European Union to ban insurance for tankers that carry Russian oil
Last week, the European Union (EU) decided to phase out imports of crude oil from Russia through the sea routes by the year-end. Another notable move is the proposal to deny insurance to oil tankers carrying Russian oil anywhere in the world. The details of the proposed insurance ban are being worked out. The concerns of the vessel owners, especially in Greece and Cyprus, have to be taken on board before imposing an insurance ban. If implemented, the ban can impact easy movement of Russian oil as few shipping companies will be willing to transport oil in uninsured tankers.
Ship insurance companies not only cover the physical damage to the hull and machinery of the vessel but also provide protection and indemnity (P&I) against thirdparty liability. P&I insurance typically covers claims due to personal injury, Illness and death of the crew, passenger etc., stowaways and their repatriation arrangements, claims due to damage or loss of cargo, unrecoverable General Average contributions, liability due to collision, damage to fixed and floating objects (jetty, pier, marine animals, rig, fishery, facility, etc.), liabilities under approved towage contracts, costs of removal of wreck and salvage operations, and civil liabilities due to pollution or oil spill and so on.
Most insurers who provide such cover for the vessel owners and operators are members of the international group of P&I Clubs in many countries. They provide P&I insurance to about 95 per cent of the global tanker fleet by tonnage. The P&I insurers and reinsurers are based mostly in Western Europe. It is possible that Russia will find some way of supporting its local insurance companies for extending P&I insurance, if necessary by giving a sovereign guarantee. But, the vessel owners may be reluctant to take such insurance as the expertise required to assess the state of the vessels, the extent of damage to the vessels, costs of repairs and salvage, quantification of the losses, etc. is not readily available with insurers outside Europe.
When Russia invaded Ukraine in February, the US and its allies imposed on Russia an unprecedented range of financial sanctions, besides export controls and other measures. These included, for the first time, freezing the financial assets of Russia with the Central Banks of the United States and its allies and throwing many Russian banks out of the SWIFT network, the electronic platform for settling banking transactions. The use of insurance as a weapon to punish Russia for invading Ukraine will also be unprecedented.
The EU phase out of seaborne oil from Russia will mean that the EU will meet its shortfall from the oil producing countries in West Asia and Africa. In turn, less oil will be available for other countries like India and China from these regions. On Thursday, some of these countries decided to increase their production. That should ease the price and supply concerns somewhat.
India’s present policy is to take advantage of Russia’s lower sales of seaborne oil to Europe and buy more oil from Russia at discounted prices. However, a situation where not many shipping lines are willing to transport Russian oil through sea for want of P&I insurance can pose significant challenges in getting oil from Russia. So, India must prepare for an eventuality where the insurance ban makes transporting oil from Russia difficult and costly.