Gulf Crisis Sends Mideast Insurance Rates Rocketing
The political crisis in the Persian Gulf is spawning an insurance crisis for companies doing business in the Middle East as the Jan. 15 deadline for Iraq’s withdrawal from Kuwait approaches--and the threat of war builds.
Premiums for so-called war-risk insurance are skyrocketing--in some cases by several hundredfold--if the coverage is available at all. Insurers, brokers and corporate risk managers say companies are being forced to pass on the higher costs to consumers, or even curtail operations in the region.
In the most visible example of the war jitters sweeping insurance markets, Pan American World Airways on Thursday announced a one-week suspension of its flights into Riyadh, the Saudi Arabian capital, and Tel Aviv.
Pan Am pulled its planes out of the Mideast after its London-based insurers boosted war-risk premiums tenfold, to $162,000, for each flight into Riyadh and twentyfold, to $65,000, for each flight into Tel Aviv.
“It simply proved economically not feasible to continue operating the flights, and we were forced to suspend,” said Pan Am spokeswoman Pamela Hanlon.
But Pan Am’s problems are just the tip of the iceberg for carriers operating in the Mideast. Other airlines in recent weeks have rerouted flights to avoid overnight stays in Israel or dropped service to Jordan, Iraq’s neighbor.
The market for airplane insurance was particularly hard hit by a $300-million payout by London-based syndicates to Kuwait Airways last year after Iraq, which invaded Kuwait last August, confiscated aircraft owned by the airline.
The owners of fleets of oil tankers that routinely ply the gulf are also facing stiff hikes. For example, Chevron, which in normal times pays risk premiums of $12,500 per year for a tanker worth $50 million, will be paying $500,000 per voyage for runs into the Persian Gulf between now and Jan. 15.
And that’s just for the tanker. A typical vessel’s cargo, worth about $30 million, will cost another $150,000 in premiums per three-day voyage.
“If hostilities break out, we expect (premiums) to go even further through the ceiling,” said Ed Kettel, the international oil giant’s assistant treasurer.
Insurers are so skittish that in recent days Chevron’s insurers boosted premiums fivefold as rumors swept the insurance markets that a floating mine had been spotted off Saudi Arabia’s huge oil refining and loading complex at Ras Tannurah.
Kettel said Chevron’s premiums have risen and fallen with tensions in the region, having approached $500,000 per voyage only briefly after the invasion of Kuwait.
Although companies involved in transportation, such as Pan Am and Chevron, are feeling the biggest pinch, others are far from immune.
“People with all kinds of operations throughout the Middle East are scrambling to see if they can secure coverage,” said Drury Davis, a Chicago-based vice president in charge of political risks at Marsh & McLennan, the world’s biggest insurance broker.
“During the first days of the (gulf) crisis, everybody was interested in coverage (for assets) in Saudi and the United Arab Emirates,” he said. “In the last week, we have seen more requests for Israel.”
But, he said, insurers are so frightened at the prospect of a war affecting Israel that such insurance is either unavailable or prohibitively expensive.
“The rates for Israel are up to 6% of the insured value per month, “ Davis said. “In Saudi, the quotes I’ve seen range from 0.5% a month to 1% a month--as long as the property is far away from the oil zone near the gulf. If it’s near the gulf, forget it.”
The war-risk coverage applies only to assets that can be transported. “You’ve got to be able to pick it up and move it,” Davis said. Fixed assets such as factories cannot be insured against the risk of war except by a U.S. government agency called the Overseas Private Investment Corp.
Confronted with such “exorbitant” premiums, most companies with assets in the region forgo coverage, Davis said, adding that those seeking to boost insurance coverage in the Middle East today “are trying to close the barn door after the horses have run away.”
While the magnitude of some of the increases is new, the current insurance crisis is old hat in a region known for political instability. “Premiums went up and down during the Iran-Iraq War, and at times coverage was unavailable,” noted Kenneth Woods, president of Cigna’s Los Angeles-based division dealing with excess and surplus coverage.
And companies routinely scamble for coverage in other trouble spots. After the Tian An Men Square crackdown in Beijing in 1989, Lewis Galoob Toys Inc. in South San Francisco bought a $40-million policy to insure against disruption of manufacturing and shipping of toys made in China.
“Since we got that policy, we all sleep a lot better,” said Mark D. Goldman, executive vice president and chief operating officer.
Times staff writer Martha Groves in San Francisco contributed to this story.
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