A new Moody’s report has warned that the ongoing conflict involving Iran has heightened tail risk for specialty insurers and reinsurers, namely those underwriting complex exposures such as marine war‑risk, aviation and political violence, by increasing the probability of large, concentrated claims if hostilities persist or escalate.
The rating agency’s “baseline scenario” has suggested that the conflict will be relatively short-lived, likely a matter of weeks, and that navigation through the currently blocked Strait of Hormuz, a key transit route for oil tankers, will then resume at scale.
“We expect losses to be manageable for large, diversified insurers in this scenario thanks to their careful risk selection, aggregate claims limits and reinsurance protection,” Moody’s explained.
At the same time, war exclusion clauses will reportedly provide some insulation, although these will likely face legal challenges in some cases.
Still, Moody’s highlighted the potential for prolonged hostilities as an additional risk factor, raising the probability of more severe and complex loss scenarios.
The rating agency continued, “The concentration of high-value assets in the Gulf region increases the potential for loss accumulation relative to other recent episodes of increased geopolitical tension.
“The conflict has led to sustained missile and drone attacks across the Gulf region, and the effective closure or severe disruption of key transport corridors, including the Strait of Hormuz. This has reduced marine and aviation traffic and prompted insurers to reprice or restrict coverage.
“The closure of the Strait of Hormuz creates significant uncertainty for insurers. War risk policies generally include “blocking and trapping” provisions that allow a total loss claim after a prolonged period of detention, commonly 12 months.
“Historical precedents, including the Iran-Iraq war and the Russia-Ukraine conflict, show that such scenarios can result in clustered claims and disputes over aggregation, timing of loss and policy attachment.
“Legal uncertainty also arises, for example, where a vessel becomes trapped while insured, but suffers physical damage after cancellation or lapse of cover.”
“Overall, we expect marine losses to be contained in most scenarios, helped by insurers’ efforts to limit their exposure.
“There is a risk that ships may be detained in the Gulf for longer periods, but we believe the Strait of Hormuz is unlikely to remain blocked for as long as 12 months given its global strategic importance.”
It is worth noting that the U.S. International Development Finance Corporation (DFC) recently revealed that Chubb will serve as the lead partner for its $20 billion Maritime Reinsurance Plan, aimed at restoring commercial shipping in the Gulf and helping to restart energy and trade flows through the Strait of Hormuz.
As we’ve extensively covered, this revolving insurance offering will apply only to vessels that meet eligibility criteria, with insurance focusing on Hull & Machinery and Cargo to start.
Elsewhere in the report, Moody’s discussed the legal uncertainties affecting political violence and terrorism (PVT) and strikes, riots, and civil commotion (SRCC) coverage stemming from the conflict.
Moody’s said, “These policies are often written on an annual basis and do not include cancellation provisions. Although war exclusions are standard, the distinction between war, terrorism and civil commotion is frequently contested, particularly in scenarios involving coordinated attacks or proxy actors.
“Demand for this cover has been rising in response to the conflict, at significantly increased prices. This is positive for insurers’ business volumes in the region but it also increases their exposure to potential further escalation of the conflict.
“We expect PVT insurers will start receiving loss reports as damages from various missile and drone strikes are assessed in the coming days. Media reports highlight one of the first large loss notifications coming in from Bapco Energies, the integrated energy firm in Bahrain that was impacted by attacks on its refinery complex earlier this week.
“SRCC cover, typically embedded within property policies, may respond to civil unrest even where war exclusions apply. This creates potential for litigation over policy triggers and for aggregation disputes, particularly if multiple incidents are characterized as part of a single campaign.
“Reinsurance structures add complexity, as many primary policies written in the Middle East are reinsured internationally, concentrating risk at the reinsurance level.”
The post Specialty re/insurers face increased loss risk from prolonged Iran conflict: Moody’s appeared first on ReinsuranceNe.ws.
