Oil Importers Stare At Costly Tanker Insurance Despite Fall In Red Sea Attacks

in International Shipping News

14/03/2025

The insurance premium for merchant ships passing through the Red Sea remains firm despite a reduction in adverse incidents and is likely to stay that way for a long time, market participants in Seoul, Tokyo and Singapore said March 12.

Several key oil tanker companies have yet to resume moving their ships through the Bab al-Mandab Strait and the Suez Canal, they said.

“We will probably be the last among the lot to restart sending ships,” a source at a major oil tanker company said, citing the security risks involved in transiting the Red Sea.

The additional war risk premium (AWRP) in the Red Sea is currently around 0.5% of the hull and machinery (H&M) value of tankers for seven days and has not seen any major decline following the recent de-escalation in the Gaza war.

Meanwhile, Yemen has banned any ships linked to Israel, whether in ownership or cargo, from passing through not only the Red Sea but also the Arabian Sea. This implies that nearly the entire global merchant fleet is safe to make such transits, but few are choosing to do so.

“Our ships and crew are very dear to us, and we are not going to take this risk,” the source said.

Sources at three major oil tanker companies who spoke to Platts, part of S&P Global Commodity Insights, echoed a similar sentiment.

Longer voyages tighten supply and support freight rates. Although a clean tanker’s voyage to Europe from the Persian Gulf or India is shorter by 11-14 days compared with the route around the Cape of Good Hope, the freight rates are almost similar.

Clearlake has chartered an LR1 for around $2.8 million to move jet fuel on the Sikka-UK-Continent route, with the Suez Canal option freighted around $2.65 million, according to sources. While several fixtures now include the Suez Canal option, it is rarely exercised, they said.

Persian Gulf remains high-risk area

Maritime insurers in Asia pointed to the Persian Gulf and the Gulf of Oman, both of which have been designated as high-risk areas for over five years. In June 2019, the LR2 tanker Front Altair was attacked while transiting the Gulf of Oman.

Millions of dollars, involving hundreds of ships, have been paid out as AWRP since 2019 due to occasional violent incidents, even though the overall maritime situation in the region remains largely peaceful, chartering sources said.

“The [insurance] premium is not just about actual attacks but the risks involved,” a source with a tanker owner said.

Maritime insurance companies typically follow the HRA list provided by the Lloyd’s Market Association’s Joint War Committee.

If the relatively peaceful Persian Gulf is still classified as an HRA, it is nearly impossible for the Red Sea to “wriggle” out of this category, a maritime insurance executive said.

An underwriter said that the actual premium may decline slightly, but it is subject to negotiations. Currently, the AWRP for transiting the Persian Gulf is about half of what charterers have to pay for passing through the Red Sea, according to those directly involved in such deals.

How AWRP works

The AWRP is based on the valuation and age of a tanker, but there are “penny-pinching negotiations down to the last decimal,” a chartering executive said.

Companies with large fleets secure a discount of more than 50% off the prevailing rates, the executive said, adding that they are also allowed to split the premium and use the valid time duration across multiple voyages.

If a company has AWRP coverage for seven days as a percentage of the H&M value but only uses it for four days during transit, the amount is prorated lower, according to sources.

Large companies negotiate deals where the AWRP value as a percentage of H&M is not only lower but also valid for several weeks, insurers said.

This allows for multiple voyages — possibly two or even three — within that duration, say up to four weeks of transit time through the HRA, making transits more cost-effective for a specific AWRP value.

Lower freight premium

While the AWRP remains firm, improved security conditions have significantly reduced the premium that Red Sea loadings command over Persian Gulf loadings for deliveries to East Asia.

In 2024, the LR1 premium for the Yanbu-Japan route over the Persian Gulf-Japan route had reached w120, but market sources said it has now dropped to w45.

The MR premium for the same routes is now at w210, down w30 from the end of 2024, according to Platts data. Over the same period, the hefty $600,000 premium for crossing from the Red Sea into the Persian Gulf versus the Red Sea-Europe route has nearly disappeared, the data showed.

Source: Platts