The London market’s Joint War Committee (JWC), a highly influential advisory group of market practitioners, designates the Listed Areas or areas with “increased risk of war-related perils.” Voyages through Listed Areas must be notified to hull insurance underwriters by shipowners which ultimately triggers a negotiation for an additional premium (AP) for war risk coverage, usually quoted as a % of hull value for a 7-day period. Faced with that cost and the underlying risk, ocean carriers need to decide to either pay the AP and keep the shorter route, or detour around the danger adding more days and fuel. Either choice leads to an increase in the ship’s base costs which echoes through the chain and eventually down to the consumer. These risk-driven price increases eventually show up in inflation data and in a handful of cents per unit on many containerised goods. Ergo lists like JWC’s are key players shaping war-risk pricing, and the global marine insurance markets that are backbones for sea-related trade that Canada and allies rely on.
Maritime security is key for changing the probability of loss and the predictability of schedules, making it an important indicator that informs the market as a whole. Committees like the JWC reflect changing risk conditions in its designations. Insurers also pay close attention to those probabilities. In the Atlantic and Mediterranean, NATO’s standing naval groups and the day-to-day operations of the NATO Shipping Centre make it easier for carriers and insurers to see what’s coming. In higher-risk waters like the Red Sea, missions led by NATO allies have provided escorts and information-sharing. As these signals from various missions improve, it triggers a fall in probabilities, which typically causes war-risk APs to compress, and operators are more willing to return to the shorter route. The result is a gradual normalization that trims both days and dollars on voyages.
Now, the path from a risk flare-up at sea to a higher shelf price is a short chain of practical choices that various key stakeholders in the marine trade chains must make. The insurers decide how to reprice, ship operators then pick a route which causes freight rates to adjust, and importers fold that change into their contracts with carriers which later shows up in increases on the shelf. The overall higher voyage costs that arise from increased risk feeds into the all-in freight rate importers pay per container. Economically, IMF research finds global shipping cost spikes pass into import and producer prices and then into headline inflation over subsequent quarters, essentially with a delay. Comparatively, The Bank of Canada has repeatedly noted how global cost pressures, including freight, filter into domestic prices amid broader trade reconfiguration. For the Canadian economy, the link is modest and delayed.
The biggest exposures to these changes are durable household goods, consumer electronics, some apparel, and business inputs that all move by containers. Carriers do not “rebuild” supply chains when risk rises, but instead employ a variety of other strategies, such as shifting where containers are handed off between ships. In this way, they are able to protect some time-sensitive cargo already booked on Atlantic services.
Example Model
The following example illustrates these pricing shifts on an Asia/Middle East to Halifax or Montréal tradeline, normally via the Suez Canal.
Box: one Forty-foot Equivalent Unit (FEU) container, a standardized measure for shipping container volume, with 5,000 small appliances.
Baseline all-in freight: $3,500 per FEU.
Scenario A: The carriers can decide to pay the AP and keep passage via the Suez Canal. In this case, we assume a war-risk AP that works out to roughly $300 per FEU for several weeks while a Listed Area is in effect.
New freight: $3,500 + $300 = $3,800 per FEU
Added cost per unit: $300 ÷ 5,000 = $0.06 per unit
Scenario B: They decide instead to detour around the Cape of Good Hope. In this case we assume an extra 12 days of sailing and the use of a round daily ship cost (fuel + operations) of $120,000/day, and assume 3,500 FEU are effectively carried on that voyage (after accounting for utilization).
Extra voyage cost: 12 × $120,000 = $1,440,000
Per-FEU detour cost: $1,440,000 ÷ 3,500 ≈ $411 per FEU
New freight: $3,500 + $411 = $3,911 per FEU
Added cost per unit: $411 ÷ 5,000 ≈ $0.08 per unit
If the AP is high and the threat is acute, shipowners are more likely to detour. Whereas, if the AP compresses as security conditions stabilize, they’ll move back to the shorter route. Either way, the retail effect seen by consumers, Canadian and allied alike, is the same kind of number that comes to a few extra cents per unit on goods that move in containers.
Signals to Watch
The best ways, or a guide to follow these evolutions from risk to price, would primarily involve monitoring the various players who move it. Underwriter circulars (JWC) that change the list of risk areas are an early indicator. Carrier advisories such as Maersk, MSC, Hapag-Lloyd, and others, tell you when routes reopen or when temporary surcharges are added or withdrawn. Freight indices, like the Drewry or Freightos, benchmarks move with market conditions and give a sense of whether rates are rising on particular lanes. Canal bulletins relate more to queuing and scheduling. For the security picture, watch NATO’s Allied Maritime Command and the NATO Shipping Centre (NSC); their situational updates and merchant-shipping advisories shape underwriters’ and operators’ view of risk and predictability on Atlantic-Mediterranean routes. And for the Canada-specific lens, port throughput data and central-bank commentary on supply chains provide context for when global ripples are likely to show up here.
Though a constraint that should be noted is that these changes are order-of-magnitude estimates, meaning that real shelf prices vary with contracts, margins, and FX. Via contracts, many importers lock ocean rates for months and include surcharges. Thus, if a spike hits mid-contract, the extra cost may not be shown until renewal. Additionally, inventory that is already in transit (or in a warehouse) was bought at old rates, so price changes come, once again, with a lag.
Through margins, wholesalers/retailers choose how much of the higher cost to pass through. They can decide to bear part of it (margin compression), pass it fully, or stagger it to line up with their respective promo calendars. Category norms also matter as, for example, consumer electronics prices are stickier around product cycles than, say, low-brand elastic goods. In the case of FX (exchange rate), ocean freight and many invoices are USD-linked meaning that a weaker CAD amplifies the freight increase; a stronger CAD offsets it. For example, a 2-3% CAD appreciation/depreciation swing can change a few cents of freight pass-through.
Overall, “maritime security” in relation to the economy can sound abstract. Though in practice, as seen throughout the article, the relation, in part, can come down to risk mitigation and timing. Risk-related premiums are incentivized to shrink when allied patrols and merchant-navy coordination make routes more predictable, and timetables more stable. None of this turns Canada’s supply chains into something nimble, as they’re entrenched in deep land and consumer ties, but it does help cut down the number of times they have to be nimble. That’s the practical edge of sea power for a trading country.
Disclaimer: Any views or opinions expressed in articles are solely those of the authors and do not necessarily represent the views of the NATO Association of Canada.
