War risks raise marine insurance premiums

  • Attacks by Yemen’s Houthis against cargo vessels sailing through the Red Sea and the Suez Canal will cause some insurers to stop insuring cargo vessels travelling through one of the busiest shipping routes of the world. 
  • Instead of the shorter Suez Canal route, some shipping companies are rerouting their cargo to the longer route via South Africa, raising insurance and other costs. 
  • We expect insurers continuing to cover shipping companies that opt to use the Red Sea route to charge a significant war risk premium, adding to freight costs. 
  • While premiums are expected to go up in both cases, EIU does not expect any major impact on overall claims for marine insurers because hull, cargo and fire continue to be the major claims drivers. 
  • If risks remain elevated, they will fuel demand for specialist cover for some shipping companies, as well as calls for government support.

Yemen’s Houthis (an armed Zaydi Shia group in control of much of northern Yemen) have launched around 25 attacks on merchant vessels on the Suez Canal-Red Sea route—a key shipping route which accounts for about 12% of global trade. Several global shipping giants, including Maersk (Denmark) and Hapag-Lloyd (Germany), have decided to stop sailing through the Suez Canal, which connects the Red Sea with the Mediterranean Sea, and are choosing alternative routes. As well as disrupting global supply chains, EIU expects the escalating military conflict to raise insurance risk premiums for freight forwarders and shipping companies, forcing them to renegotiate with their insurers over coverage. However, the impact on claims and inflation is likely to be minimal unless the conflict escalates.

Marine insurers are taking on added war risks 

The Israel-Hamas war has exacerbated risks facing maritime trade flows, given the deteriorating security situation in the Red Sea. Heightened risk concerns have forced insurers to tighten their underwriting policies. The Joint War Committee (JWC), a syndicate of London’s top insurers, reinsurers and underwriters, recently expanded the ‘high risk zone’ in the Red Sea, pushing insurers to charge higher premiums in order to sustain positive claim loss ratios. 

War risk premiums for the Red Sea reportedly stood at a nominal 0.07% in October 2023, before the beginning of the Israel-Hamas war. This figure has jumped to almost 0.5% to 0.7% by end-December 2023. For Israeli ship-owners, which have been the primary targets of the Houthi insurgency, the increase is tenfold, according to media reports. Meanwhile, war risk quotes for the Black Sea—where ships exporting Ukrainian agricultural products have been declared a legitimate military target by Russia—average at between 2.5% and 3%. 

Additionally, several major shipping companies have re-routed their cargoes around the Cape of Good Hope in South Africa to avoid the attacks entirely. This re-routing adds 10 to 15 days to the total voyage, raising insurance costs further. These additional risk premiums are on top of the impact that global inflation has had on the insurance market over the past year. This had already pushed up hull and cargo insurance premiums by 8% in 2022 compared with the previous year, according to the International Union on Marine Insurance (IUMI). 

The impact on claims will be minimal

Despite the rising war risk, we believe the impact of the attacks on insurance claims will be limited. Cargo, hull and fire risks in marine insurance have traditionally been the biggest contributors to claims, with wars making up only a tiny percentage. Overall claims levels for marine insurers have been low and flat in recent years (see chart), resulting in positive loss ratios on the most important shipping routes in the world. According to a report published by The Nordic Association of Marine Insurers, 2023 was the first year since 2019 in which an insurance claim exceeding US$30m was reported. 

We believe that insurers are well-equipped to absorb war-caused losses on account of this benign claims trajectory and a recovery in revenues. The financial performance of marine insurers and underwriters has been muted over the past decade but 2022 saw a decent uptick year-on-year in global premiums. Total global marine insurance premiums totalled US$35.8bn— an 8.3% increase over 2021, according to data published by the IUMI. Post-pandemic demand for more goods and fuel shipments will continue to support demand, while marine insurers will benefit from higher premiums, particularly around the Red Sea.

However, the profitability of marine insurers has been under pressure. For instance, profit at Lloyd’s of London’s marine, aviation and transport insurance business dropped from £388m (~US$495m) in 2021 to £280m (~US$357m)  in 2022. The world’s top reinsurer, Swiss Re, saw profits in its Property & Casualty Reinsurance business (which includes marine reinsurance) tumble from US$2.2bn in 2021 to US$312m in 2022. Both companies attributed the decline mainly to higher natural catastrophe claims, but their profits for the first nine months of 2023 show a strong improvement. 

Demand for specialist war insurance grows

Swiss Re predicts that, for most insurers and reinsurers, the main impact of the Israel-Hamas war, the Russia-Ukraine war and the latest Houthi attacks will be felt through their impact on global inflation, particularly if oil cargoes are attacked. However, we also expect some adjustments in marine insurance policies, not just in terms of higher premiums but also in terms of coverage. Currently some conflict risks are excluded from standard Hull insurance cover (an insurance policy that protects the vessel against physical damage caused by a peril of the sea) but if war risks remain elevated insurers may need to review these restrictions. The demand for specialist war risk policies is also likely to increase, along with calls for government support. 

In November 2023, for example, insurance broker Marsh, Lloyd’s of London insurers and Ukrainian state banks launched a programme to cut the cost of damage claims for ships and crew voyaging through the Black Sea Corridor. The programme places relevant funds in Ukrainian state banks – Ukrgasbank and Ukreximbank, allowing them to issue letters of credit to cover ship-owners for the transport of goods through the Black Sea. Shipping companies in Israel, which relies on marine trade for its economy, have also urged the government to help with the surge in war insurance costs, as the conflict with Hamas and the Houthi rebels intensifies.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.