Red Sea Brief #18: Insurance Companies Cancel War Cover

Note: our interactive map shows where the events behind Red Sea Futures’ columns — the Red Sea Brief and the Red Sea Legal Letter — took place. Red Sea Futures’ proprietary agentic model assisted in the creation of this report.

1. Reinsurers Cancel Cover

2. Riyadh Moves the Marginal Barrel

3. Washington and Tehran Issue Conflicting Orders

4. The Houthi Ground War Widens

5. Four Parties Rewrite Red Sea Rules

6. What to Watch over the Next Two Weeks

Reinsurers cancel cover down to the berth

On August 12 four Protection and Indemnity clubs — NorthStandard, UK P&I, Skuld and Gard — issued notices canceling the war risks written into their charterers’ and fixed-premium products across the Red Sea, the Gulf of Aden and part of the Indian Ocean. P&I clubs are the mutual insurers that cover a shipowner’s liabilities — to crew, to cargo, to anyone the ship harms — for most of the world’s fleet; without their cover, a commercial ship cannot ordinarily trade.

War risk is the separate cover that pays when the damage comes from hostile action rather than from the sea; ordinary marine policies exclude war damage by definition, so when the war-risk layer goes, nothing stands behind it. Each club said it was acting because its own reinsurers — the firms that insure the insurers — had served notice on them. All four cancellations took effect at one minute past midnight GMT on August 16, moving the exclusion boundary north from 18°N to 25°30’N, which puts Jeddah, Yanbu and the entire Saudi Red Sea coast below the Gulf of Aqaba inside the excluded zone. More quietly, the usual exception for coastal waters within 12 nautical miles was withdrawn from precisely three places: the Bab al-Mandeb Traffic Separation Scheme — the marked shipping lanes at the strait — the Saudi Red Sea coast and the Yemeni coast. Excluded means uninsured. A ship inside the box is trading without war-risk liability cover; if she is hit, the club does not pay, and her owner meets crew, cargo and wreck claims from her own balance sheet. Until August 16 a ship at a Saudi or Yemeni berth kept her cover under the coastal exception; now the exclusion applies to the ports.

Full case detail in this week’s Red Sea Legal Letter (paid subscription only)

Mutual P&I entries were not canceled, and neither was the Group Excess war cover. What the clubs withdrew were the charterers’ and fixed-premium layers, cover bought by charterers — companies that hire ships rather than own them — and by owners who pay a set annual premium instead of entering the mutual. A great deal of the basin’s commercial traffic trades on that charter and fixed cover, and the loss is automatic: there is no advance notice an owner can give and no premium he can tender after the fact. The only fix is a negotiated buy-back: the shipowner or charterer pays the reinsurer, on the reinsurer’s terms, to restore the cover that has just been withdrawn. Reinsurers are reportedly using those negotiations to impose tighter warranties, conditions written into the policy that render if void if breached.

Set against that, what Riyadh is now considering looks like a ‘reply’. Saudi Arabia’s finance ministry is considering a state-backed war and political risk insurance scheme for vessels calling in the Gulf and the Red Sea, offering up to about $186 million of cover per event with the state-owned export-import bank standing behind private underwriters once losses pass a threshold. Talks are early, no Saudi official has confirmed anything on the record, and the scheme may never see the light of day. In the same month the private market pulled back from the southern Red Sea, however, a sovereign entity began working out what it would cost to stand in its place.

Full analysis in this week’s Fragility Tracker (paid subscription).

War-risk cover for a Hormuz transit is running between 7.5 and 12.5 percent of hull value, against a peacetime rate near a quarter of one percent. On a $100 million hull that is the difference between $250,000 a voyage and up to $12.5 million. At that level insurance stops being a cost line and becomes a barrier to entry: tonnage leaves the trade because owners cannot afford, or are ready to cover. South Korean lines describe sending vessels to Saudi Arabia as nearly impossible, and Seoul’s small-business ministry has confirmed factories manufacturing to orders they can’t ship. Cover remains available, Lloyd’s List notes, for vessels with no Saudi link: the premium follows the Saudi connection, not the route.