Following Houthi rebel attacks on cargo vessels in the Southern Red Sea and the Gulf of Aden, DBRS Morningstar has warned of “upward pressure on war insurance premiums” alongside disruptions to global supply chains and shipping lines.
DBRS Morningstar’s analysts noted that several major shipping lines have suspended their services through the Red Sea as Yemeni-based Houthi rebels have attacked more than a dozen vessels since the beginning of the Israel-Hamas war.
The analysts explained that the subsequent rerouting of cargo ships through the Cape of Good Hope will extend transit times, increase transportation costs, and strain supply chains globally.
They also observed that the marine insurance market has responded to the heightened security risks in the region by materially increasing the price of marine war coverages, restricting insurance capacity, and expanding the geographic area deemed unsafe for sea navigation.
“A multinational naval coalition is expected to address the security challenges in the region and protect the freedom of navigation. However, the financial impact on shipping lines, cargo owners, and insurers will remain for some time,” DBRS Morningstar’s analysts said.
Marcos Alvarez, Global Head of Insurance, DBRS, said, “Given the apparent limited capacity of the Houthi rebels to attack multiple cargo ships at the same time and a potential maximum insured value between $200 million and $300 million, including cargo for a covered vessel destroyed in an act of war, we anticipate that any eventual war-insured loss will be well within the absorption capacity of the marine insurance industry.
“However, the Russian invasion of Ukraine and the Israel-Hamas war have recently compelled many insurers to exclude the automatic coverage of war and civil risk from their cargo insurance policies, requiring the payment of premium surcharges when this coverage is available.”
Victor Vallance, Global Head of Energy & Natural Resources, added, “Because of the rising incidence of attacks on shipping vessels, BP p.l.c. (rated “A”, with a Stable trend by DBRS Morningstar) along with other major oil companies have announced a temporary halt on all shipments entering the Red Sea, of which include oil, petroleum products, liquified natural gas (LNG), and other energy-related products.
“For oil markets this will cause, at least temporarily, some disruption to energy trade flows and pull oil and LNG prices higher.”
Tim O’Brien, Global Head of Diversified Industries, noted, “While there is greater slack in global supply lines today compared with recent years, the impact of drought conditions that have reduced the Panama Canal shipping capacity by one-third is exacerbating the global impact of the current disruption in shipping in the Red Sea/Suez Canal.
“Regardless of how long the disruption lasts or how much the proposed new U.S.-led maritime task force mitigates the impacts, the restoration of network reliability will take months.”
