Red Sea risk: Why maritime insurance won't return to "normal" anytime soon

The recent Houthi ceasefire announcement has sparked cautious optimism across global shipping markets. But for those managing maritime risk and insurance, the question isn't whether attacks will pause, it's whether we can ever truly return to a "risk-off" environment in one of the world's most critical shipping corridors.

A recent discussion between myself and Ellis Morley, Associate Director of Cargo & Commodities at Howden Insurance, revealed why the path back to normalcy will be measured in quarters, not weeks, and why some level of elevated risk pricing may become permanent.

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The data tells a complex story

Red Sea transits have shown signs of recovery in recent months, with both oil and dry bulk flows ticking upward.Middle distillates and crude from the Middle East and India to Europe have reached their highest levels since 2023, while seasonal wheat exports from Russia to the Middle East and Asia have increased noticeably.

Yet volumes remain significantly below pre-crisis levels. This gradual return reflects growing commercial confidence, but the maritime insurance market remains decidedly cautious, and for good reason.

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More than 700 days of evolving threats

Since the crisis began in November 2023, over 160 incidents have been logged by Operation Prosperity Guardian and the EUNAVFOR ASPIDES. What's particularly concerning from a risk perspective isn't just the number of attacks, but their evolution.

Early in the conflict, strikes were relatively primitive, single missile or drone attacks that often missed their targets by wide margins. The primary impact was chaos rather than direct hits. Today, the threat landscape looks fundamentally different.

The Houthis have developed significantly more sophisticated attack capabilities, including coordinated strikes combining missiles, drones, unmanned surface vessels, and even unmanned submersible vehicles. Multiple vessels have been sunk, and when strikes occur now, they're far more accurate and deadly. The frequency has decreased, but severity has increased, a pattern that makes risk assessment more complex, not simpler.

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How the insurance market adapted

When the crisis erupted, many cargo insurers immediately triggered notice of cancellation provisions, giving traders just seven days to secure alternative coverage. This supply shock drove premiums sharply higher as only select insurers were willing to underwrite Red Sea transits.

The market has since matured considerably. As data accumulated, insurers began identifying clearer targeting patterns. The Houthis have established preferences for vessels with Israeli touch points, UK ownership, or US nexus. This pattern recognition has enabled more sophisticated vessel selection and pricing strategies.

The shipping fleet has effectively bifurcated: one segment continues calling at Israeli, UK, and US ports, while another segment, without those touch points, has become the primary corridor for Red Sea transits. Combined with Best Management Practices (including armed guards and specific navigational procedures), military escorts, and improved intelligence, some risks can now be meaningfully mitigated.

Insurance premiums have declined from their peak as frequency dropped and targeting patterns clarified. But make no mistake, this isn't a return to pre-crisis pricing, nor should it be.

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The shadow fleet wild card

Shadow fleet vessels account for a substantial number of Red Sea crude transits, operating without Western P&I cover, hull insurance, or war coverage. Some Russian insurers provide coverage, but the market supporting sanctioned trade is proportionally far smaller than the Western insurance infrastructure.

The Western insurance market benefits from hundreds of years of experience, deep capitalisation, and an interconnected community capable of paying the largest and most complex claims globally. Shadow fleet insurers haven't been stress-tested at scale. One or two claims might be manageable, but multiple large-scale incidents could quickly expose the inadequacy of this alternative market, leaving cargo owners and traders with potentially unrecoverable losses.

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Why this ceasefire is different (but not different enough)

The current ceasefire announcement, tied to the Israel-Gaza truce, represents the most significant de-escalation signal to date. But the proof, as the saying goes, will be in the pudding.

The Israel-Hamas ceasefire has already recorded over 500 violations in just over a month. The Hezbollah-Israel ceasefire has seen breaches including strikes on senior military officers. Historically, Houthis return to hostilities either after a single significant breach, such as targeting a senior figure, or when an accumulation of smaller violations becomes intolerable.

There won't be an announcement when the ceasefire ends. The market should expect a resumption of hostilities to be signalled by a coordinated drone and missile strike, not a press release.

After 737 days of conflict, hundreds of targeted vessels, multiple sinkings, and seafarers' lives lost, the insurance market requires more than a tweet from an alternative government organization to turn off risk pricing.

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The container ship signal

One of the most significant recent developments came when CMA CGM's Benjamin Franklin, an ultra-large container vessel carrying approximately 17,000 TEUs, successfully transited the Red Sea. This marked the first ultra-large container vessel to make the passage in almost two years.

Container vessels were among the first to avoid the region entirely, and their cargo values are substantially higher than bulk carriers or tankers (finished products like cars and computers versus raw commodities). The per-ton value exposure is exponentially greater, making this transit a meaningful signal of returning confidence.

However, container vessels don't carry explosive flammable liquids. The risk profile differs meaningfully from liquid bulk carriers, where a successful strike could trigger catastrophic environmental cleanup costs alongside the vessel and cargo loss.

