War Risk Insurance & Tanker Rates Explained

Before a single shot is fired, the insurance market prices in the risk. War risk premiums and tanker spot rates are the earliest financial indicators of a Hormuz crisis — often moving days before oil prices fully adjust.

What Is War Risk Insurance?

Standard marine hull and cargo insurance explicitly excludes losses from war, terrorism, mines, and military action. Ship owners must buy separate war risk insurance to cover these perils. This is typically a percentage of the vessel's insured value.

A modern VLCC (Very Large Crude Carrier) is valued at $100\u2013150 million. At the normal premium of 0.15%, war risk coverage costs roughly $150,000\u2013225,000 per voyage. During a crisis, with premiums at 5%, that jumps to $5\u20137.5 million — per transit.

Types of Maritime Insurance

Hull & Machinery (H&M)

Covers: Physical damage to the ship

Paid by: Ship owner

In a crisis: War risk exclusion — must buy separate WR cover to enter high-risk zones.

P&I (Protection & Indemnity)

Covers: Third-party liability: pollution, crew injury, cargo damage, wreck removal

Paid by: Ship owner, via P&I Club

In a crisis: P&I Clubs issue additional premiums or exclude war zones entirely. Some refuse cover for Hormuz transit.

Cargo Insurance

Covers: Value of the oil, LNG, or goods being transported

Paid by: Cargo owner (oil company, trader)

In a crisis: War risk surcharges are passed through to the buyer — ultimately raising the landed cost of crude.

Loss of Hire

Covers: Lost revenue if the ship is detained, damaged, or waiting

Paid by: Ship owner

In a crisis: Premiums spike when vessels face seizure risk (e.g., Iranian IRGC Navy boarding).

How War Risk Premiums Are Set

War risk insurance is primarily underwritten at Lloyd's of London and through the London insurance market. Rates are set by the Joint War Committee (JWC), which maintains a list of high-risk areas. When a region is added to the JWC Listed Areas, insurers automatically raise premiums or require additional cover.

What Triggers a Premium Spike

•JWC adds or expands a listed area (e.g., Persian Gulf, Gulf of Oman)

•A vessel is attacked, seized, or mined in the region

•Military forces issue navigation warnings or threat assessments

•Diplomatic negotiations break down or military posturing escalates

•Insurers observe vessels diverting away from the strait (signals underwriter concern)

Tanker Spot Rates: The Worldscale System

Tanker rates are quoted in Worldscale (WS) points. Worldscale is a standardized index where WS 100 represents a base freight rate for each route, recalculated annually. Actual rates are expressed as a percentage of this base.

Normal Market (WS 40\u201360)

• VLCC AG-to-East (TD3C benchmark)
• ~$1.5\u20132.5 million per voyage
• Reflects balanced supply/demand
• Ship owners earn modest returns

Crisis Market (WS 150\u2013300+)

• Fewer ships willing to transit
• $5\u201315+ million per voyage
• War risk surcharges added on top
• Some charterers refuse the route entirely

The TD3C benchmark (Arabian Gulf to East Asia VLCC route) is the most-watched rate for Hormuz exposure. It is published daily by the Baltic Exchange and is the basis for tanker freight derivatives traded on ICE and CME.

Who Ultimately Pays?

Insurance costs and tanker rate spikes don't stay with shipowners. They cascade through the supply chain.

Cost Cascade

Underwriters. Set premiums based on risk. Profitable until a major loss event.

Ship owners. Pay premiums and pass costs to charterers via higher freight rates.

Oil traders/charterers. Add freight and insurance costs to the delivered price of crude.

Refiners. Pay higher crude acquisition costs. Pass through to wholesale fuel prices.

Consumers. Pay at the pump, in heating bills, and in higher prices for goods.

Historical Precedent: The 1984\u201388 Tanker War

During the Iran-Iraq War, both sides attacked commercial tankers in the Persian Gulf. Over 400 vessels were hit. War risk premiums for Gulf transit rose from under 0.1% to over 5% of hull value. The cost of shipping crude from the Gulf roughly tripled.

The crisis led to the US Navy's Operation Earnest Will — the largest naval convoy operation since World War II — and permanently changed how maritime war risk is priced. The modern JWC Listed Areas system evolved directly from this experience.

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