Morningstar DBRS, the international credit ratings and research firm, has said that a proposal by the government of the United States to support insurance for vessels travelling through the Strait of Hormuz may not be sufficient to rapidly restore commercial navigation in the region.
In recent commentary, Morningstar DBRS states that the escalation of conflict in the Middle East has significantly disrupted shipping through the strategic waterway, which normally carries around one fifth of global oil supply as well as substantial volumes of seaborne gas.
Morningstar DBRS explains that the deterioration in the security environment has sharply increased the risks facing commercial shipping. The firm says that several marine insurers have either withdrawn or restricted war risk cover for vessels operating in the Gulf region, leaving shipowners with limited options for insurance protection.
According to Morningstar DBRS, this has contributed to a growing number of vessels remaining anchored outside the strait as operators weigh the dangers of entering the area. The firm notes that oil tankers have already been targeted during the conflict, reinforcing concerns about potential loss of life, environmental liabilities and the destruction of high value maritime assets. Morningstar DBRS adds that although some cover remains available, the cost of war risk insurance has increased considerably.
Morningstar DBRS says that in response to the disruption, the administration in the United States has proposed that the US International Development Finance Corporation provide political risk insurance and financial guarantees for vessels travelling through the strait.
The proposal also considers the use of naval escorts to accompany tankers through the region. Morningstar DBRS explains that the objective is to rebuild confidence among shipowners and ensure the continued flow of energy supplies through one of the world’s most important maritime routes.
Under the plan described by Morningstar DBRS, the agency could either offer insurance cover directly or reinsure private insurers, potentially using authority granted under the Merchant Marine Act of 1936, which allows the US Maritime Administration to issue war risk insurance and reinsurance.
However, Morningstar DBRS argues that government provided primary insurance may have limited impact on the current backlog of vessels waiting to pass through the strait. The firm states that the main constraint affecting shipowners is not simply the availability of insurance but the elevated operational risk associated with the conflict.
Morningstar DBRS notes that missile strikes, drone attacks and damage to vessels have raised the probability of losses. According to Morningstar DBRS, insurance cover does not reduce the underlying physical risks faced by crews and ships. As long as security conditions remain unstable, Morningstar DBRS says that some shipowners may continue to avoid the route even if government backed cover becomes available.
Morningstar DBRS also states that naval escort capacity could prove limited when compared with the normal volume of shipping passing through the waterway. The firm explains that the Strait of Hormuz typically handles dozens of large tankers each day. Morningstar DBRS notes that even if convoy arrangements are introduced, the available naval resources may limit the number of vessels that can be escorted at any given time, which could slow transit and delay efforts to clear the backlog of ships waiting to cross.
Another consideration identified by Morningstar DBRS is the potential effect of direct government insurance on the private marine insurance market. The firm explains that specialist marine insurers and protection and indemnity clubs have significant expertise in underwriting war risks and handling complex maritime claims.
Morningstar DBRS says that if government insurance were offered at subsidised rates it could encourage further withdrawal by private insurers, which would concentrate risk exposure on the public balance sheet.
Morningstar DBRS suggests that a public private risk sharing arrangement could provide a more effective alternative. The firm points to the framework established under the Terrorism Risk Insurance Act following the September 11 attacks as a possible model. Morningstar DBRS explains that under this structure the federal government does not provide primary insurance cover but instead acts as a financial backstop once industry losses exceed a predetermined threshold.
Applying a similar approach to marine war risk insurance could help stabilise the market while preserving the role of private insurers, according to Morningstar DBRS.
The firm says that insurers and protection and indemnity clubs could continue underwriting voyages through the Gulf, while government support would be activated only in the event of exceptionally large aggregate losses. Morningstar DBRS says that such a framework would help maintain underwriting discipline, preserve established claims management processes and support the continued availability of private sector capacity.
Morningstar DBRS also notes that policymakers could consider temporary mechanisms such as premium support or government guarantees designed to ensure shipowners retain access to war risk insurance while the market adjusts to the evolving risk environment.
The firm explains that war risk premiums often rise sharply during periods of conflict, which may discourage shipowners from entering high risk areas even when insurance cover remains available. According to Morningstar DBRS, targeted support could help maintain shipping flows without displacing private insurers.
The firm also says it remains unclear whether any insurance backstop or naval escort programme introduced by the United States would extend to vessels that are not flagged, owned or operated by US interests. Morningstar DBRS observes that many of the vessels currently waiting near the strait are not connected to the United States.
The firm also emphasises that any insurance initiative would likely need to be supported by stronger maritime security coordination, including expanded multinational naval patrols, convoy systems and intelligence sharing, to reduce the risk of attacks on commercial shipping.
From a credit perspective, Morningstar DBRS says the disruption highlights the critical role that marine war risk insurance plays in supporting global energy supply chains. The firm states that a prolonged withdrawal of coverage could raise freight costs, disrupt shipments of oil and gas and increase volatility in energy markets.
Morningstar DBRS concludes that while government intervention may be necessary during periods of geopolitical tension, policies designed to complement rather than replace private insurers are more likely to sustain the functioning of the market.
According to Morningstar DBRS, a public private framework similar to the Terrorism Risk Insurance Act could offer a more durable solution and help restore confidence among shipowners and marine insurers operating in the Gulf region.
“War risk premiums can increase sharply during periods of conflict, which may discourage shipowners from transiting high-risk regions even when coverage remains available,” added Marcos Alvarez, Managing Director, Global Financial Institution Ratings. “Targeted support mechanisms could help maintaining shipping flows without displacing private insurers from the market.”
