New Risks for Marine Insurers

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The war between Ukraine and Russia has long ceased to be a war of movement and has become a war of position.

Although most of the conflict is taking place on land, it also has a maritime dimension. But the latter is not just military: it's also economic.

In 2022, in order to weaken Russia economically and hinder its military campaign, the United States, the other G7 members and the European Union decided to cap the price of Russian oil at $60 a barrel.

The idea was that, since it is difficult, if not impossible, to prevent other countries, notably India and China, from importing Russian oil (Russia being the second largest crude exporter after Saudi Arabia, its withdrawal from the market would lead to shortages and sharp price rises), capping the price per barrel would at least have the advantage of reducing the profit from sales.

To be effective, this cap was accompanied by a ban on shipping companies based in signatory countries carrying cargoes of oil sold for more than $60 a barrel.

To get around this obstacle, Russia set up what some media outlets have called a “shadow fleet” or “dark fleet,” a term lacking hard-set specific definition. According to a May 30, 2024, report by Lloyd's List Intelligence, this so-called “shadow fleet” comprises some 600 unidentified vessels carrying almost 1.7 million barrels of oil a day, based on the data and criteria devised by Lloyd’s List Intelligence itself.

And yet, according to a recent study by the Dutch news website Follow the Money, at least 230 tankers allegedly making up this “shadow fleet” have been sold to Russia by American and European players! All for more than 6 billion dollars, the ships concerned having been sold on much more advantageous terms than they would have been before the start of the conflict.

To complete this mechanism, the Westerners had put in place another ban: for companies from signatory countries to provide insurance or reinsurance services to oil tankers carrying oil sold for more than $60.

As insurance is theoretically compulsory for shipping, this should have enabled the sanction to be widely applied. However, things did not turn out as planned.

On October 3, 2024, in a conversation with American investor Jim Rogers for TheDuran, London-based geopolitician Alexandre Mercouris remarked:

“What I'm hearing in the maritime world - I should tell you that my nationality is Greek and I have contacts in the maritime world - is that sanctions are causing huge problems in world trade, because nobody knows who to trade with. Because with secondary, tertiary and quaternary sanctions, while you think you're trading with someone who's in good standing, you end up discovering that this person is trading with someone who's trading with someone else who's trading with Russia... Apparently this creates nightmarish problems, it causes huge disruption, it also fuels corruption. That's what I'm hearing.”

One of the consequences of this situation is that many major insurers, both European and Russian, are withdrawing from the market one after the other. As a result, tankers are less controlled and suffer more damage, or even shipwreck, as happened to two Russian tankers in the Kerch Strait off Crimea on December 15, 2024.

As for the insurers who continue to operate, they end up, voluntarily or not, violating the sanctions imposed by their own governments.

This is the case of the English insurance companies West of England, NorthStandard, Britannia and the London P & I Club, which, according to an article published on June 20, 2024 in the French specialist newspaper Le Marin (Ouest-France group), are said to have insured Russian tankers whose cargoes were sold above the ceiling price of $60.

It's important to understand that the selling price agreed between oil traders is covered by business secrecy, and often neither the shipowner nor the insurer can know it with any certainty.

The documents reviewed by us and relating to oil tankers make it evident that the “shadow fleet” is a poorly defined and inconsistently applied to certain vessels by various mass media, it is essentially unfit for use by maritime insurers when screening potential clients.

In their due diligence, respectable actors shall rely on specific international treaties and national laws providing for clear and universal compliance criteria rather than unsubstantiated labels employed by certain mass media.

Where the prospective counterparty or vessel(-s) have not been found to violate any of such criteria, there is no formal justification for an insurer to deny coverage solely based on a media outlet labelling them as part of the “shadow fleet.”

Likewise, such allegations cannot be the sole justification for canceling coverage for already underwritten vessels. Insurers may only terminate or deny insurance if there is evidence of specific violations of international or national laws.

Insurers cannot predict whether a vessel that was compliant at the time of underwriting will later breach legal standards; they can only respond to such violations when they occur.

Nevertheless, even where a relevant actor follows the letter of the law, it can be singled out and labelled an enabler of the “shadow fleet.”

This is what seems to have happened recently to such companies as Alfastrahovania and Ingosstrakh. The latter, for example, despite the precautions taken (the Russian insurance company claims to have cancelled or refused cover for over 100 rogue vessels since 2022, as reported by Lloyd’s List), was reported by certain journalists as a go-to insurer for the “shadow fleet,” which may have substantially contributed to their sanctioning.

The consequences of being called out for alleged involvement with the “shadow fleet” are so heavy that it's understandable why many of the big insurers have preferred to leave this risky market. The problem is that they have been replaced by newly created small companies.

The latter are less reliable because they are undercapitalised.

According to a Politico article of November 17, 2024, ships “don't have credible insurance”. In some cases, the major Western or Russian insurers are not replaced at all, and some ships are operated without any insurance at all! In the last two cases (small insurers or complete absence of insurance), in the event of an incident involving the relevant vessels, there is every chance that the damage will not be covered.