Insuring ships against piracy could become more expensive and subject to tighter conditions after the hijacking this week of oil tanker Irene SL, one of the most long-range attacks to date by Somali pirates.
Analysts say the incident, some 1,000 miles off the coast of Somalia, confirms the seafaring gangs can operate with ease in waters previously considered safe, marking a clear escalation of the risks faced by shipping in the region.
“Premiums may rise further if the Lloyd’s market makes larger losses, and this will continue to push up the price of shipping goods, potentially raising commodity prices in affected markets such as in the Gulf,” said John Drake, senior risk consultant with security firm AKE Ltd.
Ship owners seeking financial protection against attacks by Somali pirates typically buy marine kidnap and ransom cover in the Lloyd’s of London market, insuring themselves against the cost of raising and delivering multi-million dollar ransom payments.
Insurers are reluctant to disclose the size of marine K&R premiums or claims for fear that pirates will use the information to set their ransom demands, with any increase potentially setting off an inflationary spiral.
A study last month estimated the total cost of insurance due to Somali piracy was up to $3.2 billion annually.
Brokers say that while the Irene SL hijacking has so far caused no rise in the cost of marine K&R cover, insurers are likely to step up their demands that ships operating in pirate-infested waters take physical precautions against attacks.
“We haven’t seen any dramatic increase in premiums to provide the cover that’s required,” said Sean Woollerson, marine insurance specialist at insurance broker Jardine Lloyd Thompson .
“Underwriters are paying far more attention to the security measures taken by owners. We can negotiate a discount off the price quoted by underwriters for those measures being put in place.”
The most widely used on-board defenses against piracy include razor wire and so-called citadels – secure rooms with communications equipment into which crew members can retreat while remaining in control of the vessel until naval forces arrive.
Some ship owners may baulk at an increase in insurance prices as they struggle with wafer-thin margins caused by a glut of shipping capacity ordered before the economic crisis of 2008 muted commodity demand in the developed world.
“(Dry bulk) owners already operate at such thin margins that they cannot possibly be squeezed for much more in terms of insurance, and are not likely to be able or even inclined to adopt mitigation measures,” said J. Peter Pham, an African security adviser to European and U.S. governments and companies.
Brokers estimate that sales of marine K&R policies have risen to about $125 million a year since 2008, when the product was first developed in response to an upsurge in vessel seizures and ransom demands off the coast of Somalia.
Prices initially rose strongly in the face of strong demand before leveling off last year because of increased competition as more insurers entered the market, attracted by the bumper profits on offer.
A spokeswoman for Hiscox, the biggest provider of marine K&R in the Lloyd’s market, said it was too early to tell whether the seizure of the Irene SL would spur a fresh rise in premiums.
Richard Scurrell of Special Contingency Risks, a unit of brokers Willis, said the insurance impact will depend on the size of any ransom payments, and warned that no let-up in the frequency of attacks is likely until a stable government is established in Somalia.
“I take the view that you’re not going to fix the problem (of Somali piracy) until there’s some solution to the problems on land,” he said.