It’s no secret that trade flows have been disrupted in West Asia. The Iran war has made it tough for ships to sail through the region. Even so, the government is considering setting up a dedicated fund to support insurers providing war-risk cover for ships to and from India.
Here’s the thing: global reinsurers have stopped providing cover, making it costlier and difficult to move cargo. Still, the proposal currently being evaluated by the finance ministry would enable domestic insurers to extend coverage to vessels sailing through high-risk zones such as the Strait of Hormuz. They’ll take comfort from government-backed reinsurance that would cushion potential losses.
What does it mean for trade?
Analysts say this move could be a game-changer for trade. The facility could be on lines of the Marine Cargo Excluded Territories Pool set up in 2022, in response to the Russia-Ukraine war and related sanctions. That 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). Learn more about insurance and its impact on trade.
Not everyone agrees, however. Some say the setting up of such a facility would be feasible only after the route through the Strait of Hormuz opens up. That said, the numbers are stark: the pool had 21 members, having a capacity of ₹484 crore per shipment. The corpus of the new fund could be about ₹1,000 crore.
Why did the government consider this move?
Consider this: the Iran war has upended trade flows, and global reinsurers have stopped providing cover. The government had to step in. As a result, the finance ministry is evaluating the proposal. Meanwhile, state-owned insurers, led by GIC Re, could house the pool. The latest facility being discussed may also cover crude oil shipments passing through the Strait of Hormuz apart from other cargo.
But what’s the impact on LIC? Life Insurance Corporation of India (LIC) may play a key role in providing war-risk cover for ships. Even so, the details are still being worked out. The industry, including exporters and shipping lines, have made a case for creation of such a facility in the past as well.
While the plan is still in the works, one thing is clear: the government is committed to supporting trade. As a result, the dedicated fund could be a lifeline for ships sailing through high-risk zones. That said, the challenge is to make it work. The numbers are stark: the cost of providing war-risk cover is high, and the risk is significant.
Still, analysts say the move could be a win-win for trade and insurance. The government will provide a backstop, and insurers will get the comfort of reinsurance. What happens next? Only time will tell. But one thing is clear: the government is taking steps to support trade, and LIC may play a key role in providing war-risk cover for ships.
For more information on insurance and trade, visit our business section. The numbers are stark, but the potential is huge. The government’s move to set up a dedicated fund for war-risk cover could be a game-changer for trade.
