The impact of gray zone attacks on insurance for marine and the outlook for marine risks in the Red Sea
By Christopher Gambini, Large & Complex Marine Risks, WTW; Laura Burns, Head of Political Risk for the Americas, WTW; and James Packer, Senior Security Risk Analyst for Alert:24, WTW
The impact of gray zone attacks on insurance for marine and the outlook for marine risks in the Red Sea In WTW’s annual Political Risk Survey, over 70% of globalized businesses reported losses due to political risk, with nearly half of reported losses exceeding $50 million. The most frequent cause of these losses was geopolitical events leading to supply chain disruptions, particularly in the Red Sea.
Figure 1 - Sea Shipping Incidents Heatmap (Nov 2023 – Oct 2024).
Source: United Kingdom Maritime Trade Operations (UKMTO) Incident Data.
Figure 2 - Incidents targeting shipping in the Red Sea, Gulf of Aden, and Arabian Sea by perpetrator (Nov 2023 – Oct 2024).
Source: United Kingdom Maritime Trade Operations (UKMTO) Incident Data
The Red Sea outlook Over the last 12 months, the Red Sea – as well as the Gulf of Aden and the Arabian Sea – has become the primary global risk zone for international shipping. Since November 2023, as part of their support for Hamas and other armed militant groups, Yemen’s Houthis have been launching near non-stop attacks against commercial vessels near their territorial waters. Initially targeting ships owned by Israeli companies, individuals, or those with links to Israeli businesses, the Houthis later began targeting all ships with Western affiliations; this has been particularly impactful for European nations with prominent roles in the maritime industry, such as Greece and the U.K., whose commercial vessels frequently utilize the Red Sea to transit the globally important Suez Canal.
Most attacks have involved land-to-sea launches of ballistic missiles and aerial drones, but the Houthis have also employed fast-moving “skiffs,” unmanned naval drones, and even helicopters, with the aim of damaging, sinking, or capturing vulnerable commercial maritime assets. Since the start of Houthi operations, dozens of ships have been targeted, and while most vessels have survived running the gauntlet of missiles and drones that is the Red Sea in 2024, not all have been so lucky. The Houthi attacks have resulted in two vessels being sunk, with others being significantly damaged, while the Bahamas-flagged Galaxy Leader – one of the first victims of the Houthi attacks – was hijacked in a stunning helicopter assault in November 2023. Sailors have also tragically lost their lives, underscoring the fatal risks facing those who choose to transit a Red Sea under sustained threat from armed groups in Yemen.
Ongoing coalition airstrikes against armed groups in Yemen – as well as the deployment of American and European warships to the region – may have slightly reduced the frequency of incidents, but it has not lessened their severity. The geopolitical tension in the area has not only affected regional stability but also posed severe challenges to maritime operations. The persistent and evolving nature of these risks is evident in other global hotspots like the seas around Ukraine, which have similarly impacted global trade flows and insurance markets.
In terms of Red Sea risks, however, the threat situation appears to be changing as the year approaches its end. In mid-2024 the Houthi leadership announced that they would be commencing direct attacks on Israel, rather than focusing solely on Red Sea shipping. Houthi long-range missile attacks against Israel have increased in scope and scale since this declaration, and the past few months have seen a handful of Houthi-claimed missile and drone strikes on Israeli towns and cities, although their efficacy has been limited, thanks in part to Israel’s air-defense systems.
As the Houthis have redirected their attention to Israel, attacks against shipping have declined in turn; since September 2024, WTW’s Alert:24 analysts have tracked an overall decline in the number of reported attacks on shipping in the Red Sea, and these trends are confirmed by data from industry bodies such as the United Kingdom Maritime Trade Operations (UKMTO). Although it remains to be seen how far this trend will continue, if at all, as of November 2024 the Red Sea shipping lanes are experiencing a notable lull in Houthi attacks, as their resources are diverted northwards to Israel.
