How Shipping Insurance Really Works During a War

Steve Ogullukian (0:02)

Bloomberg Audio Studios, podcasts, radio, news.

Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:23)

Joe, you know, I'm slightly obsessed with insurers. Maybe obsessed isn't the right word, but fascinated, appreciative of insurers, because I think there's a tendency to think of them as sort of limiting factors in the world. So, you know, if you can't get insurance in California, you can't build a house. But I also think of them as enablers of certain behaviors, right?

Joe Weisenthal (0:44)

I think that's a really good way to put it. People do a lot of things that they wouldn't otherwise do were they not able to get insurance on it. So, yes, it does cut in both directions. So we should appreciate the existence of insurance.

Tracy Alloway (0:59)

All right, well now-

Joe Weisenthal (1:00)

Actually, you know what? My daughter actually-

Tracy Alloway (1:02)

Your daughter has insurance?

Joe Weisenthal (1:03)

Well, she asked me to explain insurance the other day, which I was like, you know, and then suddenly I was like, I have to explain insurance to a 10 year old.

Tracy Alloway (1:10)

Wait, first of all, tell the listeners how old your daughter is.

Joe Weisenthal (1:12)

She's 10 I was trying, I can't remember the context exactly, what it was, maybe something about fire insurance, et cetera. But I think I was actually pretty proud of myself. I was basically like, there are these risks that happen where like, say if your house burns down, you could like ruin you financially, but it doesn't make sense to like save all that money in cash and always have that much savings available to be able to rebuild your house. And therefore the way you solve it is by paying a small amount. I was pretty like happy. I think she got it.

Tracy Alloway (1:41)

I'm glad she's planning for home ownership at an early age. Okay, well, now is a really good time to think and appreciate insurance because, as you know, we are recording this on April 8th. I feel like, do I need to say the hour? Maybe I do. 12:06 PM on April 8th. It is not entirely clear at the moment what is going on in the Strait of Hormuz. We don't know if ships are being allowed to pass or not. But we do know since the earliest days of this entire conflict happening, that one of the issues that's come up is war insurance and maritime insurance in general.

Joe Weisenthal (2:16)

Yeah, and we sort of touched on it in our very first episode that related to the war. But of course, one major reason why ships haven't been moving through is the direct threat of being attacked and sinking. But then another element is the entire insurance element. And then beyond that, that adds cost to everything. And it's not, how do you price war insurance? I have no idea. So, I have many more questions on this topic.

Tracy Alloway (2:43)

Yeah, the whole ecosystem of maritime insurance in general, you hear these things thrown around, like whole loss protection and liability protection. And there's the reinsurers, and then there's the normal insurers. And then there are insurance clubs. Right, there are all these different players.

Joe Weisenthal (2:57)

I want to be part of an insurance, you belong to the SoHo Club. Me, I belong to an insurance club. Like think about that.

Tracy Alloway (3:03)

You kind of have the club jacket thing going on at the moment. Okay, well, we do in fact have the perfect guest to talk about all of this. We're gonna be speaking with Dorothea Ioannou. She is the Chief Executive Officer of the Managers of the American P&I Club. So you can ask her if you can join.

Joe Weisenthal (3:19)

Can I join?

Tracy Alloway (3:20)

As well, as well as.

Joe Weisenthal (3:23)

I need one member to endorse me, and another one, that's how it works at these clubs.

Tracy Alloway (3:26)

All right, well the second member who could potentially endorse you is Steve Ogullukian. He is the Reinsurance Director at the American P&I Club. So truly the perfect guest. Thank you so much for coming on Odd Lots.

Steve Ogullukian (3:36)

Great to be here.

Dorothea Ioannou (3:37)

Thank you for having us. Thank you.

Tracy Alloway (3:39)

Why don't you go ahead and tell Joe what is an insurance club and can he be part of them?

Dorothea Ioannou (3:44)

Okay, great. First of all, I love that you talked about insurance, especially from our perspective, clubs, we're enablers. So what are clubs? Clubs in our context, the P&I Club, which means protection and indemnity, is a collective, it's a not-for-profit accessible mutual association. It's not a commercial insurer, and it basically, historically, is a club that brought together ship owners in the industry that were trying to fill a gap. So they came from a need for society. And really what clubs do is while they insure the owner, they are protecting society because they are insuring the owner for what you referred to before as liabilities. So that would be like losses or damages that they cause to other people, not to themselves. So the clubs never pay owned damages. We will not pay damage that occurs to the vessel in an accident or if they have economic loss, their own economic loss. So what P&I clubs do is they step in and they protect the owner and defend the claims. But they ultimately pay whatever is the fair compensation or whatever is adjudicated for passengers that perhaps get hurt on the ship due to negligence of the ship. Claims from a crew that might get hurt in an accident. Liabilities related to collision. So if the ship hits another ship and they cause damage or personal injury to people or crew on the other ship, they'll pay that. Oil pollution, environmental damage, you know, so cleanup related to that. So basically, the way we like to think about P&I, and you really should think about it like this, it's the safety net. And it is the only way that a ship can trade. So for example, let's look at what you do with your car, right? You're not allowed on the road if you don't have liability insurance, right? You don't have to have own damages insurance, right? But you do need to have liability because we need to know that all the cars on the road have financial security behind them, that if something happens and somebody else gets hurt, there's compensation that's going to come from somebody that's responsible. So that's the concept, let's say, of a P&I club.