War-Inflated Ship, Aircraft Insurance Rates Drop Back
BOSTON — WHEN the first bomb fell in the Gulf region 24 days ago, the cost of shipping in that region skyrocketed. War-related risks led to major insurance rate hikes, higher fuel prices, a drop in the number of planes and ships available, and time lags on shipping schedules. Since then, commercial insurance rates are coming back down. ``At the moment, merchant shipping has suffered no hits,'' says Jan Vidler, spokeswoman for Lloyd's of London. ``The mine threats have been less than was originally thought. But that could change in five minutes.'' The situation in the Gulf is so volatile that Lloyd's stayed open on Sunday Jan. 20 for the first time in its 303-year history.
The United States government is easing the burden of insurance costs that threaten to put some small airlines and shipowners out of business. The Federal Aviation Administration (FAA) is authorized to underwrite aircraft when commercial insurance rates are unavailable or so costly as to preclude service. (The US insures all ships used to transport military supplies and troops.)
Tower Air, a commercial airline that services New York and Tel Aviv, says it would not be operating without help from the FAA. The airline now flies empty into Tel Aviv (from Europe, where it conducts military charters) to pick up passengers bound for New York.
``Insurance used to be peanuts; now it's astronomical,'' says Rosalind Ellingsworth, spokeswoman for Tower Air. What before the war cost roughly $150,000 in one-way insurance for an aircraft and 480 passengers now would cost more than $1 million ($750,000 for the aircraft hull alone) in commercial insurance premiums. With help from the FAA, Tower pays about $50,000.
At sea, commercial rates have multiplied from the prewar level. For example, a ship worth $15 million that before paid .05 percent of its hull value annually in war-risk insurance - $7,500 - might have suddenly had to pay 5 percent every trip, or $750,000. (This in addition to about $300,000 other yearly insurance premiums.) But after three weeks of fighting and no ship losses, commercial insurance rates have come down from about 5 percent to about 2 percent, says Lloyd's Ms. Vidler. (The last time war-risk rates were so high was during the 1980-1988 Iran-Iraq conflict, when Lloyd's paid out $1 billion in claims.)
SHIPS are insured by several underwriters according to rates based on the ship's size, cargo, destination, and intended length of stay. A 250,000-long-ton crude carrier sitting at port in the northern Gulf, for example, would pay the highest rate of insurance.
Yet as war-risk insurance rates ease, other costs continue to push up sea and air shipping costs:
Ship charters are scarce, as more ships get appropriated for military use.
Many large crude tankers are not available to transport oil. They are being used by the governments of Saudi Arabia and Iran for the offshore storage of oil.
Shipping times have lengthened as many vessels add two weeks to sail around Africa's Cape of Good Hope, rather than risk transit of the Suez Canal.
The most dangerous``excluded zone'' is growing to include Israel, Egypt, and Turkey, says a Maritime Administration spokesman, increasing the costs of traveling to and from those areas.
But the high costs of freight will not affect consumers that much, says Arthur McKenzie, a consultant at the New York-based Tanker Advisory Center. ``The tanker freight rate is a very, very small proportion to the cost that the consumer pays at the gasoline pump.'' Before August of last year, tanker transportation added about 2.5 cents to a gallon of gasoline; if costs rise 150 percent, that becomes 7 cents.
``Unless that rate lasts for weeks, it won't even make a blip at the gas pump,'' he says. ``The minute the rates get up so high, every shipowner that has possible tonnage available moves in, and the price moves back down.''
In the meantime, he says, the temporarily high rates are good for the shipping industry, which has been in a slump for the past 12 years due to low freight rates and oversupply of ships.