Episode Transcript
[00:00:00] Speaker A: Hello, Freight Buyers Club. Mike asked me to introduce myself. My name is David McKee. I'm a partner at Preston Turnbull LLP. I'm a shipping and maritime insurance lawyer. And Mike wants me to share a few ideas for you as to some things about current issues that you might be facing.
[00:00:17] Speaker B: David, welcome to the Freight Buyers Club. Everyone in the container shipping supply chain understands that when there's war, they have to pay more. But can you give us the view from the maritime insurer's point of view how you go about assessing risk? And how does that apply to key areas such as the Black Sea, the Strait of Hormuz and Bab El Mandeb?
[00:00:40] Speaker A: Okay. Well, first things first. There's sort of two separate types of insurance that we need to consider. There's the general hull and machinery insurance on the ship, and then there's the war risk insurance. War risk insurance can be on the ship and the cargo. And the two are sort of. They reflect different markets and they have different approaches to rating a risk. Basically, each of them is doing the same thing. They are insuring the ship or the cargo against the risk of loss or damage by certain perils. In the case of war risks, those perils include mine strikes, drone strikes and other sort of warlike acts, or terrorist acts or piracy, that sort of thing. And generally, as I expect you'll all appreciate the level of threat of those kinds of things or the chances of those kind of things happening are very different in different parts of the world. Some areas are hotspots, they're not always hotspots, but suddenly they become hotspots. And basically the way that the war risk insurance works on the ships is that there are a general insurance for navigating in areas of lower risk. And then the ship owner operator pays an enhanced premium for operating in areas of perceived enhanced risk or higher areas. And those change from time to time. Those areas are set by something called the Joint War Committee, made up of insurers here in London. And they listen to various experiences. They get security threat assessments from independent advisors, and they decide that basically for insurance purposes, specific areas are going to attract an additional cost of insurance if you want your ship to go through those areas. So therefore, if you have cargo on board a container ship and the route carries it through a particular high risk area, then there's going to be a surcharge on the ship owner for his insurance for going through that area. And the ship owner is going to want to pass that on to cargo insurers, both in terms of freight, equally. The Cargo market, if you're insuring there is also going to be imposing an additional surcharge because of the perceived enhanced risk in those areas.
[00:02:52] Speaker B: Can you explain how those insurance costs have been changing through 2026, particularly when we look at the Bab El Mande, but also increased transits through the Red Sea and the Suez Canal. How has that changed over, over the course of 2026?
[00:03:09] Speaker A: Well, generally, certainly before sort of February, then those areas were not perceived to be particularly high risk. Some of them were, but they're relatively low rates being charged for transits on there in the sort of 0.00 something percent on the hull side for the war insurers. As soon as what happened in Strait of Hormuz took effect, then the rates soared. And instead of a ship owner paying a 0.005 or something like that, it was going to 5, 10% of the hull value. So if you think of a container ship's value, that can be astronomical, $100 million, suddenly insurance for those particular voyages becomes very expensive. And that's partly the reason why some operators have looked to, if you like, alter routes or not go to certain ports or to change the nature of the ships that are calling at those ports to use smaller feeder vessels to serve particular container terminals, for example.
[00:04:07] Speaker B: What needs to change and what would be the criteria for reduced insurance premiums for container shipping operators? Because we've heard plenty of times this year piece in our time, mainly from the White House, but that obviously hasn't been reflected in the safety of shipping.
What needs to actually change so that there is a material impact on what container shipping operators are paying and therefore what their customers will pay?
[00:04:32] Speaker A: Well, what needs to change is that the particularly in the Middle east needs to become a safer place for ships to transit. Increasingly, everybody's sort of weaponizing ships and targeting commercial ships. And until that dies down, then I'm afraid I think everybody's going to be paying a little bit more for insurance through those areas or looking at alternative routes. And the answer to that is obviously potentially much longer voyages or different voyages or overland transits to get your cargo to destination.
[00:05:03] Speaker B: But how long does a seaway need to be devoid of threat or devoid of attacks before this is deemed a less of a high risk area? How does that process work?
[00:05:14] Speaker A: Well, basically, as I said before, the Joint War Committee sort of draws on established data risks to ships of things actually happening in security assessments. If the Joint War Committee gets a security assessment that says that the risk has diminished and this particular area is no longer a perceived area of enhanced risk, then they will change those areas. They will issue a circular and that will no longer trading through that area will no longer attract an additional premium.
[00:05:41] Speaker B: David, thanks for joining me today of the Freight Buyers Club.
[00:05:43] Speaker A: Thank you very much.
