US Moves to Replace Lloyd's on Hormuz War Risk
The U.S. is stepping in to offer sovereign political risk insurance for oil tankers in the Strait of Hormuz after London insurers pulled war coverage. The directive, backed by U.S. Navy escorts, aims to break an "actuarial blockade" and could redirect billions in premiums from Lloyd's of London to the U.S. Development Finance Corporation.
This isn't the first time the U.S. government has stepped into the role of a maritime insurer of last resort. The War Risk Insurance Act was first passed in 1914 to provide coverage for ships and cargo during World War I, establishing a Bureau of War Risk Insurance within the Treasury Department. This authority was used again to support the shipbuilding and supply efforts of World War II. The current intervention follows the withdrawal of war risk coverage by major maritime insurers, including Gard, Skuld, NorthStandard, the London P&I Club, and the American Club. These companies, which collectively insure about 90% of the world's ocean-going tonnage, issued cancellation notices effective March 5th, creating what some have called a "de facto close" of the Strait. The private market's exit was triggered by a rapid escalation of risk, including confirmed missile and drone attacks on multiple commercial vessels. As a result, war risk premiums surged from around 0.2% of a ship's value to as much as 1%, adding hundreds of thousands of dollars to the cost of a single voyage. The Joint War Committee at Lloyd's also expanded its list of high-risk areas to include waters around Bahrain, Kuwait, Oman, and Qatar. The U.S. International Development Finance Corporation (DFC), a government agency formed in 2019, has been tasked with providing this new political risk insurance. The DFC's stated mission is to mobilize private capital for global development projects, and its CEO, Ben Black, indicated the agency had been preparing a contingency plan for months to minimize market disruptions. This move is reminiscent of Operation Earnest Will during the "Tanker Wars" of the late 1980s, when the U.S. Navy escorted reflagged Kuwaiti tankers. However, some analysts express skepticism, noting that U.S. law may not permit the Navy to escort foreign-flagged vessels and that the naval fleet may lack the capacity for extensive escort duties while military operations are ongoing. The disruption has had an immediate impact, with shipping traffic through the critical chokepoint dropping by as much as 80-94% after the insurance cancellation announcements. At least 150 vessels, including 40 Very Large Crude Carriers, were reported to be idling in the Gulf, unable or unwilling to transit without insurance. Container lines like Hapag-Lloyd have already imposed war risk surcharges of $1,500 per standard container.
