Rising Insurance Costs In The Red Sea: Impact On Global Trade

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Mfame Editor
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  • London insurers to designate larger sections as risky
  • US and allies to address heightened Houthi attacks.
  • Disruptions in the Suez Canal echo concerns about trade normalization.

Escalating Risks and Increased Insurance Premiums

Recent attacks in the Red Sea have prompted London insurers to designate larger sections as risky, causing a significant surge in war risk insurance costs. Insuring vessels transiting the Red Sea has spiked to about 0.5% of a ship’s hull value, a stark rise from earlier rates of 0.1% to 0.2%, reports Bloomberg.

Global Response and Economic Ramifications

A new task force is being assembled by the US and allies to address heightened Houthi attacks, considering both diplomatic solutions and potential military strikes.

With major shipping companies like A.P. Moller-Maersk and oil giants like BP Plc and Equinor ASA pausing Red Sea routes, trade slowdowns are exacerbating inflation risks globally. The choice to circumvent the Red Sea by sailing around Africa is increasing expenses and causing delays, impacting the prices of goods.

Financial Implications and Supply Chain Disruption

Increased premiums and route diversions can cost up to $500,000 per voyage for a vessel valued at $100 million, affecting ships traversing the Southern Red Sea or Gulf of Aden.

The disruptions caused by Houthi attacks are creating bottlenecks in global trade routes, affecting both the Panama and Suez Canals and consequently delaying deliveries and supply chain operations.

Impact on Global Trade and Future Concerns

About 90% of worldwide trade relies on sea routes, and the disturbances in the Red Sea and potential disruptions in the Suez Canal echo concerns about trade normalization, similar to the delays caused by the Suez Canal blockage in 2021.

Conclusion

The recent surge in insurance costs, trade route diversions, and disruptions in the Red Sea due to escalated attacks are posing significant challenges to global trade, potentially leading to prolonged delays and increased costs for essential goods worldwide.

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Source: Bloomberg

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