Red Sea crisis: Rising insurance costs, inflation surge and containership detours

World Today

A cargo ship boat model is seen in front of “Red Sea” and “Houthi attacks” words in this illustration taken January 9, 2024. REUTERS/Dado Ruvic/Illustration

Yemen-based Houthi rebels and militants have carried out 27 attacks involving drones and missiles on container ships and vessels in the Red Sea since November.

U.S. and British militaries have launched retaliatory bombings on Houthi sites in Yemen, warning American-flag vessels from entering the Red Sea and the Gulf of Aden.

Houthis said it will continue to expand its targets in the region, including U.S. ships, a part of their reaction to the Israel-Hamas conflict in the Gaza Strip.

The military tensions have alarmed economic and security experts concerned about the spillover effects.

In December, the delays caused a 1.3% decline in world trade. More than 90% of ship containers have been rerouted around the tip of South Africa.

Costs on shipping companies and businesses

The Red Sea is a major trade route for shipping companies, with 15% of global seaborne trade passing through.

But the conflict has forced companies to detour their missions, adding more costs.

Many ships are going around the Cape of Good Hope in South Africa, pushing up freight rate costs by $10,000 per 12-meter (40-foot) container.

Over $200 billion worth of goods have been diverted to avoid the militants.

The voyage around the Cape of Good Hope takes around 34 days, compared to using the Red Sea, which would take 25 days.

Insurance costs have also risen.

Rating agency Morningstar DBRS reported that at its peak, war rates insurance premiums spiked 0.7%, around $800,000 in insurance costs per trip on cargo valued at $120 million. Experts are expecting more rises in premiums.

Consumer prices expected to rise

Consumer prices in Europe are also expected to rise due to the disruption.

“European consumers will feel the pain … It will hit developed economies more than it will hit developing economies,” DP World CFO Yuvraj Narayan said at the World Economic Forum meeting Davos, Switzerland.

Analysts report that 15% of imported goods going to Europe, the Middle East and North Africa goes through the Red Sea, including 21.5% of refined oil and 13% of crude oil. Oil markets have been less rattled because of a lower demand and oversupply.

Ratcheting tensions in the region?

Along with the strikes, the U.S. has formed a 20-country naval task force to protect commercial ships going through the region.

Meanwhile, Houthis have seen a rise in popularity in Yemen, while also finding solidarity with Iran-supported groups fighting in the region.