War Risk Insurance Market Grows Amid Global Volatility

Increased armed conflicts, geopolitical uncertainty, and heightened civil instability are markedly boosting the war risk insurance market as organizations and individuals seek to transfer some of their financial risk related to conflict.

The war in Ukraine put a spotlight on war risk insurance, with individuals taking out coverage on their homes, cars, and individuals to fill gaps in general household insurance, which typically doesn’t cover conflict damage, the BBC reported. While individuals can leverage war insurance coverage, most policies are bought by companies looking to insulate themselves against conflict-related risks.

War risk insurance can include a wide variety of coverage levels, spanning from sabotage and terrorism (the lowest level) to civil and interstate war (the highest level). Insurers usually try to cover the full range, since it’s often unclear when a risk has upgraded from sabotage or intergroup conflict to outright war. The sector has grown exponentially since the 9/11 terrorism attacks in 2001, according to the BBC.

In January, Insurance Journal estimated that the global total of war-risk premiums is close to $1 billion. Notably, supply chains have leveraged war coverage to supplement traditional shipping insurance. The coverage can also be added to cover losses due to grounded planes, rerouted shipping, or cargo lost or damaged in transit. War risk insurance helped maintain the flow of about $150 billion worth of cargo moving through the Red Sea and Black Sea in the first half of 2024. Shipowners buy a separate risk policy for sailing through war zones; policies usually last seven days but can extend for up to a year.

“Without the specialist war risk insurance market, the impact upon vital marine trade routes would have been far greater than we’ve seen,” Chris Goddard, founder and chief executive officer of Vessel Protect, told Insurance Journal.

The article noted, “Underwriters are effectively making bets on how likely it is that a vessel becomes a casualty of war, often using a simple calculation: How many ships are sailing through that area, and how many have suffered damage recently?”

It’s a gamble for the insurer, especially if incidents become more frequent. If a ship is attacked or sunk, insurers could be on the hook for huge sums. The Tutor was sunk in the Red Sea by a Houthi drone boat in June 2024, and it had an estimated value of $37 million. But without insurance, the shipowner would be paying that out of pocket.

After more Houthi militant attacks on vessels in the Red Sea, the cost of insurance for ships sailing through the area nearly doubled, with war risk premiums rising from quotes of 0.4 percent of the vessel to 0.75 percent of the vessel—potentially adding hundreds of thousands of dollars to the cost of a voyage through the region, Reuters reported in August 2024.

War risk insurance is gaining popularity on solid ground, as well, especially from companies operating in high-risk areas. Policy costs are typically kept quiet, but one war risk insurance underwriter told the BBC that premiums for a British or American company operating in Lebanon or Israel are currently priced at between 0.5 percent and 2 percent of the total cover they buy. So, if a business wants $100 million of annual cover, it would pay between $500,000 and $2 million in war risk insurance premiums. The site’s regional or national volatility or stability would change the rate—premiums in stable Gulf states are much lower, estimated at between 0.025 to 0.05 percent.

Determining the right premium level is a challenge for insurers, especially because civil instability is currently volatile and so fast-changing in many places that past trends are unreliable indicators to inform rates.

"Wars and conflicts more generally represent black swan events," Constantin Gurdgiev told the BBC. Gurdgiev is a finance professor at the University of Northern Colorado and an expert in the study of risk and conflict finance. Because of this rarity, “historical data tends to be a weak basis for establishing any priceable insights.”