At first glance, the Strait of Hormuz remains open — albeit at significantly higher cost for those willing to bear the risk. But long before traffic slows visibly, the financial conditions that sustain it begin to erode. In early March, several global insurers reassessed their exposure to the region and withdrew or restricted war-risk coverage for vessels transiting the Persian Gulf. This was not a political decision, nor a response to a single catastrophic event. It was a financial calculation. The risks had become too uncertain, the potential losses too large, and the ability to price those risks too limited.
Shipping is not merely about vessels and cargo but a web of financial guarantees. Every voyage depends on insurance coverage — covering damage to the vessel, loss of cargo, environmental liabilities, and third-party claims. Without these, ports may refuse entry, financiers may withdraw backing, and shipowners face risks that are commercially untenable. The result is simple – ships do not sail. Even where coverage remains technically available, it now comes at a cost that alters the economics of trade. War-risk premiums have surged from negligible levels to as much as 1–3 per cent of a vessel’s value. For a large oil tanker, this can translate into millions of dollars for a single journey. At that point, insurance ceases to be a safeguard and becomes a barrier. When the cost of managing risk exceeds the potential return from the voyage, the market does not adjust — it withdraws.
Crucially, insurers do not bear these risks alone but pass them on to reinsurers — the global institutions that ultimately absorb large, catastrophic losses. When that layer tightens, primary insurers have little room to manoeuvre. Coverage shrinks, pricing becomes volatile, and, eventually, risk becomes uninsurable. This shift, from expensive risk to unavailable risk, is not theoretical. It has already played out once, in the aftermath of sanctions on Russian oil. Following Western sanctions after the invasion of Ukraine, global reinsurance capacity for Russian oil shipments effectively collapsed. The International Group of Protection and Indemnity (P&I) Clubs, which traditionally covers about 90 per cent of global shipping, largely exited Russian-linked trade, forcing a structural reorganisation of risk markets. In response, a parallel system emerged. Russian insurers, backed by the state and supported by the Russian National Reinsurance Company (RNRC), began underwriting shipments outside the traditional global framework.
Alongside them, a network of insurers and facilitators across multiple jurisdictions including entities linked to countries in Asia, the Middle East, and offshore registries, enabled trade to continue, often with opaque or weakly regulated coverage structures. This ecosystem now supports what is widely described as Russia’s “shadow fleet” — a network that has expanded to hundreds, and by some estimates over a thousand vessels operating outside mainstream insurance systems. At least 12 European countries have since coordinated efforts to monitor and disrupt this system, reflecting how widespread and systemically relevant it has become. The lesson is not that trade stops when insurance collapses. It is that trade reorganises.
Alternative systems emerge — backed by sovereign guarantees, opaque insurers, or fragmented reinsurance pools. These arrangements keep flows alive, but at a cost. Many vessels in such networks operate with questionable or unverifiable insurance, raising the risk of environmental and financial fallout. That experience is now directly relevant to the Gulf. If global reinsurers continue to reduce exposure to conflict-linked routes, insurers will face the same constraint they did in the Russian case. Coverage will either become prohibitively expensive or disappear altogether. At that point, trade will not simply slow — it will bifurcate.
For India, this presents a complex dilemma. On one hand, participation in alternative arrangements, as seen in Russian oil trade, can ensure continuity of supply. On the other, it shifts risk onto less transparent systems and introduces exposure that is harder to quantify, regulate, or contain. This is why the rise in freight and insurance costs is not just a pricing issue. It is an early signal of structural change. As shipping routes are rerouted and insurance capacity tightens, the effects cascade outward. Freight rates rise. Delivery timelines stretch. Supply chains adjust under pressure, and import costs increase, feeding into inflation and widening external imbalances.
What distinguishes the current moment is that policymakers are no longer reacting to outcomes, such as oil price spikes, but to underlying mechanisms. The monitoring of freight and insurance costs reflects an awareness that the disruption begins much earlier, in the financial plumbing of trade. And that plumbing is now under strain. As long as reinsurance capacity remains constrained, trade through critical chokepoints like the Strait of Hormuz will continue to face disruption, whether visible or hidden. Oil markets will remain volatile. Supply chains will operate under pressure. And economies will bear the cost.
The broader lesson extends beyond the present conflict. Globalisation does not function simply because goods can move. It functions because risk can be priced, distributed, and absorbed across a stable financial system. In that sense, the most consequential shifts in global trade are no longer happening on shipping routes, but in the markets that insure them. Power, in today’s world, lies not just in controlling territory, but in controlling risk. And when the institutions that underwrite that risk begin to retreat, even the busiest shipping lanes do not need to close to fall silent.
