Escalating tensions in the Middle East, especially in the Red Sea region, have recently rekindled concerns within the (re)insurance industry regarding potential claims inflation, with BofA Securities noting that, although direct and indirect impacts have been restricted, the industry remains vigilant.
The political risk and war insurance sector have swiftly adjusted pricing since October, anticipating potential disruptions. However, direct losses have been minimal, and the market has seen minimal impacts on premium rates.
Indirect impacts from supply chain disruption, resulting from rerouted voyages in the Red Sea, could potentially have a negative effect on claims inflation.
Despite heightened tensions, insurance coverage for voyages in the Red Sea remains available. Marine war insurers have responded promptly with premium rate increases to account for increased risks, ensuring continuous coverage for shipping companies.
However, rather than relying on insurance, some shipping companies are choosing to reroute vessels from Asia to Europe, adding significant distances to journeys and causing delays and disruptions.
Specialty (war) insurers have reported limited direct implications so far, with only a small number of losses expected to be covered. Premium impacts are also deemed limited, as “lost” war premiums may be replaced by extended coverage for longer journeys.
It’s important to note that longer journeys resulting from route changes should not trigger business interruption insurance claims, which typically require physical damage.
However, the report highlights potential negative implications from indirect impacts, particularly in the form of further disruptions to supply chains.
Motor insurers, particularly those reliant on imported spare parts, could face operational challenges due to shipping delays. Estimates suggest that around half to two-thirds of overall motor claims across the industry relate to physical damage rather than bodily injury.
The Red Sea challenges come on the heels of a period marked by significant claims inflation for the (re)insurance industry.
Factors such as post-COVID normalisation, adverse weather conditions, and supply chain delays following the Ukraine crisis contributed to a backlog of repairs and severe claims inflation in 2022/23, especially in the UK.
The current outlook for claims inflation had been showing signs of moderation, but the Red Sea disruption introduces uncertainties.
Higher shipping costs are anticipated to drive further inflation, while delays in voyages could extend repair times, impacting the industry’s overall claims outlook. Used car prices, a key factor in determining write-off values, had been declining with improved car supply, but the report suggests that the outlook is now less certain.
As a result of these concerns, BofA Securities has assigned Underperform ratings to major insurers, including Admiral, Direct Line, and Linea Directa.
Industry stakeholders are closely monitoring the situation, as any further disruptions in the Red Sea could exacerbate existing challenges and hinder the progress made in moderating claims inflation.
