Why the ban on insurance of tankers with Russian oil is dangerous

The EU, in addition to the decision on the oil embargo, agreed with London on a ban on insuring the transport of fuel from RUSSIA. This measure can hinder the supply of Russian oil to third countries. RBC figured out

The European Union agreed with the UK to strengthen the European embargo on the import of Russian oil by banning insurance on the transportation of Russian fuel around the world. This was reported on May 31 by Western business media. Moreover, according to the Financial Times (FT), citing a source in the European Commission, the G7 is working on joining the ban. The UK government intends to soon announce a ban for its companies to provide insurance coverage for ships transporting Russian oil . “This is happening in a coordinated way [with Europe],” one of the British officials was quoted by the FT.

By itself, the ban on buying Russian oil (up to 90% of its exports to the EU will be under it by the end of the year) will rather reorient supplies than reduce them, while a ban on insurance can have a stronger economic effect, writes The Wall Street Journal. It's a "wild card" in the pocket of the Europeans and probably one of the most important elements in the "offensive" on Russian oil exports, says Rory Johnston, an economist and author of the Commodity Context industry mailing list.

RBC looked into what the decision of the EU and the UK to stop insuring these operations would mean for Russian oil exports.

How the maritime insurance market works

In world practice, shipowners carry out the following types of insurance (in order of importance) — shipowner’s liability insurance (very broad coverage, which means protection of the shipowner’s property interests as a result of losses, claims from third parties, etc.), ship insurance, insurance of the transported cargo, explains the representative of the All-Russian Union of Insurers (VSS). Shipowner's liability insurance corresponds to the English term protection and Indemnity (P&I, protection and indemnity).

P&I is insured by the International Group of Mutual Insurance Clubs, an association that unites 13 largest ship insurance clubs (England, usa , Scandinavia, Japan, etc.). The members of the club are mainly shipowners and charterers. They annually make insurance premiums to the club's fund, from which shipowners' expenses are reimbursed in case of losses due to harm to the crew's HEALTH, loss of the ship, damage to port facilities, cables, etc. The main goal of the activities of the International Group of Clubs is the distribution of insurance risks on the basis of a pool agreement and the acquisition of reinsurance in the international pool of the group.

Vessel insurance (casco) corresponds to the term hull and machinery (H&M) - protection of the hull and equipment. “If we draw an analogy, it does not differ much from car hull insurance. The only difference is that H&M also covers engine breakdowns,” says a BCC representative. Finally, cargo insurance is most often provided not by the shipowner, but by another party in accordance with the terms of the contract for the supply of cargo (including the consignee). In general, P&I and H&M are the main types of insurance coverage, while it is practically impossible to do without the first one, the ARIA notes. Without proper P&I coverage, few charterers will want to ship cargo, and most ports will deny ships access, confirms trade publication Lloyd's List.

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What role does London play?

The UK is a leading player in both mutual insurance (P&I) and ship insurance (H&M). The International Group of P&I Clubs, or IG P&I, is based in London, and seven of its 13 associated clubs are also based in the British capital. According to IG P&I itself, its members cover 90% of the world's tonnage of seagoing vessels.

Also in London is Lloyd's of London, an insurance and reinsurance market. This is not an insurance company, but a marketplace that allows you to bring together buyers and sellers of insurance, and in fact a regulator that sets the rules for its participants (underwriters, brokers). Lloyds, in particular, provides an opportunity to insure the ship's hull and cargo. Lloyd's of London announced on June 1 that it is working closely with British authorities and international regulators to enforce sanctions against Russia.

“The main safety and reinsurance capacities used by shipowners and cargo owners [connected with Russia] were located in Western markets,” Soglasie insurance company told RBC.

What are the difficulties with the interpretation of sanctions

European Commission President Ursula von der Leyen said this week that European leaders have agreed "a ban on insurance and reinsurance of Russian ships [with oil] by European companies." Britain will impose similar sanctions , according to The Times. “The main question is: what does “Russian ship” mean? Walking under the Russian flag? Russian-owned? Chartered by the Russians?” - quotes the publication Lloyd's List of an unnamed insurance underwriter. “Until we receive clarifications and formal definitions, we cannot say how this sanctions package will affect us,” he says.

