Red Sea: Transport insurers continue to tighten the reins

While shipping companies are trying to send more ships through the Bab al-Mandab and the Suez Canal thanks to a growing naval presence in the Red Sea, insurers are thwarting their plans. The photo shows the car carrier “Galaxy Leader,” hijacked by the Houthis on November 19, 2023. The ship has apparently been in the Yemeni port of Hodeidah since then, serving as a tourist attraction. (Photo: Photo: EPA-EFE / YAHYA ARHAB)
February 26, 2024 | by Michael Hollmann
In recent weeks, many ship insurers have canceled war coverage in their policies for voyages to the southern Red Sea and the Gulf of Aden. According to brokers, reinstating the risk is so expensive that voyages through the risk area can no longer be offered at competitive rates.

The cancellations made by numerous insurers and underwriters from Great Britain, Scandinavia, and the Netherlands as of February 20th concern a specific liability segment: war-related coverage in commercial P&I policies (liability insurance) for charterers and shipping companies.

The benefits apply to war damage in shipping that exceeds the value of the affected vessel. This can be the case, for example, with accidents resulting in severe environmental damage or wreck removal. Example: A sunken or burned-out ship has to be removed from the sea and disposed of at a cost of €20 million, but the ship’s value is only €5 million. Under normal war policies (“Primary”/Hull War), the shipping company would receive €5 million for the ship’s value, and the remaining €15 million from the P&I insurer.

Reinsurers withdraw coverage
Following the cancellation by the commercial P&I insurers, which primarily insure smaller merchant vessels up to 20,000 dwt, the affected shipping companies would have to pay the €15 million themselves. For many companies, this would mean bankruptcy.

The P&I insurers were forced to make the exclusion because even the major reinsurers withdrew their coverage. However, both sides have agreed that the risk could be reinstated for individual voyages for an additional premium.

“Based on the initial quotes we’ve seen, the price is far too high. For most of the ships affected, transit through the risk area is no longer worthwhile,” a northern German insurance broker who manages several affected fleets told DVZ.

For a smaller multipurpose heavy-lift carrier, the required premium is €8,000 – in addition to the primary marine hull war insurance, which now amounts to 0.5 to 1 percent of the vessel’s value per transit. This means that the shortcut through the Red Sea no longer offers any financial advantage for this class of vessel, according to the broker. (ol)