Navigating Red Sea Risks

STYLES: A general cargo policy includes war, strikes, riots, and civil commotion—which are specifically excluded under an all-risks policy. In London, we have a war, riots, strikes, and civil commotion buyback policy, which covers war perils. Within our cargo policies, there is a seven-day notice of cancellation in respect to war [and] strikes, riots, and commotions.

We tend to rely on the Joint War Committee [of the Lloyd’s and International Underwriting Agency company markets] to decide and act on changes to outlook, threats, and risk and to define areas that are of concern and threats so we can act accordingly by issuing a notice of cancellation, if needed, or amend the terms of the risk if we feel it is correct at that time.

It’s very different in the hull market. In fact, the hull market can amend terms, but they cannot come off risks. So the majority of the time, the cargo market provides a reinstatement coverage at increased premium levels.

STYLES: It depends on your coverage provider. The Black Sea is an interesting one, and the situation continues to develop. Based on the many systemic risks related to Russia targeting vessels, detaining vessels, and the result of blocking and trapping risks, in March 2022 reinsurers reached out to insurers to say that they were excluding Black Sea coverage going forward, including to/from/via/within Russia. There are certain markets that, following review of exposures and net lines, chose to step back into this frame for this region in order to support global trade. This is, of course, in line with uncertain times which continue to this day. At Markel we insure shipments to/from/via the Black Sea, the Baltics, and the Russian Far East region.

With regards to the Red Sea, there is less of a sanctions and reinsurance touchpoint. However, there are some markets that believe that the risk in the Red Sea is too great, and they have stepped away from underwriting those perils, triggering notices of cancellation. Other markets have reinstated policies, especially for new and existing clients, while others have decided not to accept any new Red Sea/Gulf of Aden war and strikes writeback business. Speaking for Markel, we have decided to continue to support our existing clients, including international trade and supply chains, by providing reinstatement coverage and writeback coverage for war and strikes needs for anyone transiting the Red Sea, Gulf of Aden, Bab-el-Mandeb Strait, and the Indian Ocean.

STYLES: Yes, it applies the same. It’s worth noting that there are various notice of cancellation provisions out there. Some capacity providers have issued notice in respect of bulk shipments only, while other capacity providers have also issued notice in respect to bulk and containerized cargoes. We are now seeing notice of cancellation being given on containerized cargoes; as a result of that, we are getting approached for containerized shipments passing through the Red Sea.

GOWER: On the hull side, the Red Sea has always been a breach area. The Joint War Committee, which comprises the Lloyd’s Market Association, syndicates, and company members, widened the high-risk zone in the Red Sea to 18 degrees north in response to the recent Houthi attack there. The alerts were aimed at insurers in response to the considered increased likelihood of attacks and threats in the region, and as a result, war rates in the area have risen dramatically. The hull war market has obviously been in existence for a long time, and it charges these breach premiums on top of the annual covers that some people buy for what is deemed to be a high-risk area. That was similar to what happened with Russia and Ukraine.

P&I [protection and indemnity] has always been covered as part of the P&I perils; however, as Brook mentioned, when the treaty market imposed exclusions onto our policies in respect of Russia/Ukraine and the Black Sea, we had to find alternative solutions, and we developed a P&I buyback solution—effectively covering P&I perils as a result of a war loss that has now extended to the Red Sea. In the Red Sea, it’s less of a net line concern because we still have reinsurance backing, but the leaders of some of the P&I club programs issued notice of cancellation in respect to the Red Sea earlier this year. As a result, we stepped in again and offered a buyback solution there.

STYLES: I can probably speak on behalf of the London market and especially for the cargo market. We work on the basis of understanding the situation, seeing how that’s trending, and then making informed decisions. The Houthi’s initial attacks began on 19 November 2023, and it wasn’t until mid-January when the cargo market began to issue notice of cancellation to clients for their Red Sea exposures. Prior to that, we had a number of vessels be hit, including the Galaxy Leader, which to this day remains detained by the Houthis at the Port of Hodeidah [in Yemen].

So we reacted based on intel and experience of what we’d seen over a set period of time—it’s a measured approach from the London market. We issued notice on rates that we perceive to be fair, and the client always has the option to either accept or decline those rates or find alternative capacity elsewhere. On the hull, for the London market, many people adopted those rates or, as we’ve seen, decided not to transit their goods via the Red Sea. In fact, we’re seeing Red Sea tonnage down 70% and the number of sailings per day down 55%, meaning that a lot of transit is going via the Cape of Good Hope, which has its own issues.

