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In a significant escalation of maritime tensions, leading insurers have revoked war risk coverage for vessels operating in the Gulf region, following a surge in hostilities between the United States, Israel, and Iran. This decision has left at least 150 ships, including vital oil and liquefied natural gas tankers, anchored in the Strait of Hormuz, a crucial artery through which approximately 20% of the world’s oil and gas supplies transit. The effective closure of this key shipping route has caused a dramatic spike in freight costs and raised concerns about the stability of global maritime operations.
Insurers Respond to Escalating Conflict
The decision by several prominent mutual marine insurers, including Norway’s Gard and Skuld, the UK’s North Standard, and the American Club based in New York, to cancel war risk coverage from 5 March is a reflection of the escalating conflict in the region. Peter Hulyer, head of UK protection and indemnity at insurance broker Marsh, explained that this cancellation pertains to non-poolable war cover, typically reserved for high-risk exposures, which includes chartered vessels operating in Iranian waters and the surrounding Gulf.
Insurance rates are projected to rise sharply, with estimates suggesting increases could range from 50% to 100%, pushing rates from 0.25% to as high as 1% of the insured asset’s value. “The heightened risks in the Middle East necessitate a comprehensive reassessment of insurance rates,” said Marcus Baker, global head of marine at Marsh. This move comes in the wake of intensified airstrikes by US and Israeli forces on Iranian targets, which have already resulted in damage to at least three tankers and the tragic loss of one seafarer over the past weekend.
Shipping Costs Surge Amid Disruption
The fallout from these developments has been immediate and severe. The Containerized Freight Index, monitored by Trading Economics, recorded a 6.5% increase, signalling the rising costs of transporting goods. For instance, the price for shipping a 40-foot container from Shanghai to Jebel Ali in Dubai surged from $1,800 on Saturday to approximately $3,700 by Monday. This escalation is compounded by the temporary suspension of operations at Dubai’s Jebel Ali port, following an aerial incident that ignited a fire last weekend.
Although the Strait of Hormuz handles only about 2% to 3% of global container traffic, its closure has broader implications for supply chains in and out of the Middle East. Freightos has warned that importers and exporters will experience considerable disruptions and increased costs, as shipping routes are adjusted and the availability of vessels diminishes.
Tankers Stranded as Companies Reroute
The instability in the region has prompted major shipping firms, including Denmark’s Maersk, Germany’s Hapag-Lloyd, and France’s CMA CGM, to reroute their vessels away from the Red Sea, opting for longer journeys around Africa instead. CMA CGM has also instituted an emergency conflict surcharge, charging between $2,000 (£1,491) and $4,000 per container for cargo traversing the volatile area.
Meanwhile, a significant number of tankers remain stranded or are being diverted, thus reducing the available shipping capacity on global markets. Matthew Wheatley, an energy analyst at Wood Mackenzie, noted that this situation could lead to further increases in global freight rates if the conflict persists and tanker availability continues to be constrained.
Why it Matters
The withdrawal of war risk coverage and the ensuing turmoil in the Strait of Hormuz illustrate the profound impact of geopolitical conflicts on global trade. As shipping costs soar and routes are disrupted, economies worldwide face the ramifications of heightened tensions in the Middle East. With vital energy supplies at stake and the potential for further escalation, the maritime industry must navigate these challenges carefully to maintain stability in an increasingly volatile landscape.
