A rocket into ship insurance. Red Sea insurance from 10,000 up to 700 thousand USD per ship
By Marek Grzybowski
Attacks in the Red Sea increase the business risk of marine insurers, and war risk premiums are rising, Moody’s reports. Operators and freight forwarders encounter cases where insurers avoid bearing the risk of insuring ships carrying goods through the Gulf of Aden. The instability of marine insurance prices is a growing problem for insurance brokers after the attacks in the Red Sea, warns United Insurance Brokers Ltd (UIB).
According to a report by Moody’s, recent attacks on shipping lanes in the Red Sea have resulted in a sharp increase in war risk premiums. Risk assessment is not only a challenge for insurers operating in the maritime business.
It is also a problem for agents and forwarders, ship owners and ship operators. Many fleet managers simply changed ship routes. Disruptions to shipping lanes have raised concerns about potential losses, prompting shipping companies to re-evaluate their insurance in the face of increased risks. The liner shipowners were joined by the operators of bulk carrier fleets and the owners of tankers, which we inform about on an ongoing basis in GospodarkaMorska.pl
Emily Stausbøll, Xeneta Market Analyst, said: “Rates have not hit anywhere near the levels we saw during Covid-19, but the sudden nature of the Red Sea crisis has seen a more rapid increase in rates, which is arguably creating even more disruption than during the early months of the pandemic.”
Insurance with war risks
According to a UIB spokesman, “in order to control risk and ensure appropriate prices, most international marine insurers have issued declarations canceling war coverage for ships in high-risk areas” and allowed insurers to “take advantage of the option to charge additional premiums for each insured shipment.”
– We are not concerned about the lack of international demand [for insurance – MG] and reinsurance opportunities to meet the increased demand for war insurance for ships and cargo, the challenge for our clients is the significantly increased costs – emphasized the spokesman.
Houthi attacks have led to a sharp increase in “war risk” premiums. This type of insurance is offered to operators for ships at risk of losses resulting from crossing conflict zones.
– These are water areas where damage may occur due to attacks or seizures of ships by pirates in high-risk regions. It is even enough that the ship or cargo has links with the shipowner, operator or forwarder from a specific country – explains Kassandra Jimenez-Sanchez in “Reinsurance News”.
– Ships linked to the US, UK or Israel currently pay 25% to 50% higher war risk premiums than other ships sailing in the Red Sea, said David Smith, director of hull and marine liabilities at insurance broker McGill and Partners, reports Jonathan Saul and Carolyn Cohn, Reuters.
“The ships that have had problems so far are those linked to Israeli, American or British ownership, – informed Marcus Baker, global head of maritime and cargo at Marsh, told Reuters editors.
Rocket into the ship
Some insurers are currently avoiding insurance of ships entering the Red Sea, sources from the operators inform. During one of the most serious incidents, a tanker operated by a British operator company, whose cargo was owned by the global trading company Trafigura Maritime Logistics, was hit by a surface-to-water missile. The fire on board M/V Marlin Luanda, flying the flag of the Marshall Islands, has been extinguished. We wrote about it here
– We are pleased to confirm that all crew on board Marlin Luanda are safe and the fire in the cargo tank has been completely extinguished. The ship is now sailing towards a safe port. The crew continues to closely monitor the ship and cargo, the cargo owner informed after the fire was extinguished.
In the announcement of January 27 this year. it said: “No other vessels operating on Trafigura’s behalf are currently transiting the Gulf of Aden and we continue to carefully assess the risks associated with any voyage, including in relation to the safety and security of crew, shipowners and customers.
Insurance agency companies report that war risk rates for Red Sea cruises have until recently fluctuated around 1% of the ship’s value during the first days of February 2024.
Brokers demanded about 0.7%, with various discounts used by insurers earlier, Reuters reports. In times of peace, insurance premiums were less than 0.1% of the ship’s value. Despite higher premiums, insurers offer customers post-transit discounts if the journey goes without any incidents, reports Akankshita Mukhopadhyay from Reinsurance News.
Costs are rising, but there is no big problem
Additional costs are already counted in hundreds of thousands of dollars for organizing a seven-day transport of crude oil. “The apparent safe passage offered by the Houthis to vessels flagged or owned by Russia, China – including Hong Kong – and Iran is intended to provide a degree of certainty to trade markets linked to these countries,” Jonathan Saul and Carolyn Cohn report, citing Munro Anderson , head of operations at Marine war risk and insurance specialist Vessel Protect, part of Pen Underwriting.
The UIB predicts that the turmoil over insurance rates will have deeper consequences. United Insurance Brokers Ltd’s analysis notes that providing cover for vessels passing through high risk zones increases complexity and risk for insurers in more remote loss scenarios.
Lloyd’s and large marine insurers are expected to face greater cost exposure given their market leadership. With reinsurance, risk is spread among different insurers and reinsurers around the world. Therefore, according to the UIB, in most scenarios individual insurers expect only moderate losses due to limits on the size of insurance contracts. The practice in marine insurance is to diversify risk among several carriers, combined with reinsurance protection and a low risk of accumulation of losses.
Reinsurance without risk and losses
Despite the challenges associated with the unpredictability of operations in at-risk waters, the short duration of war risk insurance allows insurers to quickly adapt their approach in the event of risk escalation. This allows for flexible creation of rates that take into account changing situations in threat regions.
– The overall risk is perceived to be low and naval defenses have been effective in deterring most attacks to date. The physical location of ships in the Red Sea further reduces the risk of damaging multiple ships in one attack, reports Kassandra Jimenez-Sanchez from “Reinsurance News” for UIB.
In the event of a total loss to a ship, insurers anticipate moderate severity due to the relatively low value of container ships. Reinsurance provides a sufficient level of security for the insurance industry. Reinsurers in particular are expected to remain largely unaffected by windfall costs. UIB stipulates that “Problems may only arise in more distant war scenarios.”
– Some insurers are no longer willing to insure against war risks for ships owned by the United States, Great Britain or Israel traveling through the Red Sea, CNN’s Matt Egan reports, quoting Marcus Baker. He is the head of the maritime, cargo and logistics department for global markets at Marsh McLennan.
Insurance or longer route?
While not all insurers are imposing restrictions, Baker said the insurance market is clearly “tightening” and rates could continue to rise. In January 2024, war risk indicators increased from just 0.01% of the ship’s value in early December to 0.7% in mid-January this year. This means that the cost of insuring a container ship worth USD 100 million increased from USD 10,000. dollars per cruise up to 700 thousand dollars currently – reports Matt Egan from CNN.
This is a problem for many operators, forwarders and production chain managers. The Red Sea is an important trade route connecting Asian markets with Europe, whose factories are eager for production parts like a rainforest.
Components for the production of cars and wind farms, parts for household appliances, furniture and other products flow through the routes connected with the Suez Canal. Goods essential for the market flow in containers through the Red Sea and the Suez Canal. This route accounts for 30% of global container transport.
Real threats and the deteriorating shipping safety situation have forced operators to re-route ships around the southern tip of Africa. Liner connections and many bulk carrier and tanker operators extended the journey by approximately 3,000. nautical miles, and the delivery time was extended by 8 to 10 days.
As a result, ships sailing from China to Great Britain have to cover approximately 13,000 kilometers. miles. By bypassing the Red Sea, the Suez Canal and sailing around the Cape of Good Hope, operators save on “war” insurance, but add crew, bunker and other costs to their budgets.