China's insurers see chance in trade shunned by West
Mainland insurers could take a bigger role in covering supertankers carrying crude oil from Iran to China when the European Union introduces tougher sanctions on Iranian oil shipments from July 1. But the stringent European controls could see a raft of other consequences including a surge in tanker charter rates and a slump in Iranian oil prices, experts said.
The sanctions, which are being introduced to pressure Iran to curb its nuclear programme, will prevent Western marine mutual organisations insuring vessels chartered to carry Iranian crude and petrochemical products from July 1.
The Western mutuals, called protection and indemnity clubs, insure about 90 per cent global tanker fleet including ships operated by Cosco Dalian, China Shipping Development and Nanjing Tanker. The clubs provide compensation if there is damage to the ship and cargo. They also provide liability insurance of up to US$1 billion to shipowners whose tankers are involved in oil spills.
While no marine insurance policies are written in Hong Kong, the sanctions will stop Western mutuals and insurance brokers based in the city from referring Iranian business to Europe. The sanctions will also stop the China P&I Club, which is owned by the mainland's leading shipowners, from insuring mainland ships engaged in the Iranian oil trade because major coverage is underwritten by Western reinsurers, experts said.
Michael Frodl, of C-Level Maritime Risks, said China had 'shifted a good amount of its oil buying away from Iran, but still needs to import a not insignificant amount of Iranian oil'.
Oil analysts said Iran produced 3.5 million barrels of oil per day of which 80 per cent went overseas before sanctions were introduced. Of this, about 550,000 barrels per day were exported to China with about 900,000 barrels going to India, Japan and South Korea. A 300,000 deadweight tonne supertanker carries about 2 million barrels of oil. They said oil shipments had been cut by around 350,000 barrels per day since sanctions were first introduced and expected a similar sized reduction when the European Union introduced its ship insurance ban.
Frodl said: 'The sanctions that intimidate Western shippers and insurers are not going to stop China from importing that oil. If insurance companies shun tankers willing to do the work, China and its diaspora in the shipping and insurance industry in Asia are going to find a way to insure those ships.'
Insurance experts said mainland insurers such as PICC, China Taiping Insurance and Ping An Insurance already offered marine insurance on the mainland. 'PICC is extremely large with turnover of 174 billion yuan (HK$213.67 billion) last year,' said an executive at one P&I Club. 'But turnover from its marine business was only 4 billion yuan last year.'
To put these figures into perspective, the international group of the 13 leading P&I Clubs collected US$2.7 billion in premiums last year and incurred US$720 million worth of insurance claims. This involved all kinds of incidents and not just oil spills, which have been falling with an average of 2.5 spills a year since 2010.
But with a potential liability of up to US$1 billion for each oil spill, Mark Kellock, the insurance analyst at Barclays Capital, said 'even PICC would not have the capability to cover it and would have to reinsure it'. If mainland insurers were to cover tankers transporting Iranian crude and petrochemicals to China, they would likely seek support from state owned China Reinsurance (Group). Mainland insurers and ChinaRe are still mulling how to respond.
Arthur Bowring, managing director of the HK Shipowners Association, said Iran would likely cut the cost of its crude oil to encourage foreign buyers, while tanker owners willing to transport it could see charter rates double or triple.