War Risk Insurance: Why Does It Get Canceled During War?

Ryan Petersen, CEO of Flexport, a supply chain management and logistics company, publicly questioned on Tuesday why war risk insurance is canceled when a war begins. Petersen’s post on X, the social media platform formerly known as Twitter, prompted a flurry of responses seeking to explain the counterintuitive practice.

The issue has gained prominence as carriers begin to halt routes in the Gulf region and impose increased costs for war risk insurance, impacting global supply chains. According to a report from Arab News, the situation is unfolding against the backdrop of heightened geopolitical tensions.

Israeli shipping line ZIM has already warned customers of potential service disruptions due to the ongoing conflict in Israel. In a customer advisory issued on October 11, 2023, ZIM stated that insurers have imposed an additional war risk insurance premium on all vessels calling at Israeli ports. The company is passing this additional cost onto cargo owners, effective immediately.

“our thoughts are with the victims of the horrific and tragic events taking place in Israel, and we stand in support of our employees, their families, and affected communities,” ZIM said in its advisory. The company emphasized its commitment to maintaining service to and from Israel despite the challenges.

ZIM is obligated to pay the increased premium to maintain service. Petersen also suggested, though this has not been independently confirmed, that ZIM is providing roll-on/roll-off ships to support the war effort.

The core of the question raised by Petersen – why insurance is canceled during a war, when the risk is most apparent – appears to stem from the fundamental basis of insurance, which is the calculation of probability. One response on X noted that insurance is based on the probability of an event, and once a war has begun, the probability has become a certainty, rendering traditional insurance models inapplicable.

As of Tuesday afternoon, ZIM continues to operate and accept bookings to and from Israel, with ports in Ashdod, Haifa, and Eilat functioning normally, despite the added insurance costs.