Maritime Insurers Withdraw War Risk Cover in Gulf Amid Escalating Iran Conflict
In a significant development impacting global trade, leading maritime insurers have cancelled war risk cover for vessels operating in the Gulf region. This move comes as the escalating conflict between the US, Israel, and Iran has severely disrupted shipping, effectively closing the vital Strait of Hormuz and sending freight costs soaring.
Strait of Hormuz Effectively Closed, Vessels Rerouted
At least 150 vessels, including critical oil and liquefied natural gas tankers, have dropped anchor in the Strait of Hormuz and surrounding waters. This strategic shipping route, through which approximately 20% of the world's oil supplies and 20% of seaborne gas tankers pass, is now effectively closed. The closure follows intense airstrikes on Iran initiated by the US and Israel over the weekend, creating a high-risk environment for maritime operations.
Major marine insurers, including Norway's Gard and Skuld, the UK's North Standard and London P&I Club, and the New York-based American Club, have announced the cancellation of war risk cover. This insurance typically protects shipowners from costs and damages resulting from war, terrorism, and piracy. The cancellations apply to Iranian waters, the Gulf, and adjacent waters, effective from 5 March, and are likely to further deter shipowners from traversing the region.
Freight Costs Surge as Shipping Routes Are Altered
The disruption has led to a sharp increase in the cost of transporting goods. The Containerized Freight Index, monitored by Trading Economics, rose by 6.5% on Monday. According to the online shipping marketplace Freightos, terminal container rates for Shanghai to Jebel Ali in Dubai—the largest port in the Middle East—jumped from $1,800 for a 40-foot container on Saturday to approximately $3,700 on Monday.
Dubai-based DP World temporarily suspended operations at Jebel Ali over the weekend after an aerial interception caused a fire on Saturday night, though operations have since resumed. Freightos noted that while only about 2% to 3% of global container volumes pass through the Strait of Hormuz, its closure may not heavily impact the broader container market. However, the firm warned that for importers and exporters moving goods in or out of the Middle East, services will be significantly disrupted, and costs will rise for goods that can still be transported.
Broader Regional Disruption and Insurance Market Reactions
John Wyn Evans, head of market analysis at the UK wealth asset management group Rathbones, explained that rate increases are linked to a combination of rerouting and higher oil prices. Rerouting involves longer sea journeys, which reduces capacity and requires faster sailing to meet deadlines, exponentially increasing fuel consumption.
Adding to the turmoil, Iran-backed Houthi rebels in Yemen, who had paused attacks on Red Sea vessels since October, have threatened to resume strikes. In response, major shipping companies—Denmark's Maersk, Germany's Hapag-Lloyd, and France's CMA CGM—have diverted all sailings away from the Red Sea until further notice, rerouting them around Africa. Denmark's Norden has suspended all new business requiring transit through the Strait of Hormuz, and CMA CGM has imposed an emergency conflict surcharge of between $2,000 and $4,000 per container on cargo moving through the region.
In the insurance market, shares in Beazley, a leading marine insurer operating in Lloyd's of London, initially dropped 2.8% as investors worried about potential large losses from the Middle East and risks to its takeover by rival Zurich. However, the share price rebounded by 1.8% after the two companies announced an agreement on the £8.2bn deal on Monday afternoon. Analysts at Jefferies suggested this announcement might indicate that Beazley's loss exposures, and those of the broader specialty insurance market, remain contained. Beazley wrote just over $500m in premiums for marine insurance in 2024, about 8% of its total book, with exposure to war-related risks estimated in the low single digits of its overall business.
