With oil importers being forced to buy higher insurance covers for the crude being brought in, reinsurers are turning cautious.
Indian insurers are facing the heat in the wake of recent events involving US and Iran. Even as oil importers are being forced to buy higher insurance covers for the crude transported to India, reinsurers are turning cautious by increasing premium.
Without adequate insurance, importing crude oil is very risky. Crude oil used in the production of a range of fuels is heavily imported by India and a drop in quantity impacts an array of industries including aviation, transportation and cosmetics/retail among others. Firms from the Middle East that export crude oil do so only once there is insurance available for the shipment by the importer.
"It is a tough period because treaties are also set to be renewed for providing reinsurance cover. Rates are going up and refiners have not agreed to the hike," said a senior insurance executive.
If crude oil import gets impacted, the prices of existing goods like petrol, jet fuel as well as cosmetics will increase. Companies exporting oil will not do so unless they have a complete insurance.
Insurance covers are equal to the quantum of crude oil imported. In 2019, Iran was providing shipping and insurance to India's state-owned refiners. However, that cover is turning out to be inadequate now.
On January 14, the United States said that there are threats to commercial vessels in and around the Persian Gulf due to the ongoing tensions with Iran.
US-Iran relations turned sour in January 2020 after a US airstrike killed Iran’s top military official Qassem Soleimani. Iran responded by firing missiles at US troops stationed in Iraq. Further, it also accidentally shot down a Ukrainian jetliner near Tehran, killing all 176 on board.
In a maritime warning, the US said that heightened military activity and increased political tensions in this region continue to pose serious threats to commercial vessels.
How does this impact refiners?
This means that commercial vessels carrying crude oil could be at risk of an attack. Insurance covers taken by oil importers protect the products from damage due to external attacks. Political risk covers taken by companies also provide protection against kidnapping and ransom, terrorism, civil war, riots, property damage and business interruption.
Reinsurance firms have decided to charge 20 percent higher premium for these covers which has led to insurance companies finding themselves in a sticky position. Though the insurers need to increase charges, their customers - oil importers - are resisting the move. Oil importers are reluctant to pay the additional sum and insurers don’t want to lose these insurers.
Will pooling risks help?
The current tensions is reminiscent of the situation seven years ago when Iranian crude importing refineries had to face problems as insurance firms declined to extend full coverage. Indian refiners have also sought a separate energy insurance pool for importing crude oil from Iran.
Oil companies are seeking a pool size of Rs 9,500 crore-11,000 crore. But the petroleum ministry is still not on board on this issue since a chunk of the contribution has to be given by the government.Indian insurers largely depend on European companies to re-insure their risks. However, with the current tensions prevailing, a majority have sought a mark-up in premiums and have also refused complete coverage.