Reinsurers pull back from Israel and Middle East risks

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Global reinsurers have begun inserting cancellation provisions into policies to protect against a full-scale Middle East conflict, a move that threatens to further drive up costs and risks for businesses operating in the region. 

The pullback from reinsurers, who share risks with primary insurers and play a crucial role in the global economy, reflects mounting concern in the financial sector over the direction of the war between Israel and Hamas that began in October. 

The get-out clauses were inserted into some contracts drawn up with insurers as part of turn-of-the-year policy renegotiations, four market participants told the Financial Times. Such clauses were entirely new and had not been used before, two of them said.

If triggered, this would mean that the insurer would not from that point have reinsurance coverage for any newly underwritten premises or other asset — such as, for example, a commercial building damaged by a rocket attack. The increased risk would then likely be passed on to the client in the form of higher premiums or reduced coverage.

“The risk of something going out of control is extremely high,” said an executive at a big reinsurer. “The insurance industry has a problem in that region for the foreseeable future.”

The global insurance sector has about $10bn of exposure to Israel through such political violence and terrorism policies, according to industry estimates.

One reinsurance broker said it was “bizarre” that some insurers had accepted such cancellation clauses, which they said would fuel uncertainty and “[raise] a number of concerns such as who or what defines escalation”.

Reinsurers also demanded significantly higher prices, and pushed primary insurers to cap the amount of coverage that they provide to clients in Israel and neighbouring countries, such as Lebanon and Jordan, the people said. Some reinsurers had argued for exclusions of these countries from framework contracts, they added, but had limited success.

Aon, one of the world’s biggest insurance brokerages, noted in a report this month that reinsurers had looked to “increase price and reduce coverage in a meaningful way” for Israel and the wider region. Market participants said this was feeding through to significantly higher prices for international and local groups seeking to protect infrastructure and property. In the event, some businesses have opted to renew their insurance policies without including cover for Israel assets, relying instead on a state compensation fund, according to two market sources.

Global reinsurers have between them about $600bn in capital and have already been ratcheting up prices after years of losses from inflation, a series of natural catastrophes and Russia’s full-scale invasion of Ukraine. This has helped push up the price of cover for businesses everywhere.

The latest moves follow similar actions after the war in Ukraine, where reinsurers responded more severely by excluding countries fully from contracts. One person familiar with the market negotiations said there was “frustration” among underwriters at the latest cancellation provisions.

Global reinsurers Munich Re, Swiss Re and Scor declined to comment, while Hannover Re said in a statement that it had taken a “bespoke and differentiated approach by [insurance] client depending on the underlying portfolio”. For already written business in Israel and its neighbours, “we have decided to rather limit our accumulations than to request full or partial exclusions”, it added.

The marine insurance market has also seen a sharp rise in the cost of travelling through the Red Sea and Suez Canal as a result of a wave of attacks by Iran-backed Houthi rebels. 

Shipowners already had to notify their underwriter before moving through a designated portion of the Red Sea, and pay an additional premium. These added charges have jumped by 10 to 15 times in recent months, said market participants, contributing to some clients’ decisions to reroute their ships around Africa.