The United States' Strait of Hormuz maritime reinsurance backstop

Monday 9 March 2026

The Strait of Hormuz has long been one of the most precarious arteries of the global economy. Barely fifty kilometres wide at its narrowest point, the channel linking the Persian Gulf to the Gulf of Oman carries roughly one fifth of the world’s oil exports together with vast volumes of liquefied natural gas and refined petroleum products. When conflict interrupts this passage the consequences reverberate immediately through global commodity markets, shipping finance and international diplomacy. 

In the early days of the current United States–Iran conflict, that vulnerability has again become apparent. Iranian threats to close the strait and attacks on commercial vessels have caused insurers to withdraw or sharply restrict war-risk coverage for ships operating in the Gulf, leaving tankers anchored outside the waterway and forcing exporters to curtail production. Oil prices have surged, with Brent crude jumping dramatically as hundreds of vessels halted operations amid fears of drone, missile or mine attacks. 

It is against this background that the United States has announced a USD 20 billion maritime reinsurance backstop designed to restart traffic through the strait. The programme represents a striking intervention by the state into the global insurance market, intended to restore confidence in shipping through a war zone. Yet the success of such an initiative will depend not only upon financial guarantees but also upon the realities of military risk and political escalation.

The mechanics of the programme

The scheme will be implemented through the United States International Development Finance Corporation (DFC), working alongside the US Treasury and military authorities. The DFC will provide up to USD 20 billion in reinsurance coverage for maritime losses incurred in the Gulf during the current conflict. 

Reinsurance in this context means that the American government will not insure ships directly. Instead it will act as a financial backstop to private insurers. Commercial underwriters will continue to issue policies covering vessels, cargo and crew against war-related risks such as missile strikes, drone attacks, mining or sabotage. Should losses exceed the insurers’ own capacity, the DFC will reimburse them up to the specified limit.

The structure mirrors arrangements previously used in aviation and terrorism insurance markets. After the attacks of 11 September 2001 for example, governments created similar backstops to prevent the collapse of aviation insurance coverage. War-risk insurance, which covers damage arising from acts of war, rebellion or terrorism, is particularly prone to sudden withdrawal because a single catastrophic event may produce losses far exceeding normal actuarial expectations. 

The current plan therefore attempts to restore a functioning insurance market by removing the most extreme tail risk from private insurers’ balance sheets. According to the DFC coverage will initially focus on hull and machinery insurance for vessels and on cargo carried through the Gulf, and will operate on a revolving basis up to the USD 20 billion ceiling. 

In addition to financial guarantees the programme will operate in coordination with United States Central Command, which may provide naval protection for commercial shipping. The combination of insurance coverage and military escort is intended to recreate the conditions under which maritime commerce can resume despite ongoing hostilities.

Why insurance collapsed in the first place

To understand the significance of this intervention it is necessary to consider why the private insurance market failed. Maritime insurers operate on the basis of calculable risk. In normal circumstances even dangerous routes such as the Strait of Hormuz remain insurable because losses are rare and predictable.

War fundamentally changes that calculus. When governments or armed groups deliberately target shipping, the probability distribution of losses becomes uncertain and potentially unlimited. Insurers therefore react by raising premiums sharply or withdrawing coverage altogether.

In the current crisis premiums for transiting the strait reportedly rose dramatically before insurers began cancelling war-risk cover entirely. Once insurance disappeared, shipowners faced an existential financial problem: a modern supertanker may be worth over USD 100 million, and the cargo it carries even more. Sailing without coverage is therefore commercially impossible.

The result was a classic financial choke point. Even if ships could physically pass through the strait, the absence of insurance made the journey economically irrational.

Will the backstop stabilise markets?

The American reinsurance plan is designed to break precisely this deadlock. By guaranteeing catastrophic losses, Washington hopes that insurers will resume issuing policies allowing tankers to move again and restoring the flow of oil and gas.

In the short term the policy may indeed have stabilising effects. Commodity markets respond as much or even more to expectations as to physical supply. If traders believe that oil exports from the Gulf will continue, price spikes may moderate even before traffic fully resumes. The mere announcement of a credible insurance mechanism can therefore calm markets.

However the scale of the problem raises doubts. Analysts note that potential liabilities for the hundreds of vessels currently in the region could exceed USD 350 billion, far beyond the USD 20 billion guarantee currently proposed. The backstop therefore functions less as comprehensive insurance than as a signal of political commitment.

There is also a fundamental distinction between financial risk and physical danger. Insurance can compensate for destroyed ships; it cannot prevent them from being destroyed. If Iranian forces or allied militias continue attacking shipping with drones, missiles or mines, insurers may still hesitate to underwrite voyages even with a government guarantee.

Historical precedents illustrate this point. During the Iran–Iraq “Tanker War” of the 1980s the United States escorted Kuwaiti tankers through the Gulf under Operation Earnest Will. Despite heavy naval protection one of the escorted vessels, the Bridgeton, struck an Iranian mine during its very first convoy, demonstrating how difficult it is to eliminate maritime risk in a confined waterway. 

The lesson from that episode is that naval power can reduce risk but rarely eliminate it entirely.

Geopolitical implications

Beyond its economic function the insurance programme also carries geopolitical meaning. By underwriting Gulf shipping the United States effectively assumes responsibility for the continued functioning of a crucial global trade route.

This is an extension of a longstanding American strategic role in the region. Since the late twentieth century Washington has maintained that the free flow of hydrocarbons from the Gulf is a matter of international security. The new insurance backstop is therefore not merely a financial instrument but a strategic signal that the United States intends to preserve maritime commerce despite Iranian threats.

At the same time the programme reveals the limits of that power. The need for government-backed insurance reflects the reality that private markets cannot absorb the risks generated by modern warfare. When geopolitical conflict reaches a certain intensity, only states possess balance sheets large enough to guarantee trade.

Commodity markets and the psychology of risk

The ultimate question is whether the programme will stabilise global commodity prices.

Oil markets are sensitive to both physical disruption and perceived danger. The Strait of Hormuz normally handles roughly twenty per cent of the world’s oil flows. Even a partial interruption therefore produces dramatic price reactions. 

If the insurance scheme succeeds in restoring even a portion of tanker traffic, it may reduce the extreme volatility currently affecting energy markets. Yet stability will remain fragile. The strait is geographically narrow, heavily militarised and easily disrupted by mines or drone attacks. Even isolated incidents could send freight rates and insurance premiums soaring again.

Moreover the programme addresses only one component of the supply chain. Production cuts in Gulf states, storage bottlenecks and political escalation could continue to constrain energy flows regardless of insurance arrangements.

Some tentative conclusions

The USD 20 billion reinsurance facility announced by Washington represents an innovative attempt to stabilise global trade during a regional war. By absorbing catastrophic losses the United States hopes to revive a maritime insurance market that collapsed under the pressure of geopolitical risk.

Yet financial guarantees alone cannot eliminate the dangers inherent in navigating a war zone. Insurance can spread losses, but it cannot remove missiles from the sky or mines from the sea. The success of the programme will therefore depend as much upon military and diplomatic developments as upon actuarial calculations.

For global commodity markets the initiative may provide temporary reassurance. But the deeper truth remains unchanged: as long as conflict threatens the Strait of Hormuz, one of the world’s most vital energy corridors will remain a place where economics and war collide.