SERVICES

The Middle East, a testing ground for the insurance sector / INTERVIEW

Genoa - Wars, pirates, international tensions: the region is a shifting crucible. A conversation with Francesco Ferrari (First)

Genoa - The Middle East is a difficult region, truly the testing ground for marine insurers; they are constantly struggling to come up with new solutions to offer marine insurance to operators who carry out shipping in areas that over the last decade have witnessed a succession of civil wars, acts of piracy, terrorist threats and military aggressions. But what are the most serious challenges in this region? “The hotspot right now,” explains Francesco Ferrari of Genoa-based insurance brokerage company, First, “is Yemen, where there is an ongoing war. Some ships have been attacked, even with rockets. The problem has a political dimension.” Ships that want to access this area have to take out special insurance cover for war risks. “Rates,” Ferrari pointed out, “have risen sharply for ship hull and machinery cover, with some insurers going as far as refusing to cover the risk. Aden and Hodeidah, Yemen’s most important ports, while fully operational do not guarantee adequate security conditions.”

Premiums for additional insurance, then, are very high. Shipowners sometimes decide not to operate in Yemen, or to forgo insurance coverage, taking risks that Ferrari sees as very significant. A similar situation exists in Libya, where almost all ports are operational, b ut owners have to pay costly extra premiums for war risk insurance. A ship that may be worth $25 million can end up paying up to $60,000 dollars in extra premiums. Two years ago, the scourge in the Middle East was not war, but piracy in the Gulf of Aden. “At that time, we utilized insurance instruments called Kidnap and Ransom, which had been devised by UK insurers,” r ecalled Ferrari.

Even then, while some shipowners went along with the higher premiums that applied to policies of this type, o thers undertook navigation at their own risk. As, over time, acts of piracy began to drop, the premiums followed suit, until, with the establishment of the convoy system, which guarantees greater protection from attacks, many insurers have stopped marketing these policies. In a depressed freight rate market any increase in costs affects shipowners’ balance sheets significantly. Today, t he problem of piracy is more significant in West Af rica than in the Gulf of Aden.”

***

To illustrate the insurance market’s changing nature, Ferrari recalled how, in West Africa, until recently, the Ebola virus represented a real threat, and that then, as well, the insurance industry came up with a specific insurance product for shipowners, against the risk of the ship being put under quarantine by authorities. I n the Middle East, Iran represents another unknown. It’s a country in part still under sanctions, but now Iran is open for business, and shipowners are indeed operating there. The P&I insurance Clubs in the past could not offer coverage, w hich was then prohibited.

While at present the sanction regime has been eased, there is still a blacklist of people and companies connected to Iran’s nuclear programme that remain under sanctions . The Clubs are able to provide insurance only if the parties that undertake the shipment are not included in that list. Insurers have to know the names of those involved in the shipping, from that of the shipper to the receiver. If even one name is contained in that blacklist, insurance coverage is refused.”

The complexity of the Iran case is revealed by the so-called “snap back clause”. What is it, exactly? “At present the Clubs are able to cover accidents there. But they warn that if they’re requested to issue a letter of guarantee on behalf of the insured party, that letter’s effectiveness is conditio ned to Iran remaining free of international sanctions.” In fact, the end of the sanction regime was decided following an international agreement, which, however, is subject to verification. If the terms are not met, the agreement is void. And so “if the country were to have sanctions again, the guarantee of insurance would be voided.”

To give a concrete scenario: if due to a ship collision, a quay in the port of Bandar Abbas gets damaged, the Club issues a letter in which it undertakes to cover damages; but if Iran is sanctioned again, the damages will not be covered. It follows that as Iranian port authorities will not recognize that clause, the letter of guarantee will not prevent the shipowner from the possibility of having his ship seized. “Another challenge in doing business in Iran are bank transactions, which are carried out in US dollars and go through US banks, that block them.” Nevertheless, explained Ferrari, the interest of P&I insurance Club associations for Iran remains high. The Iranian merchant fleet is being reborn and lacks insurance, apart from that which a small domestic club is able to provide, and it is in the interest of firms, including Italian ones, such as Fratelli Cosulich and Rina, that solutions be found.

Pressed for time?

Get the best news of the week in your inbox

Subscribe ››