Boost Insurance Costs to escalating Trade Chaos in the Red Sea
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(Source: Bloomberg) The rising cost of war-risk insurance for ships traversing the Red Sea presents yet another potential barrier to trade through a waterway that the US Navy has already declared too hazardous for commercial shipping.
According to people familiar with the situation, underwriters are now charging between 0.75% and 1% of the ship’s value to sail through the region.
This is a significant increase since US and UK airstrikes against the Houthi rebels in Yemen at the end of last week. Quotes for cover were around a tenth of that just a few weeks prior. There’s a chance that the steep rise will make crossing the important waterway prohibitively expensive.
Shipowners and charterers who are willing to take a chance while sailing through the Red Sea must decide whether it is more cost-effective to pay the growing extra insurance premiums and the Suez Canal transit fee, or to take the longer route around the Cape of Good Hope and incur additional fuel expenses.
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“War risk insurance premiums for ships have skyrocketed,” Clarksons Securities analysts including Frode Markedly said in a report. Rerouting around Africa may prove to be more economical for shipowners and charterers than paying the combined costs of insurance premiums and transit fees through the Suez Canal.
For a newly built ship valued at $100 million, a 1% war insurance cost would require paying $1 million just to get by.
the riskiest parts of the Red Sea and Gulf of Aden. Coverage is typically expressed as a percentage of a vessel’s value for a specified duration.
The ongoing threat to vessels in the area was highlighted by the missile strike on Monday of a US commercial ship operating in the Gulf of Aden.
This happened as major trade association Bisco brought attention to a US Navy advisory advising shipping firms to think about avoiding the region.
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Furthermore, an updated alert was released by the US Department of Transportation cautioning merchant vessels to stay away from the Southern Red Sea until further notice. Vessels had been advised to avoid the area for 72 hours in a previous alert.
“Rates are increasing which is reflective of the significant and opaque risk exposure within the Red Sea,” said Munro Anderson, head of operations at marine war risk and insurance specialist Vessel Protect.
“The rate of change in risk profile leading to far more dynamic pricing than would normally be the case is the main challenge presented by the current situation.”
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