Somali Pirates Heighten Menace

By | November 30, 2008

Insurers Increasingly Concerned Over Growing Threat of Attacks


Yo, ho, ho and a tanker of oil – Pirates of the Caribbean they’re not. Today’s descendants of the marauders of the Spanish Main operate from “mother ships” in fast, well-equipped and heavily armed speedboats. They pose an increasing threat to international shipping both in the Gulf of Aden and increasingly in the Indian Ocean.

When pirates boarded and took control of the Saudi/Aramco-owned supertanker Sirius Star on Nov. 16, it made headlines around the world for a number of reasons. At 318,000 deadweight tons and 1080 feet, it was the largest vessel ever captured by pirates. It was carrying around two million barrels of crude oil, valued at approximately $100 million. It was taken more than 500 miles off the coast of Kenya, far from Somalia and the Gulf of Aden, where the pirates have normally operated.

So, why not send in the Marines? A report from Reuters noted that Navy Admiral Mike Mullen, chairman of the U.S. Joint Chiefs of Staff, suggested military intervention would be complicated by hostages and ransom demands. “I’m stunned by the range of it,” he said, adding that, “once they get to a point where they can board, it becomes very difficult to get them off because, clearly, now they hold hostages.”

Shipping companies and their insurers are clearly worried by the increase in both the frequency of pirate attacks and the size of the vessels they seize. In an article on the Lloyd’s Web site (www.lloyds.com), Brendan Flood, marine underwriter for specialist insurer Hiscox, stated: “This is an unprecedented attack, given the size of the ship and the fact it was so far from the traditional hunting ground of Somali pirates. Despite the best efforts of the international military task force the logistical challenge of policing an area which, as this latest attack has demonstrated, is now more than a million square miles of ocean, is enormous.”

The cost of recovering pirated vessels has risen as well. According to news reports the pirates who took the Sirius Star first demanded a $25 million payment, then reduced that demand to $15 million at press time, for the release of the ship and its crew. That’s a far cry from the $50,000 ransoms they were demanding for fishing boats a couple of years ago. Piracy it seems is a growth business.

That’s bad news for everyone except the pirates. In the same article, Neil Smith, senior manager at the Lloyd’s Market Association, stated, “Insurers are very concerned about the ongoing situation, as are the whole shipping community. Insurers alone cannot act to resolve the problems, it will take a collective political effort on behalf of global governments to address the political situation in the area.”

Beefed up security is only a partial solution, although it could have a dissuasive effect. The Indian Navy reportedly sank a pirate mother ship that had opened fire on one of its frigates, which was patrolling in the Gulf of Aden.

But, as Smith pointed out, “Such activities [comprehensive security measures] obviously take time to come together. Underwriters have met with government representatives on a number of occasions. The U.K. government is aware of the problems and is taking a lead within the E.U. on expanding naval presence.”

As Admiral Mullen indicated, however, once a ship is taken, it’s very difficult to invoke a military response, as to do so puts both the vessel and its crew in peril. That situation directly concerns the insurance industry. As Flood noted, “with the general situation having deteriorated so quickly, insurance premiums for the hull, cargo and crew for vessels taking this increasingly dangerous route will be under pressure and will need to be reassessed.”

Ship owners/operators traditionally insure the ship (hull coverage) and the cargo through marine insurance. They also usually have additional clauses applicable in war zones. Piracy is part of that coverage. But as attacks increase and ransom demands rise, additional types of coverage may be desirable.

Lloyd’s noted on its Web site one suggestion, voiced by Amlin’s Simon Beale at a seminar it held in mid-October. He “advised ship owners to switch piracy from hull cover to war to ensure a greater degree of financial support.”

Guillaume Bonnisent, kidnap and ransom (K&R) underwriter with Lloyd’s Hiscox, said ship owners are also in search of specialist kidnap and ransom cover. He indicated that, “we’ve had over 50 different broking firms worldwide approach us on behalf of owners and managers seeking protection for vessels. Without a doubt the surge in piracy activity in the Gulf of Aden has been the catalyst for this increase.”

He explained that traditional marine cover will meet the cost of the ransom but none of the costs involved in the process. “What we’ve found is the ransom can account for just 25 percent to 30 percent of the costs of the incident. Where K&R cover goes above the traditional marine policies is that it will become involved from the moment a vessel is seized. We’ll provide a crisis management team and meet the costs of the security team that’ll be needed to take the ransom to the Somali pirates.” He added that the security team’s fee can be more than the value of the ransom.

Topics Lloyd's

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