Marine and aviation insurers have raised prices and imposed new conditions for war cover as the Middle East conflict expands beyond Israel and Gaza.

The situation in the Middle East intensified in late September when an Israeli airstrike on the Lebanese capital of Beirut killed Hassan Nasrallah, leader of Lebanon-based, Iran-backed armed group Hezbollah. Israel followed the airstrike with a ground incursion into Lebanon on Oct. 1, and Iran responded by firing missiles at Israel the same day.

Hezbollah has been firing rockets into Israel since the beginning of the Israel-Hamas war in 2023. Since November 2023, following the outbreak of the Israel-Hamas war a month earlier, commercial ships in the Gulf of Aden and the Red Sea have been plagued by persistent attacks perpetrated by the Houthis, an Iran-backed group based in Yemen, targeting shipping linked to Israel and its allies, though unaffiliated shipping has also been affected.

Some vessels can still obtain marine war insurance for the Red Sea, but it is "very expensive," David Smith, head of hull and marine liabilities at insurance broker McGill and Partners Group Ltd., said in an interview. "We've seen rates going through the Red Sea double, if not triple, over the past month or so."

New requirements

Marine war insurers charge an additional premium, known as a breach premium, for ships entering a list of high-risk areas maintained by the Joint War Committee, a group of Lloyd's of London and London market marine hull war underwriters. Additional premiums are expressed as a percentage of the vessel's value.

Smith said it was difficult to give a percentage for the current rates because pricing depends greatly on the individual vessel's flag, ownership, type, size and cargo. Recently, price increasingly depends on whether the vessel or any others in its fleet have called at an Israeli port in the previous 12 months. "That's quite a new warranty that's certainly being imposed," he said.

Certain ships may not be able to get cover at all to cross the Red Sea. A large, US-flagged vessel being operated by a US company, for example, might struggle to get insurance, Smith said, "which I've never seen before." While typically there is always someone willing to offer cover for a price, "what I'm seeing now is that actually, there is a point at which people are simply going to say no at any price."

Ships carrying goods between Europe, Asia and the Middle East typically go through the Suez Canal, which means traveling via the Red Sea and Gulf of Aden. Industry estimates say shipping through the Suez Canal accounts for 12% of global trade and 30% of global container traffic, according to an S&P Global Market Intelligence supply chain report.

The danger and high premiums mean most ships are now taking the longer route around Africa's Cape of Good Hope. This adds at least 10 days to journeys, according to Market Intelligence's maritime, trade and supply chain division. While avoiding additional war premiums and attacks, this route can introduce other problems.

"Where there are longer journeys, there's greater risk of incidents and accidents because you're spending more time at sea," Jonathan Moss, managing partner and head of marine and trade at law firm DWF, said in an interview. Moss noted that longer journeys mean increased risks of goods contamination, fires on board and exposure to extreme weather.

"Longer voyages mean increased risk for the London market and for Lloyd's, so increased risks [mean] rising premiums," Moss said.

On the aviation front, Israeli airlines continue to operate in Israeli airspace, and other airlines are flying to Tel Aviv, according to Edward Bond, aviation and aerospace partner at McGill and Partners. Aviation war coverage in Israel "is still being provided by insurers at heightened premium levels for sure, but the cover is still there," Bond said in an interview.

Since Israel began targeting Hezbollah in Lebanon, war coverage is still available for operators flying into Beirut "at very much increased premium levels," Bond said, although he noted that flights there are mainly repatriation flights, so there is limited requirement.

Underwriters are also taking different approaches, Bond said, with some coverage being subject to Israeli permission to go into Lebanese airspace, and some charging additional premiums in case aircraft have to remain in Tel Aviv or Beirut longer than expected because of technical problems. Despite some additional requirements from underwriters, "essentially, they're being supportive in providing coverage to the greater extent," he added.

Watching and waiting

Marine and aviation insurers are closely monitoring the situation for signs of further escalation. For marine insurers, the main area of concern remains the Red Sea, and the recent expansion of the conflict has not yet resulted in more waters and territories being added to the Joint War Committee's listed areas.

"It's very much a waiting game," Smith at McGill and Partners said. "You can still happily trade to the majority of the Middle East countries." But he added that an area could be added to the list "very, very quickly," with only seven days' notice.

Just as the change can be rapid, so too can marine insurers' response. The validity of quotes for war cover is 48 hours, Smith said. "That gives you some idea of how the market can react and change very, very quickly."

Similarly, aviation underwriters are primed for a rapid response. "Any rates that are being imposed to accommodate the increase in exposure have quite a short validity on them," Bond said. "It's just a number of hours as opposed to days or weeks now."

In the balance

The question now is whether the conflict will escalate further. Israel continues its campaign against Hamas in Gaza.

Israeli troops killed Hamas leader Yahya Sinwar, described as the architect of Hamas' Oct. 7, 2023, attack on Israel that sparked the war in Gaza on Oct. 16. The Israeli military also continues to target Hezbollah in Lebanon, most recently aiming airstrikes at branches of Al-Qard al-Hassan, a bank that Israel says is used by Hezbollah, according to the BBC.

The situation could go either way, according to risk specialists. A more regional conflict where Israel and Iran engage one another directly is now closer than it has ever been, "which was always the fear when this war broke out in October 2023," Bilal Bassiouni, head of Middle East and North Africa forecasting at risk advisory firm Pangea-Risk, said in an interview.

However, it is not a foregone conclusion. Iran seems to want to avoid direct a conflict with Israel, particularly one which would draw in the US, which is a "major mitigating factor," Bassiouni said. Iran's missile strikes on Israel in April and October "were calibrated to not draw an aggressive response from Israel, particularly [one] that will force Iran's hand into direct engagement."

Israel also seems to be reluctant to begin direct conflict with Iran for now.

Israel will "almost certainly respond militarily against Iran" for the Oct. 1 missile strike, Jack Kennedy, head of Middle East and North Africa country risk at Market Intelligence, said in emailed comments. But he added that the Israeli government "likely maintains a preference toward avoiding a wider war with Iran while high-intensity [Israel Defense Forces] operations targeting Hezbollah in Lebanon continue." Israel's retaliatory strikes will probably target ballistic missile and air defense assets rather than nuclear or critical infrastructure, Kennedy said.

A further mitigating factor is diplomatic efforts by the US and the Arab states in the Persian Gulf, such as Saudi Arabia and the United Arab Emirates. If the US and Gulf states can persuade Israel to keep its retaliation against Iran to military targets rather than oil refineries or nuclear facilities, the situation would return to the status quo of proxy conflict, Bassiouni said. "It will really depend on Israel's next move where we go going forward," he added.

A worst-case scenario would be if the US directly supported Israeli attacks on a wider range of targets in Iran, which might then draw in the Gulf states, Bassiouni said. But he added: "We are still not at this stage."