk premium on a vessel valued at 100 million dollars equates to a 2 million dollar insurance cost — or roughly 1 dollar per barrel attributable solely to insurance.

At a 3% premium, the cost rises to approximately 1.5 dollars per barrel, while at 5% it reaches 2.5 dollars per barrel. Should premiums climb to 10%, the pure insurance component alone could exceed 5 dollars per barrel.

Between March 1-3, premiums increased to 0.5%–1%, they reached approximately 3% by March 6, and approached 5% around March 19.

At the same time, market reports point to cases where pricing widened further, with indications of a 4%–10% range for certain risk profiles.

A second defining feature of the current crisis is availability.

The Lloyd’s Market Association (LMA) has emphasized that the constraint on vessel movements is not a lack of insurance, but rather the assessment by masters and shipowners that the risk to crew and vessel is excessively high.

The LMA further noted that war risk policies incorporate cancellation and repricing mechanisms, allowing premiums to remain largely nominal in peacetime and to adjust dynamically as threat levels escalate — as observed in Ukraine and the Red Sea.

Based on industry data, insurers and war risk underwriters are currently operating along three main axes: per-transit repricing, based on stricter differentiation by flag, ownership, cargo, loading/discharge ports and routing; stricter underwriting terms, including restrictions for specific risk profiles, requirements for enhanced security measures, and special clauses that constrain operational flexibility; and active exposure management, whereby underwriters reduce their risk appetite during periods of heightened volatility.

In this environment, other solutions are also emerging, including announcements by US President Donald Trump regarding an alternative insurance support mechanism.

The America’s Development Finance Institution (DFC) has outlined a rolling plan of up to 20 billion dollars, coordinated with coverage initially expected to focus on hull and cargo insurance, “only for vessels meeting eligibility criteria” — although detailed terms and conditions have yet to be clarified.