US explored tying naval escorts in Strait of Hormuz to government insurance
Vessels seeking protection may be required to take out cover from programme run by Development Finance Corporation
The Trump administration has explored plans to require ships escorted by the US Navy through the Strait of Hormuz to buy US government insurance, according to people familiar with the discussions.
US President Donald Trump has said that the US would insure commercial vessels seeking to transit the strategic waterway, as its near closure has forced ships to idle in the Gulf and pushed Brent crude prices to more than $105 a barrel.
The Development Finance Corporation, the government’s international investment arm, unveiled a plan earlier this month to provide up to $20bn reinsurance to support vessels through the strait that would be combined with naval escorts.
The administration has since considered requiring ships that want a navy escort to buy insurance under a programme run by DFC along with Chubb, a private insurer, instead of buying commercial insurance in the private market.
It remains unclear if the Trump administration will proceed with the mandatory component of the programme, which senior industry figures believe could generate tens of millions of dollars in profit provided ships were not struck by Iran.
Under the model discussed, ships seeking US military escort through the Strait of Hormuz would be required to purchase the US government’s insurance for hull, machinery and cargo, according to insurance market figures directly in touch with the DFC.
However, there remains considerable uncertainty over whether the naval protection promised by Trump will be made available. Two people added that coverage was not expected to be available for at least a week.
The US Navy is trying to work out how it could provide escorts without risking damage to its ships which would be vulnerable to Iranian attacks from drones, missiles and fast boats loaded with explosives.
As of Tuesday, commercial insurers were offering to cover transit through the Strait of Hormuz without a military escort for about 3 to 5 per cent of the value of a ship. This meant that a tanker worth $100mn would pay roughly $3mn to $5mn for cover, reflecting an expectation by insurers of a “total loss” of as many as one in 20 vessels.
But most ships have declined to buy such cover as shipowners and crews have been deterred by Iranian threats to strike vessels passing through the vital trade chokepoint.
DFC’s preliminary work fleshing out a mandatory insurance model has angered some commercial insurers, who argue that ships escorted by military vessels could buy cover from private markets.
Multiple insurance brokers familiar with the DFC’s discussions said it had envisaged prices closer to 1 per cent of the insured cost, or about $2mn in premium for a tanker with an insured value of $200mn.
In addition to Chubb, the DFC has also been in talks with American International Group (AIG) about insuring the scheme, the FT first reported.
An insurance facility backed by the DFC in Ukraine, set up to support private sector investment in the war-torn country, has been “very profitable” for the agency as it faced just one claim in the last year, according to a person familiar with the structure.
But insurance executives are not sure whether oil tankers and other vessels will sail through the Strait of Hormuz under the protection of a US naval convoy if one can be arranged.
“I don’t know if the naval accompaniment is going to be a deterrent or an attractive nuisance” for Iran, one executive at an insurance broker said.
DFC said its insurance plan would “protect ships transiting the Strait of Hormuz while under US military escort if and when such escorts begin”.
The US defence department and Central Command, which oversees American military operations in the Middle East, both declined to comment on whether the US Navy would only provide escorts to ships that took out insurance cover from DFC.