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When a region becomes a war zone, insurers must cancel existing war risk policies to re-rate the risk and charge a higher premium for vessels transiting that area.
The International Group of P&I Clubs, comprising 12 member clubs including the American P&I Club, collectively insures 90% of the world's ocean-going tonnage.
The International Group of P&I Clubs collectively purchases the largest reinsurance policy in the world, which involves approximately 85 separate reinsurers.
The International Group of P&I Clubs provides coverage for up to approximately $8 billion per incident, with reinsurance purchased collectively up to $3 billion.
Standard P&I insurance policies explicitly exclude liabilities arising from acts of war.
Following the outbreak of conflict in the Persian Gulf, the war risk insurance premium for one vessel increased from $15,000 per year to $60,000 for a single seven-day transit to exit the area.
War risk insurance premiums for ships voluntarily trading in the Persian Gulf conflict zone ranged from 3% to 10% of the ship's hull value.
War risk insurance is priced cheaply during peacetime based on the assumption that ships are trading in peaceful areas.
A P&I (Protection and Indemnity) club is a not-for-profit, mutual association of ship owners that provides liability insurance.
P&I clubs cover third-party liabilities such as passenger and crew injuries, collision damages, and oil pollution cleanup, but not damages to the owner's own vessel.
The American P&I Club is the only American-based maritime insurance club.
The average claim for the American P&I Club is between $20,000 and $30,000, typically for small crew or cargo claims.