War risk premiums for cargoes surge amid Red Sea crisis

War risk insurance premiums on cargo ships have shot up following the war-like situation in the Red Sea with many insurance companies even unwilling to cover cargo sent on voyages transiting the area.

The war risk premium, which increased from 0.05 percent to 0.7 percent in early December, shot up to one percent of the value of the ship about a week ago.

This means the premium to be shelled out by shipping firms will be $2 million if the cost of the ship is $200 million. If the situation worsens, the rates are likely to go even higher, insurance officials in Mumbai said.

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Saurabh Verma, managing director of Global Insurance Brokers, said the Red Sea scenario typically falls under the category of war risk for marine insurance.

“There is a Joint War Committee in London that monitors geopolitics. Depending on their assessments, insurance rates for war are determined. In a normal situation, standard premium rates apply. However, in a warlike situation, such as the one in the Red Sea, the need for reinsurance to cover war or similar perils is assessed to determine whether the current war rates remain applicable. The rates are adjusted in response to changes in risk, with higher risk levels leading to increased premium rates,” he said.

S&P Global said marine insurance rates for war risks have tripled following the latest spate of attacks in the Red Sea while tanker forward freight agreements are trading higher amid heightened shipping risks.

Officials said some insurance companies are unwilling to cover cargo sent on voyages transiting the Red Sea route, as they want to avoid the risk of high-value claims from cargo owners. There were reports about insurers even pulling back policies already in place for shipments passing through high-risk areas, as both parties typically have the option to undo existing cover with a 30-day notice.

Houthi rebels have attacked vessels suspected of being linked to Israel as they transit through the Red Sea, prompting the London market’s Joint War Committee to extend the territory constituting the Red Sea war risk to account for missile range.

Sobel Network Shipping Co, a worldwide freight forwarder, said the London insurance market has classified the southern Red Sea as a high-risk area, requiring ships to notify their insurers when sailing through such regions and pay an additional premium, typically for a seven-day cover period.

Analysts forecast a further rise in transportation costs in the region. The escalation in insurance premiums will contribute to higher costs and the perceived risk increase might lead many vessels to bypass the region altogether, opting for longer routes such as circumnavigating the Horn of Africa, Sobel said. However, this will push up the cost of the cargo, leading to price rise at a time when countries like India and the United States are trying to rein in inflation.