Insurers shun many ships carrying goods through the Red Sea as attacks continue
(CNN) — A growing number of insurers are refusing to cover American, British and Israeli vessels against war risks in the key commercial shipping corridor through the Red Sea as attacks from Houthi rebels continue.
The hesitation from insurers comes as US officials have warned American merchant ships to steer clear of the vital waterway until further notice.
The crisis in the Red Sea threatens to damage the economy by increasing prices on consumers and delaying the shipment of goods.
“Some insurers are no longer willing to underwrite war-risk insurance for vessels with ownership or involvement with the US, UK or Israel traveling through the Red Sea,” said Marcus Baker, global head of marine, cargo and logistics at Marsh, the insurance brokerage and risk advisory unit of Marsh McLennan.
A US-owned and operated cargo ship was hit by a Houthi anti-ship ballistic missile on Monday, according to US Central Command. A Houthi official vowed on Wednesday that attacks on “Israeli-linked” vessels in the Red Sea as well as the Arabian Sea will continue.
Although not all insurers are imposing restrictions, Baker said the insurance market is clearly “tightening” and rates could continue to surge.
War-risk rates have spiked from just 0.01% of vessel value in early December to 0.7% today, Baker said. That means the cost to insure a $100 million container ship has spiked from $10,000 per voyage to $700,000 today.
This is a problem because the Red Sea is a vital trade route that connects to the Suez Canal, which accounts for 10% to 15% of world trade and for 30% of global container shipping volumes.
The deteriorating security situation has forced shippers to reroute vessels around the southern tip of Africa — a detour that can add 3,000 nautical miles and 8 to 10 days to the voyage.
Ships sailing from China to the UK have to go an extra 8,000 miles if they avoid the Red Sea and the Suez Canal and sail around the south end of Africa instead, said Vicent Clerc, CEO of Maersk, the world’s second largest container shipping line.
“That means more emissions, more fuel,” Clerc told CNN’s Richard Quest in Davos, Switzerland. “It means also they will not be back on time in China. That means the containers take longer time to turn. You just have costs piling on here. The longer this is going to last, the more this is going to cost.”
Daily traffic through the Suez Canal has tumbled to the lowest level since March 2021 when a vessel called the Ever Given blocked the canal, according to PortWatch, a group set up by the International Monetary Fund and Oxford University.
Shipping rates have tripled since October on Asia-to-Europe rates, according to S&P Global, which warned of a “global contagion” from the Red Sea disruptions.
The risk is that shipping and insurance costs spike to the point that it lifts consumer prices, unwinds progress on inflation and causes supply chain bottlenecks like the ones that snarled the US economy after the Covid-19 pandemic.
However, Mark Zandi, chief economist at Moody’s Analytics, told CNN that the Houthi attack on Red Sea shipping will most likely have limited impact on global inflation and the economy.
“Global shipping costs have jumped and oil prices are up a few dollars a barrel,” Zandi said in an email, “but if this is the worst of the impact, which seems most likely, then it will not materially translate into higher consumer price inflation globally.”
“It is not significant enough to impact the global economy,” Kristalina Georgieva, managing director at the IMF, told CNN’s Richard Quest, also while at Davos. “The risk is more of spillover of violence and prolonging the conflict, and then uncertainty is very high. How would that impact the world? I worry it could be quite negative.”
Despite the Red Sea disruptions, Ikea still plans to push ahead price cuts, the furniture company’s CEO told Quest at the World Economic Forum in Davos on Wednesday. Ikea also does not foresee any product shortages from the Red Sea problems.
Asian and European consumers are likely to experience a bigger impact from the disruptions than Americans because that’s where most of the Red Sea trade flows, according to Zandi.
For instance, Tesla customers in Europe could suffer delays because the electric vehicle giant announced plans last week to idle its giant plant in Germany as the Red Sea problems delayed supplies.
Still, it helps that shippers have very recent experience to draw on when dealing with supply chain headaches in 2020 and 2021.
“Shippers are now much better at using alternative ways of moving their goods around the world,” Zandi said.
Stephen Schwartz, executive vice president of Wells Fargo Global Receivables & Trade Finance, noted that while shipping costs have spiked, they remain below Covid levels.
“We have not seen the situation in the Red Sea translate into material movements in prices in the US such as consumer goods and gasoline prices,” Schwartz said. “However, the longer the disruption lasts, the likelihood increases that US companies and ultimately consumers could be impacted.”
Zandi similarly warned that there is a risk that the Red Sea crisis escalates to the point where there is a real economic impact, including by potentially expanding to include Iran or even potentially derail Iranian oil exports.
“Then the fallout on global inflation and economy will be much more serious,” Zandi said. “But that is a low probability scenario, at least at this time.”
The-CNN-Wire
™ & © 2024 Cable News Network, Inc., a Warner Bros. Discovery Company. All rights reserved.
