Red Sea attacks straining global supply chains and adding upward pressure on war insurance premiums - DBRS Morningstar

Any eventual war-insured loss will be well within the absorption capacity of the marine insurance industry, global head of insurance says

DBRS Morningstar published a commentary discussing the implication of the recent Houthi rebels’ attacks to cargo vessels in the Southern Red Sea and the Gulf of Aden for global supply chains, shipping lines, and marine insurance companies providing war coverages in the region, UK based DBRS Ratings Ltd. said in its media release.

Key highlights include the following:

- Houthi rebels’ recent attacks on cargo ships have further disrupted marine operations in the Southern Red Sea and the Gulf of Aden, unsettling global supply chains and raising transportation costs.

- A multinational naval coalition is expected to address the security challenges in the region and protect the freedom of navigation. However, the financial impact on shipping lines, cargo owners, and insurers will remain for some time.

- The marine insurance market has responded to the heightened security risks in the region by materially increasing the price of marine war coverages, restricting insurance capacity, and expanding the geographic area deemed unsafe for sea navigation.

“Given the apparent limited capacity of the Houthi rebels to attack multiple cargo ships at the same time and a potential maximum insured value between $200 million and $300 million, including cargo for a covered vessel destroyed in an act of war, we anticipate that any eventual war-insured loss will be well within the absorption capacity of the marine insurance industry,” said Marcos Alvarez, Global Head of Insurance.

“Because of the rising incidence of attacks on shipping vessels, BP p.l.c. (rated “A”, with a Stable trend by DBRS Morningstar) along with other major oil companies have announced a temporary halt on all shipments entering the Red Sea, of which include oil, petroleum products, liquified natural gas (LNG), and other energy-related products,” said Victor Vallance, Global Head of Energy & Natural Resources. “For oil markets this will cause, at least temporarily, some disruption to energy trade flows and pull oil and LNG prices higher.”

“While there is greater slack in global supply lines today compared with recent years, the impact of drought conditions that have reduced the Panama Canal shipping capacity by one third is exacerbating the global impact of the current disruption in shipping in the Red Sea/Suez Canal,” said Tim O’Brien, Global Head of Diversified Industries. “Regardless of how long the disruption lasts or how much the proposed new U.S.-led maritime task force mitigates the impacts, the restoration of network reliability will take months.”