When shipping abandons a route, the decision is rarely made by a captain or even by a shipping line. It is usually made by an underwriter, in an office, adjusting a number.

Marine insurance is the mechanism that translates danger into cost, and cost into route changes. Understanding it explains a great deal of what otherwise looks like inexplicable behaviour in global trade.

Ships cannot sail uninsured

This is the fact everything else follows from. A commercial vessel without insurance generally cannot operate: charterers will not hire it, cargo owners will not load it, banks financing the cargo will not release funds, ports may refuse entry, and canal authorities require proof of cover.

So insurance is not a cost of doing business that can be skipped when it gets expensive. It is a licence to move.

The three layers

• Hull and machinery covers the vessel itself against damage or loss.
• Cargo insurance covers what is being carried, usually arranged by whoever owns the goods.
• Protection and indemnity — P&I — covers third-party liabilities: crew injury, pollution, wreck removal, collision damage to others. P&I is provided by mutual clubs owned by shipowners rather than by commercial insurers.

Standard hull policies exclude war, terrorism, piracy and similar perils. Those are covered separately, if at all.

Listed areas and the war risk premium

The insurance market designates certain waters as elevated risk. In the London market — historically the centre of marine war risk underwriting, and the reason Lloyd’s is so often mentioned in shipping coverage — a joint committee of underwriters maintains a list of areas where additional cover must be arranged and notified before entry.

Entering a listed area triggers an additional premium, quoted as a percentage of the vessel’s insured value and charged for a short period, typically seven days. The mechanics matter: a premium of a fraction of one per cent sounds trivial until applied to a ship worth a hundred million dollars, at which point a single transit can cost hundreds of thousands of dollars before anything is carried.

Those rates move fast. A single attack can multiply them within days, and they fall much more slowly than they rise.

The arithmetic that decides the route

An operator choosing between a short dangerous route and a long safe one is comparing two sums.

The short route costs the war risk premium, plus possible crew bonuses for entering a listed area, plus the risk of losing the ship. The long route costs additional fuel, additional days of charter, port scheduling disruption, and the opportunity cost of the voyages not made.

When the premium rises above the detour cost, traffic switches — and it switches quickly, because everyone is running the same calculation with the same numbers. That is why route abandonment looks like a stampede rather than a gradual shift.

It also explains why different cargoes behave differently. Gas carriers left the Red Sea entirely while container ships were still transiting, because an LNG vessel is worth far more, and a premium expressed as a percentage of hull value bites hardest on the most valuable ships.

Why this is also a sanctions story

Insurance is one of the most effective sanctions instruments in existence, precisely because cover is a precondition for movement.

Prohibiting insurers from covering particular cargoes does not require intercepting a single ship. It makes the voyage commercially impossible for anyone using the mainstream market. Because London and the major European and Japanese P&I clubs dominate that market, a relatively small number of jurisdictions can restrict a very large share of world shipping.

The response has been the growth of alternative insurance arrangements outside those jurisdictions, often with opaque backing and uncertain ability to pay a genuine claim — which is a large part of what makes so-called shadow fleet operations possible, and what makes them risky for coastal states worried about who pays for a spill.

The part that gets forgotten

All of this is arithmetic performed about people. A ship entering a listed area carries a crew of perhaps twenty, frequently from the Philippines, India, Indonesia or Ukraine, who did not choose the route and whose main protection is a hazard bonus and the right, under most agreements, to refuse to sail into a war zone.

Seafarers have been killed, injured and held captive in every recent episode of shipping disruption. They rarely appear in the coverage, which tends to report the premium rather than the crew.

Related coverage

• Chokepoints, Part One: The Strait of Malacca
• Chokepoints, Part Two: The Bab el-Mandeb
• Chokepoints, Part Three: The Suez Canal