Cost of Red Sea shipping insurance rises 2,700%

via Reuters

• Premiums up from 0.07% to 2%
• Houthi attacks cause leap
• Ships may pay $2m a trip

The cost of insurance to protect ships against losses incurred from conflict has jumped more than twenty-fold since October, before Houthi rebels began firing on vessels passing through the Red Sea.

In late November, the rebels in Yemen began attacking commercial ships in what they claim is a show of support for Palestinians in the Israel-Hamas war. 

Average war risk premiums for one of the world’s most important marine trading routes stood at a nominal 0.07 percent in October, according to the Economist Intelligence Unit (EIU), and even lower, at 0.04 or 0.05 percent, according to some underwriters.   

By the end of December, average premiums had crept up to around 0.5 to 0.7 percent, the EIU said in a paper in mid-January, and they are now as high as 2 percent, AGBI has learned, a rise of 2,700 percent. 

• Red Sea crisis ‘will push up Middle East consumer prices’

• Red Sea attacks could harm more than ports and shipping

• Suez shipping traffic drops 20% as Houthi attacks continue

“They might have started from a fairly low base, good value, but premiums tend to rise steadily the longer a threat persists,” said Neil Roberts, head of marine and aviation at Lloyds Market Association in London.  

Cover is generally quoted as a percentage of the value of a ship over a given time period. So a war insurance cost of 2 percent for a vessel worth $100 million would mean its owner having to pay $2 million to sail through the risk area. However, underwriters sometimes offer no-claims discounts of up to 50 percent in regard to additional premiums.

This is on top of other marine insurance costs, such as cargo, hull and fire cover, Roberts said. At the same time, overall container freight rates have climbed as shipping reroutes to avoid the Red Sea, adding journey time and fuel costs.   

The higher price of Red Sea war risk insurance is not “catastrophic” for the shipping industry right now, Roberts said, “but if there was a ship loss or sinking, oil spill requiring clean-up, crew casualty or any other collateral damage, costs would go up more quickly”.

There is “definitely a heightened risk”, he said. 

Around 12 percent of global trade passes through the Red Sea, including 30 percent of global container traffic. Many vessels are re-routing to avoid the especially high-risk Bab Al Mandeb strait between Yemen and Djibouti, a key route to access the Suez Canal to transport goods between Europe and Asia.

Ships are instead going around Africa via the Cape of Good Hope, adding approximately 10 to 15 days to journey times. Ships prepared to risk sailing through the Red Sea have to weigh up whether it is cheaper to pay the higher insurance premiums or rack up extra costs from doing the longer route. 

“For shipowners and charterers, this is a moral, security and economic question,” Roberts said. 

In a letter to the industry dated January 29, Graham Westgarth, president of the UK Chamber of Shipping, wrote: “The chamber recognises the complexity of commercial and legal ramifications for vessel owners in their decision-making regarding Red Sea transits. 

“Shipping has always accepted a degree of risk and this is balanced against the safety of seafarers. 

“Given that attacks thus far have been discriminate in their targeting and whilst accepting that mistakes will be made and some collateral damage may occur, the chamber supports its members in their assessments, either to continue to transit the Red Sea where the risk is deemed to be low, or divert where the risk is unacceptable.”

A spokesperson for the UK Chamber of Shipping said: “As with any insured risk, war risk premiums are set in response to a specific threat or risk. 

“No ship owner will want to undertake anything that prejudices their cover, and the specific terms of the cover are set by the insurers.”

Guy Platten, secretary general of the International Chamber of Shipping, said the Red Sea crisis “reinforces the importance of freedom of navigation of the sea”. 

Platten said: “WIth 12 percent of world trade, a huge $3 billion to $9 billion of daily cargo, transiting the Suez Canal, making sure ships can travel without facing physical threats to the ships and, importantly, the lives of innocent seafarers, is vital to keep this trade moving.”