War in West Asia: As ships halt Hormuz transits, why insurers are rushing to cancel war risk covers

War in West Asia: Insurance Pullbacks Threaten Hormuz Shipping as Risk Premiums Spike

On February 26, 2026, Lloyd’s of London issued notices to its clients operating in the Persian Gulf, indicating the potential cancellation of war risk insurance for ships transiting the Strait of Hormuz. Behind the move lay a grim calculus: four major tanker incidents in the past two weeks, combined with aerial targeting of oil facilities in Ras Tanura and Fujairah, had rendered the Gulf’s waters among the most dangerous in the world. By March, shipping premiums along this critical chokepoint had surged by over 300%, crippling freight operations and choking crude oil flows.

The significance is stark. The Strait of Hormuz facilitates one-third of global seaborne oil trade—around 17 million barrels per day. Any disruption here imperils energy-dependent economies, including India's. With Brent crude prices spiking to $109 per barrel within days, the economic reverberations of insurance pullbacks are as severe as the geopolitical conflict itself. What the escalating crisis underscores is not merely the importance of Hormuz but the inadequacy of existing frameworks to shield global markets from such fragility.

The Insurance Architecture: Profit Over Security

War risk insurance falls under a burgeoning subset of marine insurance, meant to protect shipping operators and cargo owners in conflict-prone areas. Managed primarily by private syndicates, like those under the International Group of P&I Clubs, these policies account for less than 2% of global marine insurance premiums. Yet their withdrawal can paralyze economies disproportionately: without such covers, vessel owners cannot meet legal or financial contingencies for risks arising from war damage, piracy, or terrorist attacks.

The legal responsibility for regulating this insurance typically rests with national maritime authorities and industry associations, but there is no globally binding regime overseeing the imposition or withdrawal of these premiums. Unlike aviation insurance, which operates under clear Convention on International Civil Aviation (1944) principles, maritime insurers suspend coverage at will, citing uneconomical risk burdens. The Hormuz notices reveal the precarious underbelly of this structure: fleets operating crucial shipping corridors are left to the mercy of insurance boardrooms, not international stability frameworks.

The Straw That Breaks the Economies

For India, the implications are dire. Fifty percent of India's oil imports traverse the Strait of Hormuz, making it highly vulnerable to erratic freight costs and energy price shocks. Indian shippers, already grappling with rupee depreciation and high energy-linked input costs, cannot afford six-digit war insurance premiums for Gulf operations. The Indian Oil Corporation (IOC) and other state-run entities scrambling to secure alternative supply routes are unlikely to offset the broader macroeconomic damage if Gulf access narrows.

Despite some mitigation from the government’s Strategic Petroleum Reserves (SPR)—currently stocked at 39 million barrels—the buffer covers only 9.5 days of consumption at current rates, far below the International Energy Agency’s (IEA) 90-day standard. Additionally, the lack of any region-specific risk-sharing framework within SAARC or with Gulf Cooperation Council (GCC) states highlights systemic preparedness failures. India’s Energy Policy (2017) envisioned supply diversification but has yet to invest adequately in alternative corridors like Oman pipelines or Gwadar routes.

Critics argue that India’s strategic navigation fails to leverage one critical advantage: the International North-South Transport Corridor (INSTC). The multimodal logistics project remains underdeveloped, with ports like Chabahar handling under 15% of projected capacity. Ironically, while U.S. sanctions against Iran constrained India’s investments here, the West Asia war recalls precisely why diversifying oil routes beyond Hormuz aligns as both strategy and necessity.

A Comparative Lens: Japan’s Shipping Insurance Response

The comparison with Japan is instructive. In 2012, during heightening Iran-U.S. sanctions, Japan’s government stepped in through the Act on Compensation for Damages to Specified Ships. The legislation allowed Tokyo to indemnify its tankers, effectively relieving domestic shippers from private insurer volatility. By contrast, India lacks an equivalent contingency structure to stabilize commercial losses during such crises. Moreover, Japan coupled its intervention with investments in diversified LNG (liquified natural gas) sourcing from Southeast Asia. Without such fiscal or strategic agility, India remains exposed to premium price shocks and energy insecurity.

Structural Tensions: Who Governs Global Shipping Risks?

At the heart of the crisis lies a larger institutional criticism: Why are maritime risks still governed by largely private arrangements when they affect state-level security and humanitarian stability? Unlike climate finance frameworks, where state-led multilateral institutions have emerged to pool climate catastrophe risks, shipping’s reliance on for-profit insurers creates an enormous disparity between the stakes for states and the leverage of insurers.

The International Maritime Organization (IMO), while charged with ensuring safe and secure shipping, has had a marginal presence in defining conflict-zone protocols. The IMO’s 2022 resolution calling for enhanced maritime security coordination between member states now reads as aspirational, strengthening skeptics’ claims that its soft-law model lacks enforcement heft. Even the European Maritime Safety Agency (EMSA) falls short of stepping into these zones, hindered by budgetary limits and political hesitations.

Meanwhile, the Gulf Cooperation Council (GCC), despite its centrality in Hormuz shipping, appears reluctant to advance policy safeguards. Reliance on wealthier members like Saudi Arabia to subsidize premium hikes proves inadequate, as GCC policy remains fragmented along sectarian and national alignments. Here lies the political economy dilemma: stakeholders most exposed to choke-point disruptions resist unified frameworks lest they undermine sovereignty or the production dominance of leading members.

Future Metrics and Accountability

The crisis could drive two immediate reforms. At the state level, countries like India must assess the viability of regionally shared reserves or public direct premium subsidies, particularly during war-induced market rigging. Payment mechanisms, via digital rupee frameworks or barter trade agreements with upstream exporters like Iraq, could cushion near-term energy liabilities and bypass volatile dollar mediation.

Globally, however, there remains little momentum for reshaping marine insurance into an essential public service function. Unless navigational corridors like Hormuz or Bab-el-Mandeb are collectively treated as global public goods—and financed accordingly—countries will remain vulnerable to both insurer discrepancies and covenant breakdowns during shocks.

Exam Application

For Prelims aspirants, this issue intersects with maritime security, energy policy, and global trade governance. It highlights India’s dependence on chokepoints like Hormuz and the gaps in both domestic and international institutional preparedness.

• Prelims MCQ 1: Which international body is primarily responsible for ensuring safe maritime navigation globally?
  A) International Maritime Organization
  B) United Nations Conference on Trade and Development
  C) International Association of Classification Societies
  D) World Trade Organization
  Answer: A) International Maritime Organization
• Prelims MCQ 2: The Strait of Hormuz is located between which two countries?
  A) Iraq and Oman
  B) Qatar and Iran
  C) Iran and Oman
  D) United Arab Emirates and Iraq
  Answer: C) Iran and Oman

Mains Question: "To what extent is India's energy security architecture capable of mitigating risks arising from chokepoint disruptions such as the Strait of Hormuz?" Critically examine in light of recent maritime insurance developments.

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