Shipowners are seeing the cost of carrying out trade in the Black Sea region increase after protection and indemnity (P&I) clubs pulled cover for war risk exposure in Russia and Ukraine, with higher rates expected to be passed on in commodity prices.
The majority of P&I clubs, which together provide around 90% of global marine liability insurance for seaborne tonnage, announced in late December that they would no longer provide fixed premium war risk insurance due to the scale of financial losses incurred by reinsurers as a result of the war in Ukraine.
Elizabeth Stephens, managing director of global political risk insight firm Geopolitical Risk Advisory, tells GTR that while insurance is still available for ships entering the Black Sea, “costs have increased by 20-25% this year” due to “the perceived risk of operating in the area”.
“As market capacity tightens, insurance costs rise. The increased costs will be passed onto the consumer in the form of higher commodity prices,” Stephens says.
In a club circular published on December 24, the UK P&I Club said its reinsurers would no longer be able to provide cover for war risk exposure to Russian, Ukrainian or Belarusian territorial risks and that war risk coverage for all non-mutual business would be cancelled as a result.
Similar statements were released by a further 11 clubs out of the 13 that make up the International Group of P&I Clubs, meaning that shipowners who are not members of these mutuals have been forced to look elsewhere for cover.
Speaking to GTR, David McInnes, partner at BDM Law, says that the cancellation of fixed premium cover will largely impact smaller vessels.
“Having said that, a lot of the trade carried out in the corridor agreed between Ukraine, Russia and other countries to allow the export of grain is done with smaller ships, because a lot of it is accessed via canals and restricted entries rather than larger ports,” he says. “Bigger fleets and bigger vessels tend to be in mutual insurance P&I associations.”
“There are other insurers that will insure it, but the price has gone up, so it makes the trade more costly. It’s possible that some will take the risk of not being insured, but it’s obviously a very risky thing to do,” McInnes adds.
On January 17, the International Group announced further details of its reinsurance contract, including the provision that excess war reinsurers required territorial exclusion language for vessels trading in waters where Russian forces were engaged in conflict. The group says it is in an ongoing process of “negotiating availability of sub-limited cover for affected vessels” that will likely result in a per-vessel limit lower than US$500mn.
A spokesperson for the International Chamber of Shipping (ICS) says that the withdrawal of charterers’ cover could also have an impact in future, as it would “adversely affect shipowners’ right to claim an indemnity from charterers” for any loss and damage that is the charterers’ responsibility.
For now, though, the trade association says that the impact seems “limited to an uplift in premium (even though the risk has not changed)”, and that it is not receiving reports of reduced traffic due to the withdrawal of reinsurance provision. It could take time for the changes “to filter through and impact the market”, the ICS adds.
Data provided by the Black Sea Grain Initiative Joint Coordination Centre, for instance, shows that shipments are continuing to leave Ukrainian ports in vessels insured by P&I clubs like the Swedish Club and Norwegian insurer Gard.
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