European dominance of key insurance for shippers a hurdle for Beijing’s ambitions
Wide-ranging sanctions on Russian oil exports in response to the Ukraine war highlight potential problem
By Ji Siqi
April 17, 2023
Illustration: Lau Ka-kuen
China has monitored Western sanctions on Russia closely over the past year, with Beijing fearing similar punishment in any future confrontation and stepping up efforts to eliminate potential choke points.
A price cap imposed on Russian seaborne oil exports by the Group of 7 (G7) – the world’s seven major advanced economies – and the European Union in December sounded another alarm for trade-reliant China because it banned companies based in G7 countries from providing financial services such as insurance for cargoes in breach of the cap.
It could affect most oil cargoes originating in Russia, including those bound for destinations outside the G7 and EU, because protection and indemnity insurance – coverage that is indispensable on all international shipping routes – is dominated by organisations based in Europe.
Four of the G7’s member states are European – France, Germany, Italy and the United Kingdom – with the others being Canada, Japan and the United States.
China definitely views maritime insurance as a weakness, especially after sanctions on RussiaKarim Moukhtar ElGalad
“China definitely views maritime insurance as a weakness, especially after sanctions on Russia,” said Karim Moukhtar ElGalad, a Hong Kong-based trade and traffic manager at Maersk, one of the world’s biggest shipping companies.
“Therefore, it is strategically important for China to have Chinese insurance institutions providing maritime insurance on a global or regional scale to make sure maritime transportation cannot be affected by sanctions from other countries like what happened with Russia.” Developing a Chinese shipping insurance sector has been on Beijing’s agenda for decades, with the authorities recently eyeing the Guangdong-Hong Kong-Macau Greater Bay Area as an incubator, but industry insiders said there was still a big question mark over whether the country’s financial sector could accommodate such an ambition. Bolstered by its status as the world’s factory, China’s shipping industry has developed rapidly in recent decades and the country is now home to seven of the world’s 10 biggest seaports. It also dominates the world’s shipbuilding industry, alongside East Asian neighbours Japan and South Korea.
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Efforts have also been made to accelerate its development of shipping-related legal and financial services, but Wang Wei, chief executive of Hong Kong-based Rare Earth Insurance Partners, said such professional services still lagged far behind its physical infrastructure.
“If we say the number of Chinese vessels increased from one to 100 in the past four decades, has its underwriting capacity also increased from one to 100 during the same time? It’s doubtful,” Wang said.
He said Chinese insurance companies had widened the scope of their marine insurance products in hull and cargo coverage. In terms of premium volume, China was the largest cargo insurance market in the world in 2021 and the second-largest hull insurance market, according to the International Union of Marine Insurance.
But Wang said the country still played a negligible role in some specific types of marine insurance, such as protection and indemnity, and reinsurance.
These sectors have long been dominated by Europe and the United States, and it would be quite hard for China to break that barrierWang Wei
“These sectors have long been dominated by Europe and the United States, and it would be quite hard for China to break that barrier,” he said.
A form of mutual maritime insurance provided by what is known as a P&I club, protection and indemnity insurance offers cover to club members – mostly shipowners – for open-ended risks and third-party liabilities, from loss of life to oil spills, that traditional insurers are reluctant to cover as claims could run into billions of dollars.
The world’s top 12 P&I clubs – primarily from the UK and Nordic countries – comprise the International Group of P&I Clubs, which is based in London.
The IG, as it is known, allows individual clubs to share large claims and purchases high levels of reinsurance – insurance for insurers – for bigger liabilities.
Over 90 per cent of the world’s ocean-going tonnage and over 95 per cent of ocean-going tankers are covered by the IG, according to its website.
China has its own P&I club, the China Shipowners Mutual Assurance Association. Though not a member of the IG, its liabilities for international routes are underwritten by some IG member clubs.
According to an article published in 2018 in China Shipping News, a newspaper administered by the Ministry of Transport, 80 per cent of Chinese shipping giant COSCO’s vessels had protection and indemnity insurance provided by foreign insurers.
While there was no imminent threat to China’s access to the global marine insurance market, Western dominance could still be a concern, the Hong Kong Federation of Insurers said.
