Red Sea crisis: No claims yet, but insurance cost may rise if tensions grow

Indian insurers expect to see a rise in marine insurance costs if the crisis faced by cargo vessels in the Red Sea escalates. However, they consider the present situation to be under control and have yet to receive any demand for claims.

“In case of a rise in incidents similar to the Indian oil tanker attack in the Red Sea (last month), there will be an increment in insurance costs for all cargo journeys made via the Red Sea,” said Parthanil Ghosh, president, retail business, HDFC ERGO General Insurance.
 

According to him, an increased frequency of such incidents will lead to greater demand for kidnap and ransom covers. 

“Besides, it has been observed earlier that cargo ships alter their transit routes as a measure to thwart such possible attacks, thereby leading to increased costs in transportation and, in turn, insurance,” Ghosh said.
 

Echoing him, Deepak Prinjha, chief technical officer of Royal Sundaram General Insurance, said: “Currently, the situation is manageable within the insurance/reinsurance industry and every company has adopted a wait-and-see strategy. Also, claims are yet to be reported.”
 

In the wake of recent attacks by Yemen-based Houthi militants, the situation around the Bab-el-Mandeb Strait, an important shipping route linking the Mediterranean Sea with the Indian Ocean via the Red Sea, remains tense.
 

According to PTI, a report by economic think tank Global Trade Research Initiative has said that the crisis is expected to push up shipping costs up to 60 per cent and insurance premiums by 20 per cent.
 

Insurers are keeping a close eye on the developments and have made an upward revision to their risk perception with companies turning cautious of the tense geopolitical scenario.
 

“The perception of risk associated with the Red Sea region has gone up and although we have not seen any losses or increase in claims so far, there is a possibility of a rise in claims and costs. In a potential scenario, if the year ends without any major claims getting reported, there wouldn’t be a price increase. Even if there is, it would be a nominal rise — maybe 5 per cent to 7.5 per cent on the April 1, 2023, renewals — due to the elevated risk situation,” said an insurance official who did not wish to be named.
 

According to the Insurance Regulatory and Development Authority’s annual report for FY23, marine insurance accounted for 2 per cent of the overall business of general insurers in India. Premium income in the segments rose 21.38 per cent 

year-on-year (Y-o-Y) to Rs 5,059 crore in 2022-23.
 

Insurers are not expecting a major impact on the marine insurance business because they are already prepared for eventualities such as the current one. The segment could be seriously impacted only if the situation worsens in the Red Sea.

International business has always been marine insurance intensive and cargo/hull is generally adequately covered, explained Prinjha.
 

“Presently we do not foresee changes in insurance terms and upward revision of marine premiums. If the situation really gets worse, there may be restrictions on this route from reinsurers, which will be followed by insurance companies and will hit the marine business. Hopefully, the current situation won’t come to that,” he added.
 

On the question of revision in reinsurance, insurers noted that the rates were not likely to rise unless a major event or claim was reported.
 

“Indian insurers are not likely to be impacted much due to limited exposure. But there will be an overall global impact due to which our reinsurance premiums are also likely to go up,” the official who did not wish to be named added.
 

Last month, London’s marine insurance market widened the area in the Red Sea it deemed as “high risk” due to the surge in attacks on commercial ships.
 

Saurabh Verma, managing director of Global Insurance Brokers, said that the Red Sea scenario typically falls under the category of war risk for marine insurance. “There is a Joint War Committee in London that monitors geopolitics. Depending on their assessments, insurance rates for war are determined. In a normal situation, standard premium rates apply. However, in a warlike situation, such as the one in the Red Sea, the need for reinsurance to cover war or similar perils is assessed to determine whether the current war rates remain applicable,” he said, adding that the rates are adjusted in response to changes in risk. That is, higher risk levels result in higher premium rates.
 

“The war risk premiums have already increased, from 0.05 per cent in early December to the current range of 0.5 to 0.7 per cent. If the situation worsens, the rates are likely to go even higher. Conversely, they may moderate if the situation improves,” Saurabh pointed out.
 

During the April-November period of FY24, the premiums from marine insurance slipped 0.79 per cent (Y-o-Y) to Rs 3,353.37 crore from Rs 3,380 crore. Premiums from marine cargo dropped 1.54 per cent to Rs 2,541.71 crore, and marine hull premiums rose  1.63 per cent to Rs 811.65 crore.