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Red Sea strikes: How do you insure ships in a war?

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Premiums have risen very steeply

By Daniel Wood

Mar 14, 2024 Share

“We’re insuring on a war basis, both the hull and the cargo,” said Andrew McMellin (pictured above).

Weeks of Houthi attacks on Red Sea shipping have impacted the global war insurance market with some premiums, according to news reports, increasing by hundreds of thousands of US dollars.

Brokers have told Insurance Business that war exclusions are impacting clients and other reports say war coverages could become unavailable and unaffordable.

However, McMellin, managing director of wholesale for Markel International, suggested his firm and other London syndicates are strongly committed to this war impacted insurance market.

The London-based chief spoke to Insurance Business in Sydney during a recent visit to Australia.

Breach zones and the Joint War Committee

“The way it works is we’ll issue an annual policy to the cargo company or the shipping company,” said McMellin. “Then when they are going into what we call breach zones, we will apply a seven-day policy and an increased premium so they can go through that particular route.”

He said war breach zones, or breach areas, are high risk areas where the shipping company needs to pay a higher premium. McMellin said that allows insurers to adapt the coverages and the conditions “if suddenly the intensity of the war increases.”

“There is a Joint War Committee (JWC) in London who set where the zones are and then everyone in the marine market follows that,” he said. “Therefore, if a shipping company goes into one of those zones, it knows it has to pay an additional premium.”

“So it doesn’t get caught out,” McMellin said the policies Markel offers are seven days duration and can be canceled.

“That’s really just in case,” he said. “If all of a sudden it all intensifies then you have the option, not to necessarily cancel the cover, but to renegotiate the terms.”

Russia-Ukraine comparison

McMellin said some insurers who provided war insurance for the Russia-Ukraine conflict did try and cancel covers.

“There were some markets trying to pull away from their obligations and were effectively saying that they weren’t going to issue any coverage,” he said. “You can’t really do that because these are annual policies so all you can do really is charge additional premium for going into those war zones.”

IB asked McMellin about reports suggesting that some insurers could pull out of offering war coverages in the Red Sea?

“Yes, some people look at that and pull away,” he said. McMellin said premiums have gone up considerably “because obviously the risk has gone up considerably.”

According to Reuters, the cost of insuring a seven-day Red Sea voyage has risen by hundreds of thousands of US dollars.

“We’re a leader in that market and have been for many, many years so we’ll continue to insure there,” he said.

IB asked if being “a leader” means Markel is insuring more ships in this high-risk zone than most other insurers?

“We’ll set the terms,” he said. “What happens in a syndicated market like Lloyd’s is you’ll have often one, maybe two leaders, who set the terms.”

McMellin said the other markets agree to the terms because they recognize the expertise of these “leaders” in this particular insurance area.

“Usually, that’s what makes the syndicated market quite efficient because not everybody is trying to ask all the questions – we price all the business,” he said.

Red Sea “incidents” happen every day

IB asked if McMellin could provide some idea of how many ships his firm is currently insuring in the Red Sea?

“Over the period this conflict has been going on there would have been hundreds,” he said. “There are incidents happening on a daily basis that are not often reported because they’re not particularly dramatic.”

McMellin said in many of these cases the damage to ships is “quite superficial.”

IB asked if Markel is getting claims concerning ships in the Red Sea on a daily basis?

“We’re getting notifications on a daily basis, yes,” he said. “But some will report that a missile hit part of the cargo and they were able to put the fire out and carried on under their own steam.”

So far, he said, there have been very few incidents where a ship has sunk.

“It can happen,” said McMellin. “There’s one ship at the moment that we don’t insure that is actually listing and they’ve taken the crew off.”

Rubymar cargo ship sinking

Days after IB’s conversation with the Markel managing director, the Rubymar cargo ship became the first vessel to sink as a result of Houthi Red Sea attacks.

According to a media release from US Central Command, the Belize-flagged, UK-owned bulk carrier sank after being struck by a Houthi anti-ship ballistic missile on Feb 18.

“The approximately 21,000 metric tons of ammonium phosphate sulfate fertilizer that the vessel was carrying presents an environmental risk in the Red Sea,” said the release.

The current state of this cargo is uncertain. One pollution expert working with the United Nations has said “there is no immediate danger” and “the hull is in relatively good shape.”

“It’s not just the Red Sea”

McMellin said his firm uses consultants to keep up to date with the Yemen conflict and Red Sea attacks.

“It’s not just in the Red Sea,” he said. “There are these breach zones in different parts of the world, including for the Russia Ukraine situation.”

McMellin said Markel has war insurance teams in both London and Shanghai. This shipping insurance, he said, “is a regular part of marine war business.”

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