Red Sea Attacks Hike Up Shipping Insurance Rates

A giant cargo ship near the Red Sea (AFP)

Houthi attacks on commercial ships in the Red Sea hiked the shipping insurance rates, with fees being imposed to cover risks associated with conflicts.
Since last Nov. 19, Iran-backed Houthis have targeted ships in the Red Sea that they suspect are linked to Israel or heading to its ports.
Houthis say their attack is in support of the Gaza Strip, which has been witnessing a war since Oct. 7, 2023.
According to the International Monetary Fund (IMF), Red Sea container shipping dropped 30% within a year.
The Red Sea is a vital route that usually carries about 12-15% of global trade, based on European Union figures.
Commercial boats need to obtain three types of insurance: hull insurance covers damage to the vessel, cargo insurance covers the vessel's load, and protection and indemnity insurance includes coverage for damage caused to third parties.
However, Premiums for ships and their cargos have "increased significantly" following the Houthi attacks, according to Frederic Denefle, head of Garex, a French firm specializing in marine risk insurance.
Garex told AFP that they have increased in proportion to the threat level.
Head of Marine and aviation at the Lloyd's Market Association (LMA), Neil Roberts, told AFP that the Red Sea is a Listed Area, meaning that vessels planning to enter must notify their insurers.
Insurance providers can then review the vessel and its voyage and demand an extra war premium on top of normal coverage.
The war premium, however, is limited to a short period.
However, Marsh Marcus Baker's global head of marine, cargo, and logistics explained that this new coverage is usually valid for only seven days, considering that hostilities may escalate.
General Manager of Ascoma International Claire Hamonic indicated that war insurance premiums have multiplied by five to ten times for vessels and cargo crossing the Red Sea.
- Huge sums of money
According to several sources contacted by AFP, the current rate of war risk premium stands at between 0.6 percent and 1.0 percent of the value of the ship.
The amounts can equal a considerable sum when some of the enormous vessels are worth over 100 million euros.
The nationalities of the companies owning or operating the ships are also considered.
Houthis have begun targeting US and UK ships, considering that they have become "legitimate targets" since Washington and London launched joint strikes on Houthi sites inside Yemen several times since Jan. 12.
The US Army alone carries out strikes from time to time that it says target sites or missiles and drones prepared for launch, the most recent of which was last Wednesday.
Head of operations at war insurance specialist Vessel Protect Munro Anderson said that the Houthis expressly indicated that they are targeting US and UK-connected vessels" or those linked to Israel.
Anderson explained that many vessels are flagged or associated with countries that don't carry the same risk profile.
"For example, Chinese connected vessels. Hong Kong Chinese connected vessels, of which there are lots, are trading in that area. Those will be able to add less premium than those connected with Israel, UK and US."
The Houthi strikes have also prompted some shipping companies to detour around southern Africa to avoid the Red Sea.
However, Hamonic warned that the diversion of ships around the Cape of Good Hope could "very possibly lead to a resurgence in piracy in the Indian Ocean."
"That risk extends from just below the Red Sea and towards the coast of Somalia," she added.
The journey takes an additional 10 to 15 days via this route, and sometimes up to 20 days, depending on the vessel's speed.
According to a London Stock Exchange Group report, the cost of a trip from Asia to northwestern Europe increased by 35% for a large container ship, and up 110% for an Aframax, an oil tanker with a deadweight between 80,000 and 120,000 metric.
- Impact on inflation
Meanwhile, analysts from Moody's Investors Services said on Thursday that attacks on merchant vessels in the Red Sea have delayed cargo and sent higher shipping costs, but soft demand and ample ship availability are muting the impact on inflation.
Nevertheless, Daniel Harlid, a transport sector analyst, said diversions are not expected to affect inflation because they are not driven by demand significantly.
Rerouting ships around Africa requires anywhere from 6% to 10% more vessels due to longer sail times, slowing the return of ships to their origination points, and sending on-demand spot rates on some routes up more than 100%.
The increases came off rock-bottom levels, and shipping experts expect them to normalize. Owners who have new ships arriving were struggling to fill existing vessels with cargo before the Houthi attacks began in November.