Price of insuring shipment of goods from Asia to West spikes regardless of route

Whether a company decides to roll the dice and ship goods through a dangerous Red Sea or take a much more circuitous route around the horn of Africa, insurance costs are elevated and likely to stay high unless Red Sea hostilities wane.

Iran-backed Houthi rebels in Yemen have attacked more than a dozen ships in the Red Sea since the beginning of the Israel-Hamas war in October. The latest incident occurred this week and for the first time involved a ship bound to Iran, according to Reuters.

Shipping traffic through the Red Sea to the Suez Canal has dropped sharply over the last few weeks as more ships are routed around the Cape of Good Hope in Africa as they make their way to the Atlantic Ocean.

But the approximately 10 days that are added to a trip from Asia to Europe and the United States when ships sail around Africa ensures that companies continue to spend more on insurance.

More days on water leads to higher insurance costs

They might avoid the spiking marine war insurance premiums, which are about 10% higher than before the Israel-Hamas conflict, but they’re adding many more days of insurance to a journey to western markets.

“If you’re taking the longer route, the insurance premiums are more expensive than taking the shorter route through the Red Sea in normal times,” said Marcos Alvarez, managing director for insurance at Morningstar DBRS.

War-risk premiums have risen to about 0.7% to 1% of a vessel’s value from under 0.1% since mid-December, according to a Feb. 5 report from Moody’s Investor Services.

“The higher premiums reflect elevated risk and fewer vessels transiting the Red Sea,” the Moody’s report states. “A lower number of transits means that the premium per transit needs to be higher to build a sufficient pool of funds to help compensate insurers in the event of loss. While premiums have risen sharply, we understand from insurers that some are providing post-transit discounts to clients once the transit has completed without event.”

U.S., UK counter strikes could push premiums down

The Red Sea premiums could go down, if the U.S. and British counter strikes against the Houthi rebels are successful in reducing Houthi attacks, Alvarez said. The countries launched their effort in early January. The latest U.S. strikes occurred Sunday, according to a Voice of America report.

“We will see war insurance prices decreasing” if the U.S. and Britain prevail, Alvarez said. Insurance “is a very reactive and dynamic market.”

The U.S. and Britain need to step up their bombings, if they’re going to bring the Houthi attacks under control, said Tom Karako, a senior fellow at the Center for Strategic and International Studies in Washington. The U.S. and Britain are not causing enough pain to make the Houthi’s Iranian backers shut down the rebels’ operation.

“While necessary, I’m doubtful that it’s sufficient,” said Karako, director of the CSIS Missile Defense Project. “That’s mowing the grass.”

The number of ships going through the Red Sea has dropped sharply at the Bab el-Mandeb Strait at its southern end near the recent attacks, according to the Moody’s report. The number of transits fell to 29 on Jan. 31 from 74 in mid-December.

Most commercial cargo is avoiding the Red Sea, while oil tankers are more willing to traverse the body of water, Alvarez said.

“The good news is the market is still willing to offer war insurance in the Red Sea,” Alvarez said. “Until we see a boat completely destroyed and sink in the Red Sea, we will see underwriting appetite for insuring war risks in the Red Sea.”