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The timeline for major energy companies

Many majors are currently using partner traders to move cargoes through the Red Sea, picking up shipments again on the other side of Suez. This arrangement sacrifices cost efficiency and supply chain control, but it insulates direct operations from Red Sea exposure.

Expecting majors to return directly will require quarters, not weeks. Even if insurance premiums decline and attack frequency remains at zero, the governance processes and risk committee approvals needed to clear direct transits will take considerable time.

Realistically, a meaningful return to Red Sea routing for major energy flows shouldn't be expected before late Q2 2025 at the earliest, and that's assuming no strikes occur in the interim.

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The broader maritime risk landscape

The Red Sea dominates headlines, but maritime war risk has become a multi-theatre challenge:

• The Black Sea remains an active war zone between two well-equipped modern militaries. Two dry bulk carriers were struck just recently. Sovereign war creates fundamentally different risk calculations than asymmetric threats, yet commercial vessels continue running this gauntlet daily. The grain corridor represented a genuine insurance market innovation, enabling soft commodity exports despite active combat operations.
• Somali piracy has resurged as naval assets deployed to counter Houthi threats have created enforcement gaps. On the hull insurance side, piracy falls under war risk policies, creating combined Red Sea/Somali exposure in the same breach area.
• The Persian Gulf became a risk-on area following Operation Midnight Hammer when B-2 bombers targeted Iranian nuclear sites. Iran recently hijacked a vessel in the straits, seized the cargo, then released the ship—a calculated action distinct from the more chaotic Houthi targeting pattern. The risk premium exists but remains lower than the Red Sea because Iran's actions, while concerning, follow more predictable patterns focused on specific strategic objectives.
• Emerging threats include potential escalation in the South China Sea and Venezuela, though these remain watchlist items rather than active breach zones.

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The limpet mine problem

Perhaps the most concerning development for risk managers is the emergence of limpet mines, remotely detonated explosive devices attached to vessel hulls below the waterline.

Vessels have exploded in ports in Italy, the Baltic, and Ukraine after previously calling at Russian ports. These mines are nearly impossible to detect, can remain attached for days, weeks, or potentially months, and destroy themselves entirely when detonated, leaving minimal forensic evidence.

This threat fundamentally changes maritime war risk from a short-tail exposure (did the vessel get hit during transit?) to a long-tail uncertainty (could this vessel have been compromised weeks ago and we just don't know yet?). Vessels that appear to be in "safe" areas may still carry explosive devices from previous high-risk zone transits.

Underwater warfare is evolving rapidly, from unmanned submersible vehicles to advanced drone technology, disrupted undersea cables, and sabotaged pipelines. The maritime domain is being weaponised in ways that make traditional risk assessment increasingly complex.

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Are we in permanent risk-on territory?

In the hull insurance world, the answer is clearly yes. Breach areas and additional premium structures have become accepted permanent features, with rates adjusting but rarely returning to full "risk-off" status.

The cargo insurance market historically operated with more binary risk-on/risk-off switching. But after years of Black Sea conflict and Red Sea disruption, with the Persian Gulf on watch and emerging underwater threats, the market is evolving toward sustained elevated baselines.

Even if all current conflicts de-escalate, underwriters will maintain scenario pricing to account for rapid relapse potential. The capability exists, as drones, missiles, USVs, submersibles, and regional triggers can activate threats with little warning.

The insurance market is fundamentally reactive and data-driven. Rates won't decline based on declarations from militant groups. They'll decline when sustained periods without strikes, combined with meaningful political progress and verified capability reductions, provide statistical confidence that the risk environment has genuinely changed.

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What this means for commercial shipping

The maritime industry has largely adapted to Cape of Good Hope routing. The initial disruption was severe, but two years of operating in this environment has normalised longer voyage times and adjusted supply chains accordingly.

From a shipowner perspective, longer routes aren't necessarily negative—they increase ton-miles and vessel employment, supporting freight rates. The pressure to return to Red Sea transits will need to come from cargo interests and charterers seeking efficiency gains, not from shipowners eager to shorten routes.

This dynamic may slow the return to pre-crisis transit levels even if security conditions genuinely improve. The urgency simply isn't uniform across the industry.

That said, the Red Sea's importance as a global trade corridor is undeniable. When the Ever Given blocked the Suez Canal, the disruption rippled across global supply chains for months. Returning this critical waterway to reliable, cost-effective operation remains a strategic imperative.

But achieving that won't happen quickly. It requires sustained de-escalation, verified reductions in militant capabilities, meaningful political progress in underlying conflicts, and time for data to accumulate that proves the risk environment has fundamentally changed.

Until then, elevated insurance premiums, careful vessel selection, robust security protocols, and conservative risk management will remain essential features of Red Sea maritime operations—not temporary inconveniences, but enduring realities of global shipping's new risk landscape.

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