The Daily View: Plunging Suez Canal revenues are down to the Houthis, not marine underwriters
LLOYD’S of London prides itself on readiness to insure just about anything, from late Liverpudlian comedian Ken Dodd’s trademark buck teeth to Bruce Springsteen’s vocal cords. I know of only two recent cases where underwriters have refused point blank to touch a risk.
In 2012, a Hollywood studio was unable to buy cover for non-completion of a Charlie Sheen movie, thanks to the moral hazard represented by the actor’s documented propensity to inject himself with cocaine. Sheen, it should be stressed, has now been clean for seven years.
And a couple of months back, Travelers’ Lloyd’s syndicate would not write Red Sea war risk on the final voyage of Eternity C, despite holding the bulk carrier’s annual placement.
That turned out to be the correct decision, at least from Travelers’ point of view. Owner Cosmoship ordered the vessel to make the trip anyway and it came under attack from Houthis, the rebel militia in Yemen. At least four seafarers died and a further 10 are now being held captive, while the vessel was a total loss.
The point is that war risk insurance is a for-profit class and Red Sea war risk insurance is the ultimate fly by the seat of your pants proposition right now.
Yes, more than 99.9% of ships undertaking these voyages will make it through OK. But for the minority that don’t, the payouts can often be huge.
Seen in that light, current additional premiums of 0.3%-0.6% for Red Sea transits — representing an outlay of $150,000-$300,000 for a vessel worth $50m — would strike most people as a reasonable deal.
Remember that many owners will not even be paying that much, as they qualify for no-claims bonuses and/or fleet discounts. Even those that do have to stump up will commonly be able to claim the money back from the charterers.
All of this brings me to my big story, based on comments over the weekend from Suez Canal Authority chair Admiral Osama Rabie, at an event held last weekend to mark the anniversary of Egypt’s 1956 nationalisation of the key international waterway.
Rabie highlighted a sharp decline in traffic since the onset of the Houthis campaign against merchant tonnage. Transits are down by more than half, from 70-80 a day to 30-35.
That vindicates the findings of my colleague Bridget Diakun earlier this month, who reached similar figures on the back of Lloyd’s List Intelligence data.
Suez revenues have plunged from over $10bn a year to less than $4bn. Given the canal’s importance to Egypt as a source of hard currency earnings, that is going to hurt the country.
Rabie urged marine insurers to reduce what he described as “elevated” premiums in the hope of encouraging more shipowners to resume transits.
The obvious counter is that rates are not in fact elevated. Far from it.
The second point, perfectly put by one source I quoted, is that marine insurers are not the underlying cause of the canal’s woes. That’s the Houthis.
Whether the risk in question is the Houthis’ malign designs on the world fleet or a film star’s drug addiction, underwriters have every right to price it at a level that makes commercial sense.
Alternatively, to use a maxim Sheen would have done well to adopt, they can just say “no”. My guess is that the Suez Canal Authority would like that outcome even less.
David Osler
Law and marine insurance editor, Lloyd’s List
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