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Shipping Insurance Rates Soar as Red Sea Crisis Bites

AFP — Attacks on commercial ships in the Red Sea by Yemen’s Houthi rebels have sent insurance premiums soaring, exacerbating costs already rising due to higher freight costs and the extension of alternative trade routes.

Since November, the Houthis have carried out relentless attacks on ships transiting the Red Sea, a maritime hub through which 12% of world trade typically passes.

According to IMF data, ocean container shipping has fallen by almost a third year-on-year through 2024.

The Iran-backed Houthis say the attack was in solidarity with Palestinians in the Gaza Strip during the Israeli-Hamas conflict.

The war began when Hamas launched an attack on October 7, resulting in the deaths of around 1,160 people, mostly civilians, in Israel, according to an AFP tally of official Israeli statistics.

Israel says Hamas militants have taken about 250 people hostage, of whom 130 remain in Gaza, and 30 of them are estimated to have died.

Israel’s retaliatory operations have killed at least 29,313 people, the majority of them women and children, according to the latest tally from the region’s Hamas-run health ministry.

– “Unusual, but not exceptional” –

Merchant ships are required to purchase three types of insurance. Hull insurance covers damage to your vessel. Cargo insurance covers a ship’s cargo. Protection and indemnity insurance includes compensation for damages caused to third parties.

Frederic Denefre, head of French company Galex, which specializes in marine risk insurance, said insurance premiums for ships and their cargo had “significantly increased” in the wake of the Houthi attack.

And it’s increasing proportionately to the level of threat, he told AFP.

Neil Roberts, head of maritime and aviation at the Lloyd’s Market Association (LMA), which represents all underwriting activity in London’s Lloyd’s insurance market, said the Red Sea threat was unusual but not exceptional.

“The situation in the Red Sea is dynamic and unusual in that a non-combatant state is targeting commercial shipping to achieve the political objectives of a third party,” Roberts told AFP.

“This is not an anomaly, as unfortunately commercial shipping is regularly threatened in West Africa, off the coast of Somalia and elsewhere.”

He pointed out that the Red Sea is a designated area and ships planning to enter must notify their insurance companies.

Insurers can review both the vessel and its voyage and request additional wartime insurance premiums in addition to normal coverage.

However, this war premium is limited to a short period of time.

– Risk assessment –

LMA’s Joint Warfare Committee meets regularly to assess security risks to shipping worldwide.

“If you go into an area that this commission says is a little bit dangerous, effectively the moment you go in your coverage ends and you have to pay for the period you’re in, and then It’s covered again,” said Marcus Baker, Marsh’s global head of marine, cargo and logistics.

Claire Hamonic, general manager of Ascoma International, estimates that war insurance premiums for ships and cargo crossing the Red Sea have increased five to 10 times.

Current war risk premium rates are between 0.6 percent and 1.0 percent of a ship’s value, according to multiple anonymous industry sources.

This could represent a significant amount, with some mega-vessels valued at over €100 million.

Munro Anderson, director of operations at war insurance firm Vessel Protect, said particular attention was paid to the nationality of the ship.

“The Houthis specifically said they were targeting connecting vessels between the US and the UK,” Anderson told AFP.

“There are a number of vessels that are flagged to or associated with countries that do not have the same risk profile.

“For example, Chinese vessels were connected. There are a large number of China-related vessels in Hong Kong trading in the region. These could add less premium than those associated with Israel, the UK or the US. ”

– The coast is not yet sunny –

Houthi attacks have prompted some shipping companies to avoid the Red Sea and detour around southern Africa.

This takes 10 to 15 days more than the Red Sea route, and can take an additional 20 days on slower ships.

This allows shipowners to avoid paying hefty tolls in the Red Sea, but they also face rising fuel and labor costs associated with long-distance voyages.

And this coast is still not free from other dangers such as piracy.

Diversion of ships around the Cape of Good Hope is “very likely to lead to a resurgence of piracy in the Indian Ocean,” Hamonic warned.

“That risk extends from just below the Red Sea to the coast of Somalia,” she added.

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