In a written reply to the Post, it said reinsurance was still “dominated by international reinsurers, which can bring up different sanctions issues” in situations like the Russia-Ukraine conflict.
Since Beijing outlined its bay area development plan in 2019, promoting the area’s marine insurance industry has been a key priority. Incorporating Guangdong province’s manufacturing powerhouse, Hong Kong’s international financial centre, and top container ports in Guangzhou, Shenzhen and Hong Kong, analysts said it was the ideal location to incubate the sector in China.
Such an advantage can attract more Chinese shipping companies and their ecosystem partners to conduct more shipping activities – including insurance – with the mainland via Hong Kong to the world Mike Lai Kee-hung
“The [Greater Bay Area] has three top ports together with many other top liner shipping companies, bulk shipping companies, and port operators. Hong Kong is an international financial centre and a top trader for [yuan],” said Mike Lai Kee-hung, chair professor of shipping and logistics at Hong Kong Polytechnic University’s department of logistics and maritime studies.
“Such an advantage can attract more Chinese shipping companies and their ecosystem partners to conduct more shipping activities – including insurance – with the mainland via Hong Kong to the world.”
But a lack of professional talent compared with existing marine insurance centres like London and Singapore could hamper those ambitions, he added.
Industry insiders said it would also be helpful if the bay area plan enhanced support services, such as setting up an arbitration centre for maritime disputes, but that also entailed multiple challenges.
Tao Jingzhou, an international arbitrator who has practised in Beijing, Hong Kong and London, said the bay area lacked a track record in dealing with shipping insurance disputes, whereas cities such as London had well-established precedents.
“Arbitration cannot be imposed on foreign parties but needs to be accepted voluntarily by all contracting parties, that’s what we call the party autonomy principle,” Tao said.
“Foreign parties might well have concerns about a Chinese tribunal’s independence and impartiality if the site of arbitration is in the [Greater Bay Area].”
The Hong Kong Federation of Insurers said Hong Kong could play a vital role in that regard by leveraging its connections with the world, particularly through its financial market and common law system.
If the West does not provide such insurance, does any Chinese company have the capacity to insure it? Li Lianjun
Li Lianjun, a senior partner and the head of the transportation and commercial litigation practice at Reed Smith Richards Butler in Hong Kong, said the key was whether China’s insurance sector, or even financial sector as a whole, had the capacity to absorb and digest the potential risks of protection and indemnity insurance.
“This requires a lot of planning,” he said. “Where does the money come from?”
For a very large crude carrier carrying around 2 million barrels of crude, the amount of protection and indemnity coverage for oil spills and personal injury could typically be US$1 billion.
“If the West does not provide such insurance, does any Chinese company have the capacity to insure it? If it is a listed company, it will have to calculate the risk and be responsible to its shareholders, and they may not be able to bear [the cost] if just one accident occurs,” Li said.
Nevertheless, there were precedents that China could learn from, Li said. When the US and Europe used a similar insurance ban to limit Iran’s oil exports in 2012, countries such as Japan and India responded by organising cover by state-run insurers or directly by their governments.
But such state guarantees were not limitless. For example, the Japanese government provided cover of up to US$7.6 billion for each tanker carrying Iranian crude bound for Japan, but the cap for Indian coverage was just US$50 million.
“If China wants to do the same, the key is the scope of the protection, which will require a comprehensive strategy,” Li said.
Chinese exports dwarf Iran’s crude trade, and analysts said that if China intended to secure a whole marine insurance supply chain to insulate itself from the risks incurred by Russia and Iran, that would go against the international nature of the sector.
The key question is whether China and Chinese insurance companies themselves have enough strength to digest all the risks internally Li Lianjun
“Because the essence of insurance is reducing risks by diversifying them to the whole world through commercial means,” Li said.
“The key question is whether China and Chinese insurance companies themselves have enough strength to digest all the risks internally.”
And the lower liquidity of the Chinese currency due to capital account controls might be yet another hurdle, Li added.
“The logic is very simple,” he said. “If you insure a vessel through Chinese companies entirely and it is then stranded in Singapore, while IG pays in US dollars and euros, will Singapore accept the compensation from Chinese insurers if they pay in [yuan]?”