In recent developments, ongoing attacks on Red Sea shipping lanes have prompted a surge in war risk premiums, posing challenges for marine insurers worldwide, according to a Moody’s report.
The disruptions to shipping routes have raised concerns about potential losses, prompting shipping companies to reassess their coverage in the face of heightened risks.
The attacks have led to sharp increases in “war risk” premiums, which are essential for covering vessels against conflict-related losses such as damages from attacks or seizures in designated higher risk areas.
This, in turn, is expected to contribute to underwriting profits, but the coverage of vessels passing through high-risk zones adds complexity and risk for insurers in more remote loss scenarios, the report noted.
Lloyd’s syndicates and insurers specialising in marine insurance are anticipated to be more exposed, given their leading position in the market.
However, the risk is spread across various insurers and reinsurers globally. In most scenarios, only modest losses are expected for individual insurers due to line size limits diversifying the risk across several carriers, coupled with reinsurance protection and a low risk of loss accumulation.
Despite the challenges, the short duration of war risk covers allows insurers to quickly adjust their approach if the risk escalates, providing a degree of flexibility in responding to evolving situations.
Following the attacks on vessels in the Red Sea, several international shipping groups announced a temporary halt to vessels using the Suez Canal, opting for alternative routes.
Transits through the Bab el-Mandeb Strait, near recent attacks, have significantly decreased, with vessels being diverted around the Cape of Good Hope, adding approximately 10 days to their journeys.
War risk premiums for Red Sea transits have seen a notable increase since mid-December, reflecting the elevated risk and reduced vessel transits.
Some reports indicate premiums rising to around 0.7% to 1% of the vessel’s value from under 0.1%. Despite the higher premiums, insurers are offering post-transit discounts to clients if the passage is completed without incident.
Insurers have become more selective in covering vessels for passage through the Red Sea, with a decreased appetite to cover vessels linked to the US, UK, and Israel.
However, the overall risk is perceived as low, with naval protection successfully deterring most attacks to date. The physical spacing of ships in the Red Sea further reduces the risk of multiple vessels being damaged in one attack, the report noted.
In the event of a total loss to a vessel, insurers anticipate modest severity due to the relatively low value of container ships, providing a level of assurance for the insurance industry. Reinsurers, in particular, are expected to remain largely unscathed, except in more remote scenarios.
