Still, the big question is: what’s the best way to support insurers providing war-risk cover for ships? The government is considering setting up a dedicated fund to help them, according to people aware of the deliberations. It’s a complex issue, but the goal is to enable domestic insurers to extend coverage to vessels sailing through high-risk zones.
That said, this isn’t a new problem. The Iran war has disrupted trade flows, and global reinsurers have stopped providing cover, making it costlier and difficult to move cargo. However, the proposal currently being evaluated by the finance ministry could be a game-changer. It would allow domestic insurers to take comfort from government-backed reinsurance, which would cushion potential losses.
What does this mean for the insurance industry?
Consider this: the facility could be similar to the Marine Cargo Excluded Territories Pool set up in 2022, in response to the Russia-Ukraine war and related sanctions. This pool, managed by state-run General Insurance Corporation of India (GIC Re), provides cover for marine cargo shipments of fertilisers and other commodities from “excluded territories” (Belarus, Ukraine, and Russia). The pool had 21 members, with a capacity of ₹484 crore per shipment. Here’s the thing: this model could work for the new fund as well.
Even so, various options are being examined, and the government official said that the setting up of such a facility would be feasible only after the route through the Strait of Hormuz opens up. Meanwhile, the corpus of the fund could be about ₹1,000 crore, and it may cover crude oil shipments passing through the Strait of Hormuz, apart from other cargo. The industry, including exporters and shipping lines, have made a case for the creation of such a facility in the past as well.
As a result, state-owned insurers, led by GIC Re, could house the pool. However, the final call on the structure, size, and where it would be housed would be taken accordingly. While the details are still being worked out, one thing is clear: the government is committed to finding a solution to this problem. Insurance companies are watching this development closely.
Why is this important for India?
Not everyone agrees on the best approach, but analysts say that this move could have a significant impact on India’s trade relations. The numbers are stark: India’s trade with countries in the region is substantial, and any disruption can have far-reaching consequences. However, with a government-backed fund, Indian insurers can provide war-risk cover, which would help to mitigate these risks. Still, the key challenge is to ensure that the fund is large enough to cover potential losses.
Yet, the government is taking a proactive approach to address this issue. It’s not just about the insurance industry; it’s about the broader impact on the economy. That said, the government needs to move quickly to set up the fund, as the situation in the region is unpredictable. Even so, the fact that the government is considering a fund to support war-risk insurance is a positive sign. It shows that the government is committed to finding solutions to complex problems. Insurance is a critical component of the economy, and this move could have far-reaching consequences.
Meanwhile, the business community is watching this development closely. The government’s decision to set up a fund to support war-risk insurance could be a turning point for the industry. It’s a complex issue, but the government’s proactive approach is a positive sign. Still, the key challenge is to ensure that the fund is effective in mitigating the risks associated with war-risk insurance.
What happens next?
Here’s the thing: the government’s decision to set up a fund to support war-risk insurance is just the beginning. The next step is to finalize the details of the fund, including its structure, size, and scope. However, the government needs to move quickly to address this issue, as the situation in the region is unpredictable. Even so, the fact that the government is considering a fund to support war-risk insurance is a positive sign. It shows that the government is committed to finding solutions to complex problems.
That said, the LIC may play a key role in this initiative, which aims to cushion potential losses. The corporation has experience in managing such funds, and its involvement could help to mitigate the risks associated with war-risk insurance. However, the final call on the structure, size, and where it would be housed would be taken accordingly. As a result, the government needs to move quickly to set up the fund, as the situation in the region is unpredictable.
