Client Alert: Responding to Heightened Risk in the Middle East

Client Alert: Responding to Heightened Risk in the Middle East
November 1, 2024 7 mins

Client Alert: Responding to Heightened Risk in the Middle East

Responding to Heightened Risk in the Middle East

The current operating environment in the Middle East is increasingly complex and multifaceted, characterized by ongoing conflicts in Gaza, Israel, Lebanon and neighboring states, alongside significant changes in the business and insurance environment.

Key Takeaways
  1. Businesses must regularly evaluate their insurance coverage to ensure it aligns with the evolving risk landscape, particularly in relation to war and political violence.
  2. Rising insurance premiums, driven by increased regional instability, require companies to adjust their risk management strategies and budgets to maintain operational resilience.
  3. Transparent communication among stakeholders regarding insurance nuances and coverage triggers is essential for aligning expectations and ensuring comprehensive risk management.

5 Executive Learnings

  • 01
    Risk Mapping

    Proactively map potential worst-case scenarios, including direct attacks and broader conflicts, to understand their impact on your operations.

  • 03
    Claims Management Strategies

    Develop robust claims management protocols to expedite processing and ensure that coverage aligns with your operational needs during crises.

Distinguishing between declared and undeclared war, particularly in a region where non-state threat actors play a significant role, is fraught with complexity. Understanding these gray areas is especially essential when determining insurance coverage. In the Middle East, the insurance market has reached a point where it now recognizes the ongoing state of conflict, which reflects the severity of the situation and can inform proactive risk management strategies.

Underwriters are reassessing their risk appetite, leading to more stringent conditions and coverage limitations. Understanding these shifts is crucial for clients, as they directly impact operational costs and risk management strategies.

Clients are shifting toward insurance policies covering political violence including war coverage to ensure they are adequately protected in the event of declared or undeclared hostile action between two or more nations, states or non-state actors.

Risk Considerations for Clients

Marine-Specific Risks

The marine insurance market has seen significant claims from recent events, including missile attacks and piracy incidents. Loss projections indicate that 2024 may be a turning point for increased claims. Businesses must stay informed about these trends to anticipate potential cost implications.

Understanding the increased threat level is vital for maritime operations, necessitating enhanced security measures and vigilant monitoring. Key risk scenarios for marine clients include:

  • Vessel Detainment: Several high-profile vessel detainments have occurred within the last year. In April, MSC Aries was boarded by Iranian commandos in the Strait of Hormuz and taken to Iranian waters. In May, 25 crew members were released, but to date, the vessel and the cargo on board remain under Iranian control, with losses predicted to hit $140 million.1
  • Houthi Threats: From 19 November 2023 to 11 September 2024, the Houthi movement has confirmed responsibility for 66 incidents, including piracy against international vessels transiting the Red Sea and the Gulf of Aden, according to the International Maritime Organization.2 Over this time, the Houthi’s modus operandi has become more sophisticated, evolving from aerial drone and missile attacks to unmanned surface vehicles loaded with explosives.3

Ship operators should exercise caution in high-risk areas and implement robust threat assessments.

Physical Damage Loss and Liabilities from War

Energy and power clients operating in the region face significant challenges. As essential services providers and critical infrastructure operators, they are direct targets. Recent incidents have underscored the need for robust coverage that cannot be easily canceled amid rising threats.

For example, in March 2022, Houthi rebels launched a series of attacks on Saudi Arabian oil facilities, including sites operated by the state oil company Aramco. These attacks involved drone strikes and missile launches targeting key infrastructure in Jeddah and other locations. The attacks led to temporary disruptions in oil production and highlighted the vulnerability of critical energy infrastructure.

The Houthi threat has become a significant stress test for the marine war insurance sector, compelling insurers to refine their coverage and emergency response capabilities. Consequently, marine war insurance policies are evolving, and shipowners and charterers must recognize how these policies indemnify vessel owners for losses and the nuances of coverage.

Recent discussions have clarified potential misconceptions about the Nordic Plan, which offers robust coverage tailored to Houthi-related incidents. This Plan is structured as a package, encompassing hull and machinery, loss of hire and liability insurance.

As the Houthis continue to exert control in Yemen, their activities are viewed as part of a broader geopolitical conflict, leading to an interpretation of their actions as if they were a legitimate state power under the Nordic Plan. This interpretation enables insurers to provide coverage that encompasses various conflict-related scenarios, reinforcing the Plan's adaptability to the new realities of maritime security threats.

Beyond physical damage, it is crucial to assess potential liabilities arising from war-related incidents. This includes, but is not limited to, pollution, loss of life and wreck removal, and grasping the intricacies of protection and indemnity cover.

Business Disruption

To enhance operational resilience, businesses must develop comprehensive continuity plans that address potential disruptions. This includes assessing critical functions, identifying vulnerabilities and implementing strategies to maintain operations amid escalating risks. Prioritizing robust contingency measures can help minimize downtime, safeguard assets and ensure service continuity.

Clients operating in the region are particularly concerned about the potential closure of the Strait of Hormuz, a crucial maritime chokepoint through which nearly 30 percent of the world's oil and gas supplies pass.4 If the Strait were closed, food security could become an issue, and industries reliant on imported goods, raw materials and energy supplies would face delays and increased transportation costs. Vessels may have to take longer alternate routes around Africa, significantly increasing shipping times and costs.

A strike on critical infrastructure also has the potential to cause significant disruption, as highlighted by Russia’s recent missile strikes on Ukraine’s power infrastructure. A strike on a power station in the Middle East that resulted in damage to onsite assets would not only lead to property damage costs, but also trigger business interruption coverage as the insured's operations would inevitably be disrupted. Such events can have cascading effects on clients and communities, emphasizing the importance of robust insurance products and proactive measures to mitigate impacts.

Recommendations

  1. Engage With Experts: Collaborate with knowledgeable brokers and security experts to navigate the complexities of the Middle East’s risk landscape effectively.
  2. Regularly Review Coverage: Conduct frequent reviews of your insurance policies to ensure they align with current risks and provide adequate protection.
  3. Develop Comprehensive Plans: Establish detailed business continuity and crisis management plans that address both immediate threats and long-term operational resilience.
  4. Invest in Training and Communication: Enhance training programs to ensure your team understands the nuances of coverage and the importance of transparent communication during crises.
  5. Stay Informed: Continuously monitor regional developments to adapt your strategies promptly and maintain a proactive stance in risk management.


Talk to your risk advisor to access advice and solutions that can help your organization manage risks related to the ongoing conflict.

Key Contacts

Rabih Asmar
Executive Director, Corporate Risk Solutions & Affinity, UAE
[email protected]

Tom Bomford
Director, Marine Hull, Global
[email protected]

Karthick Gowrisanker
Regional Head of Marine, UAE
[email protected]

Louie Grainger
Associate Director, Political Violence, UAE
[email protected] 

Jord Oostrom
Chief Commercial Officer, Middle East
[email protected] 

1 MSC Aries: what could happen from an insurance perspective? I SlothSea
2 Communication from the Secretary-General to Member States’ Representatives (Updated version – 11 September 2024) I IMO
3 Houthi explosive drone boat attacks escalate Red Sea danger I Reuters
4 Strait of Hormuz: Why the oil shipping route is a focus of worry again I Bloomberg

General Disclaimer

The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. This information is not a replacement for legal, tax accounting or other professional advice and no one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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