In the event of a ceasefire in Gaza and Lebanon, the Houthis may continue attacks on shipping. It has been reported that the Houthis receive approximately $180m per month in illegal safe-transit fees, making the continuation of a sustained threat in the Red Sea a lucrative revenue stream they are unlikely to readily abandon.1
The impacts on marine insurance Traditionally, assets located in the world’s lakes, rivers and especially oceans – including not only vessels but pipelines and offshore oil platforms – have been relatively safe from attack because they are difficult for violent actors to reach and, in the case of moving vessels, accurately target. However, new technologies such as airborne drones, unmanned surface vehicles, and the proliferation of anti-ship cruise and anti-ship ballistic missiles that were until very recently the preserve of only a handful of very capable state militaries, sourced from providers such as Iran, has made attacking offshore targets easier.
Marine insurers and policyholders are feeling the immediate impact of this increase in gray zone attacks, with insurers increasingly issuing mid-term cancellation notices for policies covering high-risk regions, reflecting the heightened risk, and moving coverage to ‘On Application’ only, for shipments passing through the affected region. ‘On Application’ policy rates can vary significantly depending on recent risk levels as well as the region concerned. This approach requires a ‘shipment by shipment’ evaluation of coverage which, additional costs aside, can be administratively burdensome to policy holders.
Notwithstanding any mid-term notice of cancellations specific to regions experiencing ‘gray-zone aggression,’ coverage remains limited under the marine policy for loss or damage resulting from political risk or acts of violence.
The Paramount Warranties of the marine policy exclude the risks of:
Capture, seizure, arrest, restraint, or nationalization
Loss or damage, whether in time of peace or war, caused by any nuclear weapon, radioactive force, torpedo, or mine
All consequences of hostilities or warlike operations
The consequences of civil war, revolution, rebellion or insurrection, or civil strife arising therefrom
Coverage is then reinstated on a limited basis via the war risks policy which is often attached to the manuscript marine policy form:
Against the risks of capture, seizure, destruction or damage by men-of-war, piracy, takings at sea, arrests, restraints, detainments and other warlike operations, or acts in prosecution of hostilities or in the application of sanctions under international agreements
Whether before or after declaration of war and whether by a belligerent or otherwise, including factions engaged in civil war, revolution, rebellion or insurrection, or civil strife arising therefrom
These exclusions and cancellations have forced many in the shipping industry to manage gray zone attack risks by re-routing their paths, significantly increasing transit times and cost, creating supply chain challenges particularly for sectors relying on time-sensitive or perishable goods. Container shipping via the Red Sea dropped around 75% in Q1 2024 as operators scrambled to find alternate routes and secure their vessels and investments. Shipping around the Cape of Good Hope – an historic shipping route lessened in importance since the opening of the Suez Canal – saw a major spike in the months following the onset of Houthi attacks, with operators prioritizing the safety of their vessels and crews despite the added costs (both in time and in money) resulting from rerouting. By avoiding the primary area of Houthi attacks, vessels sailing around the Cape of Good Hope rather than via the Suez Canal may add approximately 3,500 nautical miles (around 6,482km) onto their voyages, as well as up to 14 days of extra sailing time, with estimates indicating that the extra fuel costs alone could hit $1 million per vessel per trip.
For the customers of the shipping industry, and those companies whose supply chains are affected by shipping disruptions, recourse is sometimes available through specialist covers such as trade disruption insurance, which respond to financial losses without physical damage. These covers can apply, for instance, to losses arising from delays in getting time-sensitive goods to market – including contractual penalties, expediting costs, and costs of substitute supplies.
Businesses need to engage in thorough risk assessment and scenario planning to navigate disturbed waters effectively. Understanding and preparing for such risks is crucial in maintaining the resilience of global supply chains against the backdrop of increasing geopolitical tensions.
And the marine sector is not alone in facing these challenges. The next essay in this Index looks at an emerging vector for gray zone attacks: aerospace.
