The seemingly unremarkable coffee house on Tower Street, London, established around 1688 by Edward Lloyd, birthed an institution that now silently dictates the flow of global trade. What began as a gathering place for ship captains exchanging intelligence – safe arrivals, losses, pirate sightings – evolved into Lloyd’s of London and the complex financial architecture of marine insurance. Today, a simple phone call from underwriters can halt the movement of a fifth of the world’s oil supply, as demonstrated by the recent events in the Strait of Hormuz.
The Power of the Underwriter’s Decision
In late February and early March 2026, war risk underwriters responded to Operation Epic Fury by cancelling policies for transits of the Strait of Hormuz. This action, initiated by seven members of the International Group of Protection and Indemnity Clubs and quickly followed by the remaining five, effectively shut down tanker traffic through the vital waterway. The International Group covers approximately 90% of the world’s ocean-going tonnage. Without their backing, vessels become economically unviable, unable to secure port entry, cargo, financing, or charters.
The Strait of Hormuz handles roughly 20 million barrels of crude and petroleum products daily, representing a fifth of global demand. Approximately 20% of all seaborne LNG also passes through this 21-mile-wide channel. Prior to the hostilities, war-risk premiums stood at 0.25% of hull value. Within 48 hours, rates surged to 1%, and for vessels with American or Israeli connections, insurance became unavailable at any price. QatarEnergy halted LNG production, and European and Asian gas prices jumped nearly 50% and 39% respectively. Over 150 vessels remained anchored, awaiting orders that didn’t arrive.
A Coordinated Oligopoly and Shifting Risk Appetite
The International Group operates as a tightly coordinated oligopoly of twelve mutual clubs, administered from London. These clubs pool liabilities above USD 10 million. A reinsurance layer of roughly USD 41 billion exists, but explicitly excludes war risks, covering only natural disasters. The simultaneous cancellation by seven clubs left no alternative backstop. European insurance regulation (Solvency II) incentivized withdrawal, as rising geopolitical uncertainty increases capital adequacy requirements.
The Tanker War of the 1980s saw similar premium spikes, but trade continued because war risk insurance didn’t entirely disappear. The critical difference in 2026 was the retrocession market’s refusal to carry the exposure. As Skuld, one of the clubs, stated, “reinsurers’ appetite for war risk exposure is tightening…resulting in reinsurers withdrawing capacity at short notice.” The market effectively ceased to exist. Iran’s naval capacity was crippled in eight hours in 1988 during Operation Praying Mantis; the International Group needed less than seventy-two hours to achieve the same result in 2026 without firing a shot.
The Impact on Crew and Shipowners
The International Transport Workers’ Federation and the Joint Negotiating Group designated the Arabian Gulf, the Gulf of Oman, and the Strait of Hormuz as a high-risk warlike operations area. This triggered a bonus equal to basic wages for each day spent in the zone, double compensation for death or disability, and the right for seafarers to refuse sailing with full repatriation expenses covered. This legal right for crews to refuse passage fundamentally altered the economics for shipowners.
Donald Trump’s response involved the US Development Finance Corporation (DFC) offering to backstop political risk insurance for maritime trade through the Gulf, and US Navy escorts. This underscored insurance as a strategic instrument, demonstrating that control over underwriting equates to control over passage. Iran recognized this, understanding that mining the strait wasn’t necessary; making it uninsurable was sufficient.
India’s Vulnerability and the Need for Self-Reliance
India should be particularly concerned. None of the International Group of Protection and Indemnity Clubs are domiciled in India. The Russian crude situation after 2022 highlighted this vulnerability, as Indian shipowners faced pressure to comply with Western foreign policy directives. In 2023, the Finance Minister acknowledged the need for a full-fledged, India-owned P&I entity, but this has yet to materialize.
India is the world’s third-largest oil importer, possesses a 7,516-kilometer coastline, and has a significant merchant fleet. Yet, it lacks a seat at the table that governs its maritime lifeline. The argument for an Indian P&I entity extends beyond defensive measures against sanctions; it’s about ensuring a nation of India’s size isn’t reliant on institutions it doesn’t control.
The DFC backstop, while available to all, is an instrument of American foreign policy, and its terms can change. The modern monopoly isn’t a flag or a fleet, but a cancellation notice issued from London.
Frequently Asked Questions
What is the International Group of P&I Clubs?
It’s a group of twelve mutual insurance clubs that collectively cover approximately 90% of the world’s ocean-going tonnage, providing protection and indemnity coverage to shipowners.
What is retrocession?
Retrocession is reinsurance for reinsurers – essentially, insurance that reinsurance companies buy to protect themselves against large losses.
Why did insurers cancel coverage in the Strait of Hormuz?
Due to the heightened geopolitical risk and the unwillingness of the retrocession market to provide coverage for war risks, insurers withdrew their policies.
What is Solvency II?
It’s a European Union directive that sets capital requirements for insurance companies, incentivizing them to reduce risk exposure during times of uncertainty.
What is the role of the DFC?
The US Development Finance Corporation is a US government agency that provides financial support to projects in developing countries, often to advance US foreign policy interests.
Pro Tip: Diversifying insurance providers and fostering the development of regional P&I clubs can mitigate reliance on a concentrated market and enhance maritime security.
The cannon has its uses. The underwriter’s telephone has others.
(The author was with the Economic Advisory Council to the Prime Minister)
Disclaimer: These are the personal opinions of the author
