With the Strait of Hormuz shut for an extended period by the Iran war, domestic ship insurance premiums have jumped by more than 1,000% at the peak. This is feeding into higher freight rates, increasing the burden on exporting companies and is expected to negatively affect insurers' profitability.
According to materials obtained from the Financial Supervisory Service by Kang Min-guk, a member of the National Policy Committee from the People Power Party, as of on the 13th, there were 26 ship insurance contracts that re-entered war-risk areas such as the Strait of Hormuz and were renewed.
Premium increases varied widely by insurer, from 200% to 1,000%. The biggest jump was at Hanwha General Insurance. One policy that the company joined as a coinsurer soared 1,056%, from 50 million won to 5.8 billion won. Eight policies at Hyundai Marine & Fire Insurance also jumped 553%, from 640 million won to 4.15 billion won. Others were ▲Samsung Fire & Marine Insurance (8 cases) up 334% ▲KB Insurance (6 cases) up 253% ▲Meritz Fire & Marine Insurance (3 cases) up 221%.
The reason premium increases differ by insurer is that reinsurers use different standards to assess war risk. For hull and cargo insurance, a separate war endorsement must be purchased when entering high-risk areas such as the Middle East. When war breaks out, the insurer or reinsurer notifies cancellation of the existing contract within a set period (NOC·Notice Of Cancellation) and signs a new contract at a premium rate that reflects war risk.
Marine insurance is typically underwritten jointly by multiple insurers and then ceded again to reinsurers to spread risk. Because war risk is high, shipowners and cargo owners have no choice but to re-enroll in coverage even at high premiums.
With the Strait of Hormuz closed, oil prices and insurance premiums are rising together, and freight rates are also expected to increase. The Korea International Trade Association said on the 25th that its "emergency task force for logistics difficulties at exporting companies" received a total of 469 reports of export-import logistics difficulties from 193 companies. Among them, 129 cases were delays in operations, including suspended sea transport, the most of any category, followed by sharp freight hikes and war surcharges (117 cases).
Insurers are also expected to see an impact on profitability. Payouts that 11 domestic primary insurers and two reinsurers would have to bear for Middle East hull and cargo insurance are estimated at about 1.8359 trillion won. While that is small relative to the overall insurance market, the actual shock could grow if the Iran war drags on.
Kim Jin-eok, a senior research fellow at the Korea Insurance Research Institute, said, "For Korea, which is highly dependent on Middle East energy, the closure of the Strait of Hormuz will inevitably worsen loss ratios in marine cargo and energy insurance," adding, "It is structurally difficult to reflect a sharp rise in reinsurance expense in premiums in the short term, which could lead to a decline in insurers' profitability."
Financial authorities plan to review insurers' risk factors in preparation for a prolonged war. Insurers are also reviewing support measures for corporations located in the Middle East.
Kang said, "If the war is prolonged, it could negatively affect the financial soundness of domestic exporting companies and financial markets," adding, "If actual accidents push up loss ratios, premiums for other insurance products could rise, so stronger management and supervision by the financial authorities is necessary."