The Rising Cost of War Risk Insurance for Ships in the Red Sea

The cost of war risk insurance for ships traveling through the Red Sea is skyrocketing, making it more expensive for ships to navigate the region. Insurers are now charging between 0.75 and 1 percent of a ship’s value, compared to a tenth of that amount just a few weeks ago. This sharp increase in insurance costs poses a potential obstacle to trade, as shipowners and charterers must now decide whether it is more cost-effective to pay the increasing additional insurance costs and the Suez Canal transit fee or take the long route around the Cape of Good Hope, leading to higher fuel bills.

Analysts at Clarksons Securities have suggested that rerouting around Africa may be a more cost-effective option for shipowners and charterers, as a 1% war insurance premium on a $100 million ship would mean paying $1 million just to sail through the riskiest parts of the Red Sea and the Gulf of Aden. The ongoing threat to ships in the region was underscored by the recent missile attack on a U.S. merchant ship in the Gulf of Aden. This has led the US Department of Transportation to advise merchant ships to avoid the southern Red Sea until further notice.

The changing risk profile of the Red Sea and the rapid pricing increases for war risk insurance are making navigating the region more difficult. According to Munro Anderson, head of operations at marine war risk and insurance specialist Vessel Protect, the current situation is presenting significant and opaque risk exposure, leading to dynamic pricing that is not typically the case.

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