Evolving risks associated with global shipping, driven by geopolitical tensions, piracy, cybersecurity attacks, environmental regulations and climate change, are significantly influencing ship finance transactions, risk management and funding sources for these transactions.  

We were recently fortunate enough to be able to conduct an interview with Molly McCafferty, the Senior Vice-President of the American P&I Club who has over 25 years of experience in the maritime industry, by phone, to discuss some critical questions facing the continuously evolving marine insurance industry:

How is marine insurance affected by the increasing risks associated with global shipping in 2025 and what are the main types of evolving maritime risks that will significantly affect the marine insurance industry in 2025?

Shipowners make commercial decisions every day based on their risk tolerance. In 2025, the traditional risks associated with global shipping are significantly impacted by various external factors. Shipowners are faced with balancing their risk tolerance with the increased costs of insurance. 

Geopolitical tensions, conflict zones, cybersecurity attacks, climate change, piracy and increasingly complex regulatory environments (e.g., Energy Efficiency Existing Ship Index, Carbon Intensity Indicator, IMO 2020 ) are all part of the evolving environment.

How are marine insurers reacting to the changing nature of maritime risks in global shipping and what stance are insurers taking on transit through certain regions of the world?

As these risks evolve, insurers modify their terms and conditions, underwriting strategies and pricing models, all of which lead to higher premiums, restrictions on coverage for certain routes, or the implementation of additional security measures in high-risk zones.

Insurers’ positions may vary based on the particular risk in key “hot spots”. These “hot spots” present numerous risks for ships that may impact vessel safety, crew safety, the continuity of operations and the cost of insurance.

Speaking of “hot spots”, what are some of the risks and concerns currently affecting insurance on ships transiting through the Red Sea?

The Red Sea, which is a critical route for trade between Europe, the Middle East and Asia, has seen increasing piracy and Houthi attacks in recent years, particularly due to regional conflicts and the ongoing conflict in Yemen, in addition to tensions between Iran and Saudi Arabia. Insurers are strongly concerned about ship transits through the Bab el-Mandeb Strait and areas near the Horn of Africa.

Some insurers impose specific regional exclusions or require additional premiums for vessels intending to navigate through these areas.

The Gulf of Aden, which is located between Yemen and Somalia, at the southern end of the Red Sea has long been considered a piracy hot spot and a place of potential terrorist activities. Insurers may either exclude coverage in this region or apply higher premiums for transit through the Gulf of Aden. Some underwriters have also required additional security measures including armed escorts or safe shipping corridors (i.e., navigating ships towards less risky sea routes).

In the region, is the Strait of Hormuz also considered a hot spot for insurers?

The Strait of Hormuz is also a hot spot for geopolitical tension, especially between Iran and the United States and its allies. Military tensions and sporadic attacks on vessels raise the risk for commercial shipping in this region, especially for vessels carrying oil and gas. Insurers commonly apply war risk exclusions or high premiums for vessels transiting the Strait of Hormuz, especially those that travel in proximity to Iran’s territorial waters.

What about other “hot spots” like the Black Sea?

The Black Sea is a high-risk region because of the ongoing conflict between Russia and Ukraine.  Fierce geopolitical tension, including the various sanctions regimes imposed by the EU, UK and U.S. governments, make the Black Sea highly risky for commercial shipping. Traditional insurers have issued “war risk” insurance exclusions for vessels operating in or near the Black Sea, particularly in areas near Ukrainian and Crimean coasts, instead requiring special war risk cover insurance policies. 

Other risky areas include the South China Sea, the Straits of Malacca and Singapore, the Horn of Africa and the Central American Coast. All such regions are considered high-risk hot spots because of piracy, political instability or potential military conflicts.

How is the ship finance market affected by higher premiums in the face of geopolitical developments, increasing restrictions in response to sanctioning and increasing claims? And are environmental investment measures and recent regulatory changes affecting marine insurance premiums and ship finance costs?

Higher premiums are set by insurers in response to mitigating risk. All these risk factors increase operating costs and adversely influence the shipowner’s ability to maintain cash revenue, thereby affecting the ability to service the loans. The geopolitical landscape also increases financial risks for lenders and financiers, leading to more cautious lending practices which in turn affects the cost, availability and structure of financing in the maritime market.   

In response to environmental developments and a more complex regulatory regime (e.g., IMO 2020 and carbon emissions regulations), shipowners and operators may face higher risk premiums, increased financing costs (e.g., higher interest rates or additional collateral), stricter loan conditions, and a reduced amount of capital in the shipping market. 

How are ship finance transactions responding to new policies with regard to all these elements of change? 

In response to market volatility, geopolitics, regulations and the changing risk environment, ship finance transactions are adopting more comprehensive risk assessment and risk mitigation strategies, incorporating more stringent loan conditions and embracing alternative financing options that emphasize environmental sustainability (e.g., green financing). 

Marine insurers need to maintain their resilience to these various threats and regulations by developing flexible policies that can adjust with geopolitical and regulatory change. Considering the geopolitical and regulatory landscape in the maritime industry, traditional lenders are now more risk-averse and conservative in their approach to ship finance, opening the door to alternative financiers (including leasing companies, private equity firms and institutional investors) who are seizing the opportunities and taking a more significant role in the ship finance market. 

Thanks Molly. We look forward to further discussions on shipping insurance and the role of P&I Clubs in the near future.

*Paralegal, Vikki Madias, contributed to this article.