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Geopolitical divisions threaten the global order of sea trade. The war in Ukraine has already disrupted energy and grain shipments from Russia. A potential invasion or blockade of Taiwan by mainland China could do the same in east Asia. But war is not yet being priced into all insurance cover.
Open sea lanes with Russia and Ukraine are critical for grain and other commodity supplies. Recent drone attacks in Crimea highlight the risks. Open trade with Taiwan is even more important given the concentration of global chip supplies.
China’s largest-ever naval exercises in the Pacific are a worry. However, unlike the Black Sea region, the seas around Taiwan are not on Lloyd’s of London’s Joint War Committee list. War cover only becomes necessary for an asset to enter a region after it appears on the list.
Expect costs to rise if it does. A basic global war cover premium might cost 10 basis points of a ship’s value annually. Entry into the Black Sea conflict zone could add a further 100 to 150bp on top of that. This compares with a premium of 10 to 25bp for cover to traverse the Gulf, another JWC-listed area. At the height of the Libyan civil war, rates were as much as 500bp — albeit not for very long.
Maritime tension is just one of several problems facing the global shipping industry. Supply chains are still recovering from pandemic-era disruption and putting shippers, such as AP Møller-Maersk, under cost pressure. Port congestion has pushed up rates for hull and cargo cover at the busiest bottlenecks. Fire risks are also rising, given ships are carrying greater amounts of lithium-ion batteries.
But the war in Ukraine has caused a sustained increase in rates unlike anything seen for a generation, says Dan McCarthy, head of marine at Markel International. It was one of the first to insure the Ukrainian grain trade following the start of the war.
Rates reflect the region’s danger. A similar situation in the seas around China would mean an expensive increase in coverage.