Policyholder Pulse
Yemeni-based Houthi forces have attacked more than two dozen vessels transiting the Red Sea since the October 7, 2023, start of the current Israel-Hamas conflict, leading to a surge in marine war insurance premiums. Houthi elements have attacked commercial shipping with the stated goal of destroying America and Israel, although non-American and non-Israeli vessels have been fired upon, too, since the U.S. and its allies have been carrying out strikes against the Houthi elements in response to their attacks. The resulting increased risks of sailing through the Red Sea have led some vessels to avoid the Red Sea and divert to the Cape of Good Hope, including those operated by Maersk.
Operators choosing to continue transiting the Red Sea face a variety of insurance risks. For example, the Red Sea has been designated as a listed area by the Joint War Committee of Lloyd’s and London market marine insurers, allowing insurers but not requiring them to tack on additional premiums for vessels transiting the Red Sea. They acknowledge that the “Yemeni threat to shipping remains extant and real.” Lloyd’s syndicates and insurers still insure vessels and cargo travelling through the Red Sea despite rising political tensions and a spike in Houthi-led attacks on international shipping. But that is not to say that they will not raise rates, carve out coverage, or exclude them entirely in the near future.
Indeed, many operators are already facing a surge in insurance rates. Before the outbreak of the most recent iteration of the Hamas-Israel conflict and the involvement of the Houthi forces in the conflict, war insurance rates were a nominal 0.05%, with many underwriters waiving the cost of war coverage altogether for transiting the Red Sea. Between October and the announcement of Operation Prosperity Guardian in mid-December 2023, rates peaked at a high of 0.7% of hull value. War risks premiums have since increased even further, reaching 1% of an insured vessel’s value for a vessel transiting through the Red Sea. (In other words, for a vessel with a total insurable value of $120 million (excluding cargo), this translates to more than $1.2 million in additional insurance costs per trip in the area.) These rate increases are not being imposed equally worldwide—for example, Chinese- and Hong Kong-owned merchant vessels are still receiving lower insurance premiums due to their lower risk profile—which adds further uncertainty to the costs of securing coverage for Red Sea transits.
Meanwhile, insurers also have begun narrowing or eliminating Red Sea-related coverage. Some underwriters are implementing exclusions for vessels with links to the United States, UK or Israel when issuing coverage for trips through the Red Sea. The scope of these exclusions may hinge on the use of words such as “ownership” or “interest” with respect to certain flags or ownership of a vessel. Other insurers are excluding the Red Sea route entirely, meaning they will not provide insurance regardless of a vessel’s provenance. As these exclusions proliferate throughout the industry, many learn too late that their policies no longer cover Red Sea transit.
During these uncertain times, policyholders seeking insurance for vessels transiting the Red Sea must be wary. Coverage counsel can help policyholders navigate these dangerous waters by reviewing policies to ensure that they provide meaningful coverage of anticipated operations.