That’s a measured approach, and we continue to review the situation. We have our notice of cancellation still in place, and if the risk continues to develop, we may change rates again. At this point in time, we are watching and adjusting our approach daily. GOWER: On the hull side, after the Joint War Committee widened the high-risk zone in the Red Sea, the market almost collectively issued notice of cancellations in respect to war risks within that heightened risk area. As a result, the P&I clubs had essentially no back-to-back reinsurance cover, so a buyback solution needed to be prepared in place. Under the terms of this cover, we are responding to a resultant P&I—so an event following a war loss, such as damage to cargo following a missile strike or death or injury to crew members, a pollution event following damage to a vessel or subsequent removal of wreck.

We’re also giving cover to charterers, who could be liable for damage to hull and have potential liability to cargo as a result of a war loss if the owner was able to prove unsafe fare, which is a very broad term.

Outside of the financial insurance risk, there’s been significant investment made in software from the market. Pre-Russia/Ukraine there was no collective market resource to monitor exposures or to understand where the critical mass was, so the war was the catalyst for the treaty market by imposing exclusions on Russia and Ukraine on our reinsurance programs. As a market, we needed to get a better grip on it, and now we have access to substantial real-time information that enables us to track and monitor our exposures and our aggregates.

GOWER: It’s about 10-14 days additional transit time to go around the Cape of Good Hope. The Red Sea is one of the world’s most important trade routes. It lies south of the Suez Canal, which is the most significant waterway connecting Europe to Asia and East Africa. You’ve also got the Bab-el-Mandeb Strait, which is about a 20-mile-wide channel between Djibouti and Yemen. That is the key area that’s being targeted. There’s about 12% of seaborne trade globally and about 30% of container trade which transits through the Red Sea. It’s estimated there’s about $3 billion worth of trade at risk from Red Sea disruption.

As a result of the crisis, an increasing number of companies that transport raw materials—such as Maersk, Hapag-Lloyd, MSC, and CMA CGM—have decided to suspend operations in the area and are rerouting their ships around the Cape of Good Hope in South Africa, which was the route that the Suez Canal was meant to circumnavigate when it was first opened. Vessels taking this longer route are definitely exerting upward pressure on things like freight rates, increased fuel costs, and reduced availability of ships. There’s also wider crew concern as crew members are being forced to take on contract extensions and have prolonged periods of time on board.

There’s also an emissions point of view, as ships sailing thousands of miles around the Cape of Good Hope are emitting more carbon into the atmosphere just to deliver the same cargo. The supply and demand of container ships is also a consideration: the demand for vessels is outweighing the quantity of available ships, and as vessels are taking longer to transit the route, we are definitely seeing less vessels available. The reroute also puts a lot of pressure on ports along the Cape of Good Hope; a lot of these ports are becoming overwhelmed, which is leading to further congestion and delays in loading and unloading cargo, which also disrupts supply chains and hinders the time of the delivery of goods.

STYLES: We’ve seen ripples that go beyond the marine market. Obviously, there are cargoes not arriving at the ports they need to get to. Then there’s increased costs, which impacts everyone, especially with the current inflationary environment that we’re seeing in the world. We’re also seeing national governments miss out on tariff premiums, tax incomes, and there are shortfalls there. So you could argue that the political risk market, the credit market, and the political violence market could all be impacted by the Red Sea crisis. We’ve seen these effects before when grain couldn’t get to a certain point and prices rose substantially during the [beginning of the] Russia-Ukraine war. So the impact is not just linked to marine but can be very much linked to the wider insurance offering.

STYLES: In terms of ship size, some of the new, ultra-large container carriers could have over 20,000 TEUs [twenty-foot equivalent units]. Depending on the time of year and what sort of cargo is being shipped, the value fluctuates massively, and some of these container vessels could have up to $3 billion worth of cargo on them if all stars aligned, which is a concern to not only cargo insurers but everyone else. The additional 10-14 days delay to arrive at an EU port causes some serious stress on certain manufacturing companies. We already heard from Tesla and Volvo that they are struggling to get components to their production lines in time. So, similar to what we saw during COVID, we could see vehicles that roll off the production line with lower specifications.

Lately, the Houthis have declared that they will increase their area of operation to target Israel-destined vessels passing through the Indian Ocean or via the Cape of Good Hope. So there’s a clear threat that, if one of these container ships sails under an Israeli manifest, Houthis have the ability to target one of these vessels using either the anti-ship missile or the HESA Shahed 136 drone, which is obviously a concern for us as underwriters and insurers.

