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Notes -
US to Offer Below Market Insurance Rates to Arab Oil Shipping
CNBC Reports that the United States, in an effort to open Hormuz and avoid a rise in global oil prices, will take a series of steps designed to allow shipping to resume. While this will likely change, as it is definitely a "building-the-airplane-in-midair" policy and may in fact just be the administration trying to backfill a Truth Social post from Trump, we're likely to get something like this occurring.
-- There has been no actual Iranian effort to shut Hormuz at this time, rather Insurers have pre-emptively pulled coverage and as a result tankers are unwilling to risk it. It's questionable whether Iran can actually sink tankers, but the global insurance industry has decided it is not worth the risk. As a result oil prices have jumped a bit, though not insanely, since the war's beginning. The US government is now stepping in to offer insurance that insurance companies refuse to offer, "at a very reasonable price". This would amount to subsidizing foreign shipping companies by offering them below-market pricing for their insurance costs, and if payouts must be made the cost of a single loaded oil tanker is likely to land in $250mm range, and could run higher depending on oil prices.
-- While the argument that oil is a global market and it is important to keep energy costs and gas prices low for the American consumer...doesn't it feel odd to you that we're engaging in a giveaway to Aramco and other oil multinationals? It feels wrong, it feels antithetical to an America-First policy platform. We're using the heavily indebted US treasury to backstop foreign corporations and sovereign wealth funds. The policy itself may be sound, but the framing grates on me: we are escorting foreign ships, we are subsidizing foreign corporations, in exchange for little or nothing. I'd sooner see an agreement framed explicitly as Saudi Arabia paying for protection. If the benefits accrue disproportionately to foreigners, foreigners should shoulder the cost. America should not be in the business of subsidizing foreign shipping.
-- Does this alter the Bayesian probability that the Arab gulf kingdoms were the driving force behind the war in Iran? I'm not sure how to parse it, but it sure seems relevant. Is this indicative that they are not onside and need to be bribed to keep the coalition together? Or is it indicative that their support was the driving force all along and the USG is continuing to operate according to the wishes of Aramco?
-- On the positive, this does seem to be an admirable aligning of interests: the USG is both insurer and protector, so it has "skin in the game" to protect the oil tankers at all costs. Or at least up to $250mm or so a ship. Assuming such a thing is possible.
I'm a little confused by this. How is it that "very reasonable" = "below-market"?
@phailyoor
There's a market that refuses to sell these policies at a reasonable price, we are selling them, therefore they are below market. I'm reading "reasonable" to mean "affordable" as it is typically used colloquially, admittedly one could pedantically argue that the market price is inherently the "reasonable" price but I don't think that's how Trump intended it.
The argument in favor of the policy is that the US has better knowledge that ships won't be hit and thus can offer a better price while knowing they will make a profit on the policies. If the premiums on the policies ultimately pay for the losses, plus/minus the costs of the escorts and protection, then sure it would be a good policy. But this doesn't seem to be driven by actuarial logic so much as by an effort to avoid high gas prices going into the summer driving months in the USA.
Government insurance is historically a dangerous project, where for example Flood Insurance has evolved into a massive subsidy from the pockets of taxpayers into the pockets of people with beach homes.
Well we see that in many of these extreme cases, insurance companies have in many cases seriously underpriced insurance and gotten super hosed in the process. When it comes to overpricing, I'm sure a lot of insurance companies have also done that, but we don't hear about it because people grumbling about increased premiums isn't exactly newsworthy. In the end insurance is a market with low liquidity and high information asymmetry, so it's a place where the free market works quite poorly when it comes to pricing.
There's an asymmetry to it: one or two insurance companies can get destroyed underpricing, and in the process they will actually crowd out the companies pricing it correctly. But if one or two insurance companies overprice, they just don't get the business, some other company does.
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