Navigating shipping disruptions: signs of rougher seas ahead

Attacks on ships in the Red Sea and drought in the Panama Canal area have more than quadrupled shipping prices since late 2023. Impacts could worsen should disruptions persist into the peak shipping season in the second half of the year. Marine insurance contracts in affected areas are repricing higher or covers being adjusted, while some claims inflation is a further potential risk.

• Red Sea shipping attacks and drought around the Panama Canal are creating supply chain disruption and stress.
• Spot shipping prices are more than 4x higher than before the attacks began. Price rises may intensify if disruption persists in the peak shipping season of H2 2024.
• Marine insurance is the main impacted line, with premiums rising to account for the higher risk, and coverage being flexibly adjusted.
• Stickier claims inflation is a risk too if core goods inflation starts to tick up again.
• Other crucial shipping channels are vulnerable to geopolitical risk, while climate change increasingly threatens the Panama Canal and river shipping.

Pressure on global shipping routes is creating stress in global supply chains again, soon after the acute disruption experienced in the pandemic. Attacks on ships in the key Red Sea route from Asia to Europe since November 2023 are causing many shipping companies to reroute around the Cape of Good Hope in South Africa. This can add 20-30 days and 11 000-15 000kms to a typical round trip, so is creating long delays and higher shipping costs for exporters. Spot shipping rates between Northeast Asia and Western Europe – which apply to ad-hoc or short-term contracts and orders for port-to-port deliveries – were more than four times (440%) higher in January 2024 than in October 2023 (see Figure 1).

Figure 1. WCI spot rates in USD 000/40ft containers, Global supply chain pressure index 

Further, severe drought in the Panama Canal, which carries 2.5% of global maritime trade, has reduced daily transit slots to 24, from a normal 36.¹ Spot prices between Asia and the US East Coast have doubled since October. The disruption poses risks to the macroeconomic outlook, especially if it persists into the peak shipping season in the second half of the year. For insurers, such geopolitical uncertainty pressures the feasibility of providing coverage for certain economically valuable undertakings, such as the vital goods trade.

Shipping supply chains carry high volumes of goods such as food and commodities, so the disruption risks putting pressure on goods inflation. Manufacturing purchasing manager indices have begun to reflect the disruption in supplier delivery times and input costs in Europe and the US. For example, some auto manufacturers have halted production in European factories due to delays in parts arriving. Retail firms may suffer if higher freight costs persist for longer. Food prices are also vulnerable, since 14% of cereals and 4% of soybeans pass through the Suez Canal. About a third of Suez Canal traffic is tankers (12% of global seaborne crude oil transport and 8% of liquefied natural gas), posing risks to energy prices.

The longer-lasting the Red Sea attacks, the more likely that shipping spot rate increases feed through to contract rates and then to core inflation with a lag.² Piracy on the Horn of Africa in 2005-2012 was estimated to cost the global economy about USD 18bn per year.³ Pass-through could be reinforced by stronger-than-expected economic growth, including a pick up in global demand for goods.⁴

Figure 2. Change in tonnage transiting, 2023 vs 2019 (y-axis) and between January 2024 and January 2023 (x-axis)

Other factors point to a limited impact so far, but may deteriorate. Shipping rates for longer-term, routine shipment contracts will only be renegotiated through the year. Producers are better prepared now, with higher inventories-to-sales ratios than in 2021, and goods demand is not as strong as during the pandemic. Producer prices can take up to a year to pass through to consumer prices, which may delay the impact. Estimates show that even a sustained doubling of spot freight prices only raises core inflation by a few tens of percentage points (ppts), and headline by less than 1ppt.⁵

For insurers, marine is one of the most impacted lines, as it selectively covers war and terrorism, though not delays. Covers have generally been held for travel through the Red Sea, but with case-by-case flexibility and significant increases in rates to account for the higher risk.⁶ Port congestion creates accumulation risks, while longer transit times mechanically raise insureds' risk exposure, both factors that insurers may need to take into consideration.

There are also risks to business interruption and related covers, including Credit & Surety. Shipping delays and higher prices are manageable so far, but insured losses may rise if disruptions last longer or intensify. Stickier claims inflation is a risk too if core goods inflation starts to tick up again.

However, the Panama Canal and the Suez Canal/Bab el-Mandeb route are just two of an array of shipping chokepoints, many of which have seen large increases in traffic since 2019 (see Figure 2). Increasing geopolitical risks may threaten trade through those areas too. More frequent droughts are likely to jeopardise transit volumes in the Panama Canal, and climate change is already affecting river shipping, as seen in the Rhine and Mississippi.⁷ We view these as headwinds to the long-term resilience of global shipping trade.