The Red Sea, a vital route for international trade, is undergoing turbulent times.
With the intensification of attacks on commercial ships travelling in this region by the Houthis, a Shiite rebel group that controls a significant part of Yemen, the growing instability is affecting shipping in the region, but which implications could it mean for maritime insurance rates and coverage?
Disruption to sea traffic
The Houthi attacks have severely disrupted shipping in the Red Sea, an important international transport route, particularly between Asia and Europe. The rerouting of ships to longer and more time-consuming itineraries is increasing transport costs and directly driving up energy and food prices.
This scenario is also reflected in the increase in ship and cargo insurance rates. Insurers are adjusting their risk policies, limiting coverage or demanding higher premiums to insure vessels and cargo facing the new challenges of Red Sea shipping.
Exclusions and the intricacy of the situation
However, it is important to highlight that the risk of wars and strikes, which can include piracy, is an additional cover that is not underwritten by most companies for their transport. In this sense, the current climate is having no influence on the premiums charged for ” standard” risks.
On the other hand, with regard to this specific additional coverage, the impact is significant. The price and non-availability for acceptance have increased considerably due to the growing exposure and technical restrictions determined by insurers. The complexity of the situation in this region creates uncertainty, hindering the process of including additional layers of protection and exposing organisations to a major threat.
The areas of the Red Sea, the Arabian Sea and the waters around Eritrea, Djibouti and part of the Gulf of Aden are considered “high risk”. As such, cargo insurance for goods travelling through this region is initially held covered, but the full conditions and cost (the so-called WSRCC rate – War, Strikes, Riots and Civil Unrest) are not determined at the outset. With this in mind, insurers have sent cancellation notices (NoC) for this cover in the region listed above as high risk. It should be noted that this action does not imply that the cover is cancelled, but rather that the specific terms and prices are on hold. The final WSRCC rate will be determined at a later date, based on the specific circumstances of each shipment, namely the route and value.
This scenario has a number of implications, which extend beyond the expected increase in costs due to the high-risk evaluation. The first relates to uncertainty, since the exact cost of insurance is undetermined until the details of the shipment are definitively established. On the other hand, it ensures greater flexibility, since the “Held covered” status enables the insurance terms to be finalised closer to the shipment date, not implying postponements or delays due to these, since the cargo always has temporary protection – something particularly relevant in the context of an extremely constrained logistics chain with much longer transit times than usual.
Global consequences and the international reaction
The current paradigm in this region is extremely complex and how the situation will unfold over the coming weeks remains unknown. The importance and impacts extend across the globe, so international organisations are already directly involved in the issue.
Alongside a series of response attacks by the United States, the UN Security Council passed a resolution on 10 January demanding that the Houthis immediately cease their attacks on ships in the Red Sea. The Houthis rejected the resolution, calling it a “political game”.
The Red Sea is therefore at the epicentre of a crisis that defies commercial norms, and crossing this part of the globe appears to be highly dangerous and subject to an immense level of threat. As a result, the scenario directly affects sea freight insurance, leaving mitigation through additional insurance cover few and far between.
While uncertainties remain, companies are faced with the challenging task of adapting their insurance strategies to meet the new challenges in international shipping. To find out how your Organisation can be prepared to respond to each risk scenario, feel free to contact F. REGO’s team here.
Luís Vicente, Business Director Porto BU
