Cost of insurance for merchant ships sailing to Black Sea ports spirals out of control

The cost of insuring merchant ships sailing to Black Sea ports has spiraled out of control, becoming a huge potential impediment to the movement of Russian cargo from the region.

Underwriters charge up to 10% of the value of a ship’s hull – essentially the value of the ship as an asset – for what is called an additional war risk premium, according to four people involved in the market. Some quote simply to cover prices they know will be denied. There was almost no cost before the war.

This means that the insurance now probably exceeds the cost of renting the vessel itself. A five-year-old, $50 million tanker carrying a standard Russian cargo of 1 million barrels would need $5 million in insurance premiums alone, about $1.5 million more than the cost hiring the carrier.

The primary concern of insurers is damage to ships, either from missile attacks or possible mines. When war broke out, at least five ships were blown up. A month later, a mine was discovered around Turkey’s Bosphorus Strait, a vital shipping corridor for any carrier entering or leaving the Black Sea.

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One of the people said the pool of insurers still quoting had dried up considerably, meaning those that remained were demanding higher prices.

The charges would generally be borne by the companies leasing the vessels, not the vessel owners. The Black Sea is normally a hub for exports of crops, oil, fuels and raw materials, but has been disrupted by Russia’s invasion of Ukraine. One of the insurers said current prices are essentially unsustainable for customers.

Soaring insurance premiums are just another expense for any business looking to ship anything to or from ports in the region. The cost of renting the ship is also extreme.

It costs about $3.5 million to hire a tanker to transport a million-barrel cargo to Italy from Russia’s Black Sea port of Novorossiysk, up from less than $700,000 earlier this year, according to industry data compiled by Bloomberg.

Besides the threat of damage to ships, there are other risks. The Russian and Ukrainian navies could seize ships for national security purposes. If the carriers were held for at least six months – one of the people said a year – for political reasons, this would result in a vessel being declared a total loss, allowing its owner to recover the full value of the hull , the people said. .

In theory, owners could enter without insurance. However, due to the way insurance works, this would have a ripple effect which would ultimately expose them to the risk of pollution, removal of wreckage, liability for freight and any liability and repatriation. of the crew.

As the war continues, Lloyd’s Market Association’s Joint War Committee has added Russian waters to its list of hotspots. This likely means that insurers will charge additional premiums for more Russian ports in the coming weeks.

Photograph: An oil tanker moored in a gas and oil wharf at the Port of Constanta in Constanta, Romania, Tuesday, March 22, 2022. Ukrainian ports have been closed since Russia’s invasion leading to shifting demand further west along the Black Sea to Romania and Bulgaria, some of the major grain exporters to the European Union. Photo credit: Nathan Laine/Bloomberg

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Copyright 2022 Bloomberg.

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