Meanwhile, in the run-up to the formal ban, Western insurers have already begun avoiding Russian oil cargo, according to REUTERS. Even ships without ties to Russia risk losing insurance coverage if they pick up Russian oil, the agency writes. According to the Wall Street Journal, the insurance ban will come into effect six months after the approval of the sanctions package.

The industry as a whole has learned to comply with them over the years of oil sanctions against Iran, according to the FT, but the biggest challenge will be how to determine that it is Russian oil on board. US officials have argued that one of Iran's sanctions circumvention tactics is mixing its oil with other fuels to hide the real origin of the oil. Back in April, BLOOMBERG wrote that Shell began trading in “Latvian blend,” where a barrel consists of only 49.99% Russian raw materials (technically, such a cargo is not considered a cargo of Russian origin). It is unclear how restrictions will be implemented in practice if oil in a tanker is mixed with other oil, losing the status of a “Russian” product and becoming a blend, confirms Alexey Volostnov, partner at Strategy Partners.

Another potential problem is that insurers may refuse to insure any ships leaving a particular Russian port altogether, the FT argues. For example, Kazakh oil, which is transshipped in Russian ports, may suffer from this. Thus, the Caspian Pipeline Consortium mainly pumps oil from the fields of Western Kazakhstan, which is then transshipped in a port near Novorossiysk.

Iranian experience

Iran's systematic oil sanctions circumvention solutions fall into four categories, says Brett Sudetich, an adviser at consulting firm Gulf State Analytics:

storing oil on tankers at sea while looking for customers willing to buy sanctioned oil; changing the names of ships and their identification codes to confuse the trail; disabling the AIS system used to identify ships; secret transfer of oil from ship to ship at sea (STS).

What are the options for alternative insurance

When insuring liability for large tankers, limits under shipowner's liability insurance contracts can reach $1-2 billion, respectively, such limits require reinsurance, RBC's interlocutor in the insurance market warns. Under the current conditions, Russian insurers do not have the opportunity to provide insurance with subsequent reinsurance in traditional risk markets with such limits due to the legal ban on reinsurance abroad, he points out.

Reinsurance is used by insurance companies when, due to the size and complexity of certain obligations to customers, they need additional protection - for this, insurers themselves insure their risks in another company.

If there is no reinsurance, the insurance itself will become more expensive, about twice, says Alexey Bezborodov, managing partner of Infra Projects. However, in his opinion, it will still be possible to make it, for example, in CHINA or Arab countries.

In the realities of the sanctions, it will be necessary to look for new mechanisms to ensure the protection of the shipowner, says the HEAD of the insurance broker and mutual insurance company Rostec, the former head of the Russian National Reinsurance Company Nikolai Galushin (his words were conveyed by a representative). According to him, ships that are not formally Russian, which transport Russian oil, may find themselves without insurance (reinsurance) protection, and most likely no one will carry oil without it. “It is important here how shipowners and Russian insurers will agree to consider this business as Russian. And protect it accordingly. And then, how to rebuild protection in many ports where our ships can still call and where they may need protection, ”the expert argues.

According to Galushin, one can refer to the experience of the Iranian club, which is a construction of a public-private partnership: within a certain limit, a pool created by national players bears responsibility, and in excess of this amount a guarantee is provided by the state. The total limit of the Iranian pool is equivalent to $500 million.

“The Russian market is working on its own solutions for insuring these risks. The emergence, for example, of Russian mutual insurance clubs among shipowners is also possible, but it will take time, ”RBC answered in Soglasiya. In terms of risk reinsurance, friendly countries in Asia and the post-Soviet space are considering entering the market, but there is still a lot of work to be done, the insurance company warns.

What kind of insurance method will be chosen by the consignor (consignee), only time will show, but in any case this will be reflected in the price of the goods, they recognize in the "Consent". The market for Russian oil, of course, will not close, but it will objectively become much more difficult to sell oil abroad, says Volostnov. “The ability to transport Russian oil will remain, as there has always been the opportunity to buy Iranian oil, but the attractiveness of the product for consumers will be determined by the discount that the seller will be forced to offer,” he adds. According to the Russian Ministry of Finance, the average price of Russian Urals oil in May was $78.8 per barrel, the discount to world Brent futures quotes was about 30%.

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