STYLES: We monitor this very closely. We have intelligence that supports us; they advise us on a real-time basis if a vessel is threatened, if a vessel is attacked, if there’s a near miss. As far as I’m aware, there’s been about 70 vessels [at the time of this discussion] that have been targeted since the conflict started in late 2023. That doesn’t include vessels that have been attacked but haven’t reported it, and that could be from fear of reporting it, whereby they would potentially receive an additional premium or an increased rate as a result of that.

The Houthis not only have drones available to them, but we’ve seen anti-ship missiles being fired and hitting vessels. They also have access to cruise missiles, and most recently, we’ve seen submersible drones. These are possibly my biggest concern going forward, because these are loitering munitions…. With everything happening on a military basis with support and protection, these drones are a lot harder to identify and dispose of prior to them being a problem.

STYLES: The intelligence indicates that the Houthis are Iranian-backed and are supporting Hamas’s conflict with Israel in the Gaza Strip, so they will attack international shipping until the conflict stops.

GOWER: Another real concern is that we don’t quite know where the Houthis are getting their information from, as a lot of it seems to be quite outdated. We’ve seen instances of vessels being attacked because the Houthis believed that it has some U.K., U.S., or Israeli link, but that turned out to be completely false. So, often these attacks have appeared to be completely random

STYLES: I’ve definitely seen a large uptick in submissions on the Red Sea. That can lend itself to people stepping away from it, more notice cancellations coming out, or an increase in the rating environment, meaning existing clients start shopping around for alternative opportunities and coverage elsewhere. We continue to review this on a daily basis, and we have seen a lot more drones and missile impacts. One example is a vessel that was attacked and hit on the port side as it turned and sailed away from the Gulf of Aden. So that is a clear uptick on the aggression from the Houthis over the recent weeks and months.

It’s also worth noting that there’s been military escorts and a lot of protection provided by a number of coalition states—called Prosperity Guardian—which, at some point, shot down 28 drones in one day. There seems to be an abundance of firepower made available to the Houthis, and despite a brief quiet period during the [Ramadan] religious festivities, we have to wait to see what goes on in the coming weeks.

STYLES: On the cargo front, piracy is covered within the Institute Cargo A clauses. Piracy is not covered under a stand-alone war [and] strikes, rights, and civil commotion buyback. What’s interesting with the Somali side of things is that, with all eyes on the Red Sea and all the military firepower focused on the Red Sea, pirates have taken an opportunity to really step up their operations. This sometimes means multiple vessels being taken, some of those being Iranian fishing vessels. The good news is that some navies, like the INS Kolkata from the Indian navy, have done a fantastic job of actually supporting the merchant fleets and retaking some of those vessels.

GOWER: Piracy is covered under the hull policy, while it’s not covered under the P&I. The piracy threat is nowhere near the level it was in 2011 when navies around the world had to deploy their own warships to protect shipping areas. But, as Brook said, maritime security is now focused on defending the threat from the Houthis in Yemen, which is enabling the pirates to re-emerge and exploit the situation. The motivations seem to be different this time around; it seems to be less financially motivated, perhaps, and more geopolitically motivated in terms of the reasons why they’re taking these vessels.

GOWER: Sure. Those would fall under BMP-5, which are the best management practices to deter piracy and enhance maritime security and provide guidance to vessels to plan their voyage and to detect, avoid, and deter attacks. It states that vessels planning a voyage by the Red Sea should conduct a thorough risk assessment, both ship and voyage, and it includes them conducting a risk assessment, implementing ship protection measures like razor wire, cooperation with the military, armed bars, safe muster point system, and more. Evidence has shown that the recommendations have improved the safety of vessels. I’m not aware of any other kind of best management practices, but a lot of it comes down to the ship owner themselves and the kind of safety measures that they put in place for their own vessels, cargo, and crew.

STYLES: For the greater good of the crew, we’ve seen many shipowners putting armed guards on board; in fact, we’re also requiring armed guards on certain types of vessels, especially those with a low freeboard or those which are moving slower than the usual container vessels.

GOWER: The crew would be covered under the P&I, and we would be insuring the crew liabilities under the war risk buyback cover. But seafarer safety is a real concern, as we’ve seen with the MV True Confidence incident at the beginning of March, which was the first incident where, unfortunately, three crew members were killed.

Outside of that, the crew can refuse to sail. They can give a seven-day notice before they enter the high-risk area; then the shipping company would have the option of either reassigning the seafarer to a different vessel or repatriating them and offering two-months’ worth of wages. In practice, however, we’re not really seeing crew taking this option for fear of losing their jobs. Nowadays, there are also financial incentives being offered—such as double pay in some circumstances—for the duration of time that the crew is in the high-risk area.