Marine insurance or economic warfare?

Emerging and developed economies in Asia had both better watch out, because the West has discovered, almost by accident, that its stranglehold on the marine reinsurance market gives it the power to arm-twist Asia and get the Orientals to toe the grimy line.

The European Union oil embargo on Iran- OPEC's second largest producer- will come into effect on July 1. A new tactic will be employed amidst the slew of sanctions that have attempted to push Iran into a smaller and smaller corner over its so called 'nuclear programme' for years: in short, insurers in the EU will be barred from underwriting Iranian oil exports after July. Period.  Which means that the billion-dollar coverage against pollution or personal injury claims that a typical supertanker enjoys today will disappear, unless alternatives are quickly found.  As things stand, only five percent of the tankers in the market will be able to carry Iranian oil after July 1, reports say.

The problem is not just that ninety percent of the insurance market- or pool, considering that high-ticket tanker insurance invariably uses some form of reinsurance- is located in and controlled by the West, largely through London. The greater issue is this: the biggest markets for the daily Iranian production of roughly two million barrels of oil lie in the East- in China, India, South Korea and Japan. The EU and the US seem to be using the ban on Iranian oil, over which they are far less dependant, as a weapon in their arsenal to teach Iran a lesson and, at the same time, pressurise Asia- and Russia too, which is in the same boat- into rethinking relationships with Iran.

The pressure on Iran is the prime reason that oil prices have shot up over the last six months. Thing is, this has inflated, enormously, the fuel bills of countries like India that are heavily dependant on the import of fuel. If Iranian oil is denied to these countries by the EU embargo, the impact on their economies will be severe. I could therefore easily call the EU action a form of economic warfare.

Asian countries seem to have woken up to this problem late. In the last few weeks, however, alarm bells seem to have finally sounded as the industry struggles- last minute, as usual- to try to segue around the brick wall of sanctions. Some countries- India is not one of them- do have some insurers and P & I clubs on their shores, but these will prove woefully insufficient to deal with the scale of the requirement- they simply do not have deep enough pockets and they do not have enough of them. Hence one Japanese buyer's unequivocal comment to Bloomberg: "The bottleneck is insurance. If that is not settled, we will no longer be able to transport oil." 

Comments from shipowners, including in India, have been almost identical, although some bravado is displayed from time to time, as when Indian shipowners say they will carry Iranian oil regardless of sanctions, because the Indian Flag's safety record in the region has been excellent and so the chances of a heavy claim are low. If only it were that simple. 

Two of the old boys- Japan and Korea- are said to be trying to get the EU to change its mind, or at least push the July ban date further away, but my sense is that the West has smelled blood with these sanctions, which seem to be hitting Iran- and, almost concomitantly, India and China- hard. My bet is that the EU will push hard for a complete ban in July; I guarantee that the US will be looking over the EU's shoulder while it does so.

Some countries are also considering sovereign guarantees, where the State will pay for any clean up of oil or other damages in the event on an incident. Given that the public sector SCI is likely to be the hardest hit, India too is looking at this option (besides asking Brussels to be exempted from sanctions), and so are Japan and China. India is also pushing its State owned insurance companies to cover up to 50 million dollars worth of potential claims, but this figure is peanuts. Exxon Valdez cost $7 billion to clean up and settle, and that was thirteen years ago. 

Of course, the Americans- old enemies or old friends of Iran, depending how far back you want to go- have been ratcheting up the pressure for a long time. The ban on doing business in the United States for any entity that buys Iranian oil- a US concoction- is being sought to be creatively circumvented by Asian countries. China wants to buy Iranian oil and pay in gold. India wants to barter consumables or pay using the Rupee. The US actions and the present situation- what a US Congressman derisively calls an Iranian "junk-for-oil program”- smacks of economic warfare against Asia too, just like the EU one, though I am sure they will all pretend this is collateral damage.

The war is well and truly on. Under American pressure, Lloyd's Register, for example, has joined a plethora of industries that have stopped- or are stopping- operations in Iran. "The Americans came to us and said that if we continued to work for the Iranians we would be blacklisted in America," Lloyd's CEO told reporters in Singapore last week. 

The bottom line is that the US and the EU have discovered that marine insurance is a potent weapon in their armoury. Having chanced upon this, they will use it repeatedly. Thirsty-for- oil countries like India and China are at particular risk. Given that the conflicts that the West chooses to involve itself in usually have oil at the top of the agenda, it can be safely assumed this risk will not disappear even if the Iranian imbroglio does.

Countries in Asia therefore have no option but to develop- and reasonably quickly- reinsurance capabilities of their own. I am far from an expert on this, but I do not see why we cannot have insurance markets in Singapore, Hong Kong or even (dare I say it) Mumbai that match those in London. Makes economic sense too. 

This strategy will ensure that Asian core interests are not held hostage to the idiosyncrasies of a bunch of Western politicians belonging to States whose antecedents do not inspire confidence at all. Quite the contrary, given the warmongering and illegal invasions-for-private-gain that many of their leaders have inflicted the world with.