Yemeni-based Houthi rebels have attacked more than a dozen Red Sea vessels since the start of the Israel-Hamas war, leading to a hike in marine war insurance premiums and inflationary pressure warnings.
Since the onset of war in the Gaza Strip, Iran-backed Houthi rebels have targeted ships in what they have said is action against Israel, though non-Israeli vessels have been affected.
Enhanced security in the wake of Operation Prosperity Guardian, a maritime coalition involving the UK, Bahrain, Canada, France, Italy, the Netherlands, Norway and Spain, is expected to mitigate the financial impact on shipping, cargo and insurance stakeholders, according to ratings agency Morningstar DBRS (DBRS).
Analysts further believe that sufficient capacity is available to meet any increased demand for marine war insurance, which is traditionally supplied through Lloyd’s and the London market with some of the world’s largest reinsurers playing a material role.
Nevertheless, Houthi rebel actions and recent threats, in response to US and UK strikes on Yemeni targets, could see pressure continue to pile on the marine insurance market and drive costs for shipping firms, with wider inflationary and supply chain impacts.
“At this point, we believe there is sufficient marine insurance and reinsurance capacity to meet the current demand as well as potential increases,” Marcos Alvarez, DBRS managing director, credit ratings, told Insurance Business. “We note that there have been underwriters willing to provide war insurance for hull in the Black Sea (where rates remain above 2% of hull value) and the Red Sea/Gulf of Aden.
“Of course, this will depend on how the Houthi retaliate on the recent attacks.”
Should the situation escalate to a point – currently seen as unlikely but presenting “significant uncertainty” – wherein it becomes a full conflagration trapping and destroying commercial vessels in the region, losses would be in the “billions”, according to Alvarez.
At their peak since the onset of the conflict, war rates jumped to 0.7% (equivalent to more than US$800,000 in insurance costs per trip for a vessel with a total insurable value of US$120 million), according to a recent DBRS briefing.
Prior to the Israel-Hamas war, these were around 0.05%, with many underwriters waiving war coverage costs altogether for Red Sea voyages.
Since December’s Operation Prosperity Guardian announcement, rates have hovered at between 0.3% and 0.35% of hull value, but hikes are again expected. Alvarez predicted rates could settle at between 0.4% and 0.5% in the coming days.
“I particularly think rates won’t jump again to the 0.7% level unless the Houthi successfully sink a commercial vessel,” he said.
Missile and drone attacks on vessels have continued.
On Monday, a missile fired by the Houthi rebels struck a US-owned ship off the coast of Yemen in the Gulf of Aden, the Associated Press reported. A day prior, an anti-ship cruise missile targeted an American destroyer in the red sea.
In response to the threat, commercial shipping companies, including Maersk, have moved to avoid at-risk areas. Around 80% of containership traffic has been diverting around the Cape of Good Hope, swerving the Suez Canal, which connects the Mediterranean Sea to the Red Sea, according to DBRS.
The Cape of Good Hope reroute represents an additional 10-day journey, according to reports, significantly adding to shipping costs.
‘’Inflationary risks are front and centre again, as the US and the UK and their coalition allies strike targets in Yemen, amid warnings from major companies that shipping delays could see prices ramp up,” Hargreaves Lansdown head of money and markets Susannah Streeter said in a Friday press release.
Components shortages drove Tesla to shut down its Berlin gigafactory for two weeks, while China-based automotive business Geely, owner of Volvo and Lotus, has cautioned of European EV delivery delays.
UK grocery retailer Tesco has warned of price hikes, while retail businesses including Next and Crocs have also flagged delivery delays.
The oil and liquefied natural gas (LNG) markets have also been affected.
Major oil companies, including BP, have pushed pause on shipments entering the Red Sea.
The short-term impact of rising costs on GDP, inflation and trade is expected to be contained if the interruption remains brief, Allianz Trade has said.
Disruption comes as Russia’s Ukraine war has already piled pressure on supply chains and amid Panama Canal drought bottlenecks.
“We think that, individually, each of the events … are not sufficient to materially affect the marine insurance market,” Alvarez said. “Further simultaneous deterioration could complicate things for market participants but we consider this still to be remote.”
Analysts at DBRS were upbeat on the marine insurance market’s adaptability in the face of continued disruption.
“Marine insurance underwriters are probably the best equipped in the industry to understand the risk of war, piracy and political turmoil,” Alvarez said. “The marine insurance business has dealt with these risks for centuries – in fact, Lloyd’s of London started insuring British ships sailing through the empire, including against the risk of piracy, almost 400 years ago.”
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