By Dr. Ajay Sahai
Freight costs have gone up with shipping firms imposing war risk surcharges on cargo moving in the Gulf region as the Iran-US conflict intensifies. A section of insurers plans to withdraw risk cover. Dr. Ajay Sahai explains how freight rates & premiums are determined in such times & who finally bears the higher costs
How are ocean freight rates determined?
Ocean fright rates are market-driven and depend on demand-supply dynamics in specific trade lanes. When cargo volumes rise relative to vessel capacity, rates increase. Key determinants of rates include bunker (fuel) prices, port congestion, vessel availability, equipment imbalances, and geopolitical developments.
Carriers also adjust rates through surcharges rather than only changing the base freight.
Components of freight costs
Freight rates consist of base freight, bunker adjustment factor (fuel cost recovery), currency adjustment factor, terminal handling charges, peak season surcharge, war risk surcharge (where applicable), security and documentation charges, etc.
During geopolitical tensions, war-risk and emergency surcharges become significant contributors.
What portion of freight costs relate to ship insurance?
Insurance is embedded indirectly in freight. It includes hull and machinery insurance, protection and indemnity liability cover, and war-risk insurance. In normal conditions, insurance is a very small component of total freight. However, in conflict-prone zones, war risk premiums can rise sharply and are passed on through specific surcharges. During the Red Sea crisis in 2023, the war risk premium went up between 10-20 times.
Following the US-Israel strikes on Iran, the Strait of Hormuz—through which 20% of the world’s oil transits—has seen a 70% drop in vessel traffic. Shipping companies have put a war risk surcharge of $ 1,500 to $ 2,000 per 20 feet container to their charges, according to media reports.
Meanwhile, some of the largest maritime insurance mutuals are planning to withdraw war risk insurance cover for ships entering the Persian Gulf while others have rasied war risk premiums by 25-50%, according to reports.
Why freight rates rise during war or regional conflicts?
Freight costs increase during war due to multiple factors such as higher war-risk insurance premiums, rerouting of vessels (leading to longer voyages), higher fuel consumption, crew risk allowances and reduced effective vessel capacity. The war insurance protects shipowners and charterers from third-party damages resulting from war, terrorism and piracy, among others.
Does marine insurance become void if a ship’s crew deserts the vessel?
INSURANCE DOES NOT automatically become void if the crew abandons the vessel. Coverage depends on the circumstances. If abandonment is caused by war, piracy, or force majeure, policies may still respond. However, claims could be contested in cases of proven negligence, unseaworthiness, or policy breach.
Who ultimately bears higher freight costs?
THIS DEPENDS ON the agreed International Commercial Terms (Incoterms). Under FOB contracts, the buyer absorbs ocean freight increases. Under cost, insurance, freight (CIF) or cost and freight (CFR) contracts, the exporter bears the freight risk unless contractual safeguards allow pass-through. In competitive markets, exporters and importers often share or absorb costs to maintain good relations and continued business.
Why freight rates do not fall immediately once crisis ease
Freight markets correct downward more slowly than they rise. Insurance premiums take time to normalise, vessel schedules need recalibration, equipment imbalances persist and backlogs at ports takes time to clear. Carriers also operate on contractual cycles that delay immediate rate reductions.
How exporters & logistics firms can manage freight volatility?
Businesses should diversify routes and ports, negotiate flexible freight clauses, partially lock in long-term contracts, align Incoterms strategically, and build inventory buffers for critical shipments. Proactive risk management is essential in an increasingly uncertain global trade environment.
The writer is director general & CEO, FIEO