Supply chain underinsurance: the example of the Bab-el-Mandab strait

Tokio Marine Kiln’s Hugh Selka discusses the importance of trade disruption insurance in the wake of supply chain difficulties in the Bab-el-Mandab strait due to action by Houthi militants.

The Bab-el-Mandab strait is a 16-mile-wide waterway sandwiched between Eritrea and Yemen – a state in which heavily armed Houthi militants have free reign to disrupt shipping in the region. Every ship wishing to transit Suez must first pass through Bab-el-Mandab, bringing a trillion dollars of trade within missile and drone reach of Yemen.

Attacks from Yemen have made the strait a no-go area for some shipping lines, denying their customers access to the fastest and cheapest route between far-eastern manufacturers and European consumers. The Ever Given disruption in the Suez Canal in 2021, when Maersk were forced to divert its ships, incurred delay costs of $45m, excluding costs for the cargo owners.

Recent years have seen concerns about the Strait of Hormuz, vital for 25% of the world’s oil, the Suez Canal, through which $1trn of annual trade passes, and the Panama Canal, critical to trade with and between the Americas.

The world is full of disasters waiting to happen: situations with risky fundamentals, just waiting for a spark to translate them from risk registers to the front pages of the papers. Where these situations coincide with choke points in global trade, they can cripple supply chains.

When situations like this develop, companies are left to count the costs, whether they be financial – loss of profit and re-routing expenses – reputational, or contractual penalties owed to customers for late delivery. These costs can be unsubstantiated for companies, especially where they rely on a few contracts which are exposed to the disruption. Cost and liquidity pressures can also force companies to cut costs in their response and burn through customer goodwill instead. The financial saving today can be seen in lower sales in future.

Supply chains have never been more stressed, with increasing incidence of supply chain losses of all kinds. Global supply chains are exposed to global risks and those risks can never be fully mitigated through good supply chain management. In situations like that, trade disruption insurance (TDI) can protect companies and their shareholders against the financial impact of disruptions to their supply chains arising from political, marine and physical incidents.

Many companies find themselves underinsured, and it is at times like this that insurers’ phones start ringing with TDI enquiries – too late for Bab-el-Mandab, but ready for the next global or local disaster waiting to happen, whether Hormuz, Suez, Panama – or somewhere totally unexpected.