International trade in a polarized world – lessons from history (4): War Risk and Marine Insurance: From Florence to the Strait of Hormuz

In the last week of February 2026, the world's largest marine insurers began doing something their predecessors had done in moments of genuine maritime catastrophe: they stopped writing cover. NorthStandard, the London P&I Club, and the American Club issued notices suspending war-risk insurance for vessels transiting Iranian waters and the Persian Gulf. Within days, transit through the Strait of Hormuz — the narrow channel through which roughly a fifth of the world's oil passes — had collapsed by over 90 percent. President Trump responded by ordering the U.S. Development Finance Corporation (DFC) to provide political risk insurance and guarantees for all maritime trade in the Gulf "at a very reasonable price," with the U.S. Navy standing by to escort tankers if needed. There is a history behind this action.

Origins: War as the Original Risk

Marine insurance in its modern form emerged in the Mediterranean trading world of the late medieval period. It was formalized in places like Genoa and Barcelona before it migrated to London’s Lombard Street and, ultimately, to Lloyd's coffee house on Tower Street in the late seventeenth century. From the very beginning, war was the central preoccupation of insurance underwriters. Privateers and seizure by foreign princes were not exotic edge cases but, instead, ordinary perils of trade. Florentine marine insurance policies of the sixteenth century insured against “the fortunes of the sea”, including capture, seizure and attacks. Lloyd's policies, written in the 1680s and 1690s, covered losses from "enemies, pirates, rovers, thieves", together with perils of the sea.

There was no separate "war risk clause" as such, because war risk was not conceptually distinct from any other risk. However, during tensions between France and Britain, in 1739, Lloyd’s offered marine insurance “free of capture and seizure” (FC&S), turning these perils – for some time – into separately insurable ones.  

The defeat of Napoleon in 1815 inaugurated a period during which British naval supremacy was so overwhelming that war risk ceased to be a serious commercial concern for most trades. Privateering was abolished by the Declaration of Paris in 1856, and the great maritime powers largely refrained from attacking each other’s mercantile ships. Underwriters at Lloyd's still included broad language about enemies in their policies. Premium rates for the risk of war, to the extent they were priced at all, fell close to zero.

However, from the 1870s forwards several incidents brought insurers to distinguish between maritime and war risks. This was a direct response to new circumstances. Ships were not merely seized and released following the receipt of ransom. Instead, under the circumstances of war, it became more usual to attack and sink commercial ships. The mounting use of torpedoes had a major impact on reservations of insurers. In 1879, the new Belgian Maritime Law did not list war risk as a normal cover. This followed Antwerp’s practice; the city’s port policy of 1859 had distinguished between the risks mentioned. In 1899 Lloyd’s inserted the FC&S clause into its standard policy.

During the First World War German U-boats sank nearly 5,000 allied merchant vessels, and the question of who would bear those losses — shipowners, underwriters, or governments — became one of the most urgent financial and political problems of the war. Lloyd's and the London market found themselves facing losses on a scale that threatened solvency, and the British government was forced to step in with a state war-risks insurance scheme to keep merchant shipping afloat.

This experience produced a formal, codified war risk clause. In 1939, on the eve of the Second World War, the London market introduced the Institute War and Strikes Clauses, which expressly excluded war risks from standard marine cover and made them the subject of a separate, additional policy. This division — now familiar to every shipowner and broker as the distinction between "H&M" (hull and machinery) cover and "war risks" — was the direct product of the twentieth century's experience that war could produce losses so concentrated that ordinary insurance mechanisms would fail without government backstopping or formal segregation.

The war risk market spiked during the Iran-Iraq "Tanker War" of the 1980s (during which the U.S. reflagged Kuwaiti tankers and provided naval escorts in an episode directly echoed today), the Gulf War, and the Houthi attacks on Red Sea shipping in 2023–2025. In each case, war risk premiums were high, some insurers withdrew, but cover remained available at a price. The market bent; it did not break.

2026: The Break

What has happened in the Strait of Hormuz in the first days of March 2026 is fundamentally different. The outbreak of direct U.S.–Israeli–Iranian conflict has produced not merely elevated premiums but outright collective cancellation. Members of the International Group of P&I Clubs — the mutual insurers that cover about 90 percent of the world's ocean-going tonnage — have moved to automatically terminate war risk cover for vessels entering the Persian Gulf. The private market has not merely repriced the risk; it has declined to carry it at any price.

Trump's response — ordering the DFC to provide federal political risk insurance and guarantees for all maritime trade in the Gulf — is a repetition of an old recipe. When the insurance market cannot price catastrophe at a level that keeps commerce moving, only a state, able to absorb losses that would bankrupt any private insurer, can fill that gap. The British government understood this in 1914.

The American government understood it after 9/11, when federal insurance backstops were established to keep shipping and aviation moving. Trump is reaching for the same instrument now.