The ongoing tension in the Middle East is now affecting maritime trade as well. In many areas, insuring ships has become very expensive. Due to increasing risks, some insurance companies are even refusing to provide insurance cover altogether, disrupting shipping activities. This time the situation seems different; This issue is no longer limited to the challenges of transporting oil through the Strait of Hormuz. The cost of insurance has emerged as a major concern in itself. Particularly for ships transiting the Strait of Hormuz, ‘war-risk premiums’ have increased from a previous range of around 0.2–0.25 per cent to 1 per cent or more. As a result, operating expenses are increasing rapidly. Let us understand this matter in more depth.
Shipping challenges increased due to high cost of insurance
A large oil tanker usually costs around ₹1,500 crore to ₹2,500 crore. Under these circumstances, even a one percent fluctuation in insurance rates can increase the cost of a single trip by several crores of rupees, affecting the entire cost structure.
Rising operating expenses for companies
A large portion of the global oil supply passes through the Strait of Hormuz. As a result, many companies are choosing safer routes to avoid the risks—that is, taking long detours along the African coast. This detour route adds an additional 10 to 15 days to the travel time, which increases fuel consumption and also increases operating expenses. In many cases, insurance companies are outright refusing to provide insurance cover.
Difficulties increased due to not getting insurance
According to a report by news agency Reuters, marine insurance companies in some parts of the Gulf region are now refusing to provide ‘war-risk cover’ to ships. This has posed a serious challenge to the shipping companies, because ships cannot be operated without insurance. Insurance cover is an essential condition for financing freight transportation, port entry and meeting contractual obligations. As a result, shipowners are now faced with a dire dilemma: they are now left with only two options—either buy insurance at very high premiums, or stop trading on these high-risk routes.