The actuarial pen is mightier than the sword

It is day 18 of the largest shipping disruption since WWII. I am looking at the dashboard www.hormuztracker.com: ~3,200 ships (4% global tonnage) idle in Gulf region and ~100 container ships (10% of global fleet) affected.

“Probable cancellation and withholding of insurance cover in the face of calamity – doesn’t that contradict the spirit of insurance?’’ Asks Col. Allan Burby a renowned adviser on business ethics. He is not the only one raising this concern.

Off the golden road

Here I wish to touch upon two brilliant historians – a father and son – who bring some relief to general amnesia and hopefully it will rid us of myopia. Maritime trade has flourished long before the world wars.

In Shattered Lands, son Sam Dalrymple charts out some incredible developments in much of the theatre of ongoing crisis: “As recently as 1928, a vast swathe of Asia – India, Pakistan, Bangladesh, Bhutan, Yemen, Oman, the UAE, Qatar, Bahrain and Kuwait – were bound together under a single imperial banner, an entity known officially as the ‘Indian Empire’, or more simply as the Raj.” The rest of the story is about how the Indian Empire was unmade.
The father – William Dalrymple’s – monumental work The Golden Road spans from 250 BC to 1200 AD. While all of it deserves to be read and digested, I will draw in a miniscule segment.

Who was sailing the boats during this time that brought luxuries westwards? Asks William. “It remains an open question whether the bulk of the Red Sea trade was carried in shipping based and owned in Egypt or in India… Indeed there is more and more evidence that it was the Indians, not the Romano-Egyptians, who have dominated the Indian Ocean trade networks, not just as sailors but as merchants and agents. This is implied by the graffiti left by traders and captains from this period recently found in the Hoq caves on the island of Socotra that lies in the centre of the Red Sea, midway between Somalia and Yemen.”

Wind powered sailing vessels dominated the region – much of which today thrives on the rich deposits of fossil fuel and drives global economy. Disrupted by an industrial revolution powered by fossil fuel – we find ourselves in the midst of a struggle to seize diminishing fossil fuel supply rather than transition towards unlimited renewable sources. As we pursue infinite growth on a finite planet, we need to reconcile with some uneasy reality.
Xavier Arputharaj is a former Dy CEO of one of the largest Dubai based insurers. Shipowners must navigate between market reality and commercial dilemma, he explains. While it may appear that no cover is available, there is usually a possibility to reinstate it, provided the shipowner is willing to pay the high premium – which must reflect the increased exposure and the exposure to the war zone. The consequence – halt their trade.

However, we are in an extraordinary situation. And Why the Disruption Will Last Four to Sixteen Months Longer Than Any Model on Wall Street Currently Prices. This essay and its sequels by Shanaka Anslem Perera are very enlightening. I have pulled out from parts of his commentary in a random order.

This is the first live demonstration of what Shanaka calls Actuarial Warfare: a paradigm in which private reinsurance desks, operating under regulatory capital constraints, exercise de facto sovereignty over the planet’s most critical maritime chokepoint more durably than navies, missiles, or executive orders.

The crunch

A single Very Large Crude Carrier (VLCC) total loss could easily exceed $150 million for the hull, $100 million for the cargo, and virtually infinite liability for environmental pollution. Against a premium pool that writes $1 billion annually, a single major claim would consume the entire global war-risk market’s revenue.

When they withdraw, ships do not sail. No Protection and Indemnity (P&I) cover means no port will accept them, no cargo owner will load them, no bank will finance the voyage, no charterer will contract them. The vessel becomes a commercially unviable object adrift in a system that runs entirely on institutional trust.
The market is pricing a four-to-eight-week disruption. The evidence supports six to eighteen months as the minimum timeline for full insurance reinstatement. The mismatch between these two estimates, approximately four to sixteen months of unpriced duration, is the single largest temporal arbitrage currently available in global macro.

Hard reality

The critical infrastructure of global commerce does not run on military power, diplomatic agreements, or sovereign guarantees. It runs on a thin layer of private institutional trust that can be withdrawn in seventy-two hours.

At the base sit the P&I clubs, mutual associations of shipowners pooling third-party liability risk across their membership. The P&I clubs that insure ninety percent of global shipping tonnage are not government agencies. They are private mutual associations, owned by their shipowner members, governed by commercial logic, and regulated by a capital framework that incentivizes exit under precisely the conditions when their presence matters most.

Above them sit the treaty reinsurers, predominantly London-based syndicates that absorb catastrophic accumulation risk. The reinsurers who backstop those clubs are an oligopoly of perhaps five to ten firms whose risk appetite is governed by actuarial models, not geopolitical ambition. The entire system of global maritime trade, carrying billions of dollars of cargo across the oceans every day, stands on a foundation that can be dissolved by a small number of private decisions taken in a handful of London boardrooms.

Above those sits the retrocession market and insurance-linked securities (ILS), a $41 billion capital pool providing the ultimate backstop. This stack possesses a critical structural vulnerability: the retrocession and ILS market systematically excludes war risk.

The war-risk market, therefore, operates under a hard capital ceiling of approximately $1 billion in annual premiums and a handful of treaty reinsurers whose aggregate capacity cannot absorb a single major total-loss event.

The binding constraint on the flow of 20 million barrels of oil per day is the willingness of a handful of London reinsurance syndicates to allocate capital against unlimited tail risk under regulatory frameworks designed for peacetime.

The reinsurance desks that cancelled war-risk cover for the Persian Gulf on 5 March wielded more effective denial power over the Strait of Hormuz than the entire Iranian navy.

Unlike kinetic denial, which superior military force can overcome, actuarial denial operates on institutional timescales that no executive order, emergency programme, or naval deployment can compress.

The closure mechanism is financial, not kinetic. Its reversal requires not military victory but the sequential, multi-party reconstruction of a commercial risk market that was already structurally hollowed by 26 months of Houthi losses before the first bomb fell on Tehran.

“Never-ending fossil fuel wars are a lethal distraction: New study shows global warming doubling in speed since 2015, to 0.35°C/decade, while we fight over the last drop of oil”: Warns Assaad Razzouk.

When you drop-off civilizational threshold – nothing is insurable.

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