Can War Risk Be Securitised? Testing the Feasibility of a Marine War-Risk ILS

Marine war-risk premium has repriced sharply through the Red Sea and Gulf disruption cycle, and traditional war-risk reinsurance capacity is finite, concentrated and increasingly cautious about correlated chokepoint exposure. When a peril prices hard and capacity is scarce, sponsors look at alternative capital. The question insurers now put to us directly is whether institutional investors can be brought into marine war risk at all, and on what terms.

The honest answer is that war risk is one of the hardest perils to securitise — but not because investors dislike the return profile. It is because the peril violates several of the assumptions that make catastrophe bonds investable: a stable hazard process, an independent loss trigger, and a modelled view both sides can defend.

Mainstream catastrophe bonds carry broad war and terrorism exclusions, partly because investors and their own retrocession chains cannot price an adversarial, intentional hazard, and partly because sanctions and state-actor questions make loss adjudication politically sensitive. Any marine war-risk ILS therefore cannot be a variant of a windstorm bond with the exclusion deleted. It has to be built as a purpose-designed instrument with its own peril definition, its own loss-verification mechanics and its own exclusion architecture.

That definition work is the first deliverable, not a legal afterthought. The transaction must say precisely what counts: attack by state or non-state actor, mine or drone strike, seizure and detention, blocking and trapping, or confiscation. Each has a different loss pattern and a different evidentiary trail.

Indemnity triggers give the sponsor the cleanest economic hedge but require investors to accept the sponsor's underwriting, claims handling and reserving discipline in a peril with contested facts. Industry-loss triggers depend on a credible independent reporting agent for marine war losses, which is far less established than for natural catastrophe.

Parametric and modelled-loss triggers are more tractable than most sponsors assume. A structure can pay on objectively observable facts: a confirmed attack within a defined geographic polygon, a named-area closure, a flag-state or coalition advisory change, a war-risk listing-area amendment, or a transit-volume collapse measured by AIS-derived traffic counts. These are verifiable, timestamped and hard to manipulate, and they convert an adversarial peril into a set of index events.

The price of that tractability is basis risk. A sponsor whose fleet is hit outside the polygon, or whose loss comes from detention rather than damage, receives nothing. Quantifying that gap honestly — before placement — is the single most useful analytical service on this class of transaction.

Investors will not underwrite a narrative. A credible war-risk ILS modelling package needs an event-frequency view built from incident history and threat-environment conditioning, a severity view that separates hull damage, total loss, crew liability, cargo, delay, salvage and wreck removal, and an accumulation view that recognises how many insured interests sit inside one chokepoint at one time.

It also needs a stated model-uncertainty position. Natural-catastrophe investors are used to comparing vendor views. For war risk there is no vendor consensus, so the sponsor must supply a documented, reproducible, independently reviewable model and an explicit sensitivity range around expected loss and attachment probability.

The first marine war-risk ILS is unlikely to be a large public 144A bond. It is more likely to be a small private structure or a collateralised layer with a parametric chokepoint trigger, a short tenor, a tightly drawn geography, a low attachment probability and a mandatory reset — a proof-of-concept that establishes loss-verification practice rather than a capacity solution.

That is still worth doing. Every recognised ILS peril started as a bespoke private deal before it became a repeatable structure.

Quantica Marine Insurance AB provides independent risk analysis, actuarial modelling and structuring support for marine war-risk and specialty risk transfer, including trigger design, basis-risk assessment and independent model review. Founder and Chief Executive Officer Jonas Mohamed Osman Abdelghafour — known professionally as Yonas Osman — is an actuary and Financial Risk Manager (GARP) with more than twenty years across insurance, banking, actuarial modelling and model validation. Request a demonstration or an independent review.

Quantica Marine Insurance AB is under construction and not yet licensed to conduct insurance business. Nothing here is a solicitation, offer or recommendation to buy, sell or subscribe for any security, and securities placement, legal advice and investment advice are undertaken only by appropriately authorised counterparties.