Amid war in Iran, the White House misunderstands how political risk insurance works
On the evening of March 3, the White House shared a mysterious statement. It read in part:
“I have ordered the United States Development Finance Corporation (DFC) to provide, at a very reasonable price, political risk insurance and guarantees for the Financial Security of ALL Maritime Trade…”
This post from the White House, amid American airstrikes in Iran, suggests that the president does not understand how this type of insurance works. A bedrock principle of insurance is that a covered loss must be “fortuitous.” This means that a loss must be unexpected.
For example, if your business is on fire and you respond by rushing to your insurance agent to purchase fire insurance when the property is in flames, that insurance is invalid and constitutes insurance fraud. Simply put, you cannot buy fire insurance to cover an actively burning building because insurance applies when events are accidental. If insurance underwriters intentionally choose to provide “burning building” insurance, you can be sure that it will not be at “very reasonable price.”
To draw an example from Russia’s war on Ukraine, following the invasion, cargo war risk premiums were expected to rise by 300 percent. War risk insurance in an active war zone is anything but cheap. One reinsurer cites that coverage during an active war is excluded. This also begs the question as to what constitutes a “very reasonable price.”
The White House’s post specifically cites political risk insurance from the U.S. International Development Finance Corporation (DFC). Political risk insurance is a niche corner of the insurance market. A number of private market insurers offer it, as does the DFC. Its products include coverage for losses from confiscation, expropriation and nationalization (CEN) of property, as well as other types of political risk-related insurance. It appears that the post was intended to address the market for war risk insurance, known also as political violence (PV) insurance, a sub-branch of political risk.
The DFC became the successor organization to the Overseas Private Investment Corporation (OPIC) in 2020. Although the DFC does provide war risk insurance, its website indicates that Iran is one of nine Middle East countries where “the DFC cannot provide support.” Others that are unsupported include Bahrain, Kuwait, Qatar, Saudi Arabia, Syria, Israel, Oman and the United Arab Emirates.
The private marine insurance market has long dealt with war risk. Whereas coverage for marine hull and marine cargo is typically included in marine insurance policies at a low cost, after the commencement of hostilities, the activation of a “cancellation clause” requires those who are insured to apply for coverage if ships are traveling in designated war zones. And such coverage does not come cheap.
Ultimately, this statement calling for the DFC to provide reasonably priced political risk insurance is in line with other White House efforts to reduce insurance premiums by fiat. In 2024, then-presidential candidate Trump announced via social media that, if elected, he would cut automobile premiums in half. He has since intervened in private pharmaceutical markets, floated capping credit card interest rates, and took equity positions in private companies. In their history, OPIC and the DFC have recouped the billion dollars in losses they have experienced over the years.
The low-cost political risk insurance is understandably a measure to support the global oil business. This industry relies on shipping a significant amount of the world's oil through the Strait of Hormuz, a perilous and conflict-prone region.
Eventual political risk losses from the Iran war would, however, be borne by the Treasury and funded by taxpayers. Once again, the White House demonstrates its anti-free market leanings with knee-jerk cronyist moves. There is a private market for political risk insurance, including Lloyd’s, as well as other insurers. In this, and other instances of cronyism, our advice to the White House is to get out of the way stop harming insurance markets with needless intervention.