Cargo ships transiting the Indian Ocean will have to pay higher premiums for war risk covers as marine insurers are expanding the exclusion zone for such policies because of widening pirate attacks in recent weeks.
This could potentially raise shipping costs into and out of India as the expansion would bring the entire ocean under the exclusion zone, and with underwriters demanding additional premiums from shipowners to provide war risk covers in excluded areas.
The levy of additional war risk premium will take effect from 8 January, Stephen Rebair, a manager at London-based marine insurer North of England P&I Association Ltd, said in a recent notice to shipowners and shipbrokers.
Mint has reviewed a copy of the notice.
Pirate attacks are increasingly happening in waters closer to India than in the past as pirates who have been active mostly near the Somali coast are now deploying long-range ships to attack and hold vessels for ransom.
Mint could not independently verify the quantum of additional war risk premium levied by insurers.
War risks are generally excluded from normal insurance covers provided for a ship’s hull and machinery as well as for third-party liabilities arising out of operating ships.
But in a time of war or conflict, areas where particular war risks apply are defined and published by the joint war committee, comprising underwriters from the Lloyd’s Market Association and the International Underwriting Association.
Consequently, war risk insurers may declare these as additional premium areas and basic war risk cover may be cancelled and reinstated at a higher rate.
Shipping industry executives said India’s exporters and importers will have to pay higher costs for hauling cargo from and into India.
“The expansion of the exclusion zone will have an impact on the freight rates as shipowners pass on the higher premium on war risk cover to their customers,” said T.V. Shanbhag, group adviser to India’s biggest shipbroking, Mumbai-based Trans Ocean Agency India Pvt. Ltd.
India’s exporters and importers will also have to bear higher costs for shipping goods due to restricted availability of ships as many vessel owners may avoid using the route, Shanbhag added.
With the Baltic Dry Index (BDI) at a two-year low, shipowners are looking at every possible opportunity to hike rates, he said.
BDI gauges the cost of shipping dry commodities such as iron ore, coal, cement, grain and fertilizer, and is compiled by the Baltic Exchange based in London.