The dramatic rescue of an American sailor from Somali pirates by the U.S. Navy this weekend will likely make marine insurance more expensive, not least because the killing of three pirates could lead to an escalation of violence against unarmed crews.
It is also seen forcing more ship owners to carry insurance — as the pirates have become more mobile and have a greater reach — and lead to lawsuits between underwriters over who has to pay ransoms.
“The rescue of the American sailor at the weekend has raised the stakes,” said Peter Townsend, executive director of Marine Aon, a unit of Aon Corp. “Pirates may be more willing to resort to violence than previously.”
Four pirates seized the Maersk Alabama container ship last week. But its unarmed crew of 20 fought back and the pirates were forced to flee with the ship’s captain, Richard Phillips, in a lifeboat. After a tense standoff with the U.S. Navy, Phillips was rescued, with three pirates shot dead by snipers.
Although these events have thrust the issue of Somali piracy into the public eye, this is a long-standing problem.
“Piracy has been an issue for some time and it has already lead to higher insurance premiums,” said Paul Keane, a partner at Cichanowicz, Callan, Keane, Vengrow & Textor LLP, who specializes in maritime cases. “Premiums are going to go up because the pirates are going to become a little more vicious and hold out for more money.”
“The U.S. Navy was right to take action against the pirates,” he added. “But, I fear the pirates will now take more drastic action as a result.” That action could include executing some of the 250-plus hostages held by pirates on other vessels, Keane said.
Hijackings off the coast of Somalia rose nearly 200 percent to 111 in 2008. So far this year, there have been around 40 incidents.
Experts on these hijackings say Somali pirates have avoided deliberately harming captured crew members so far, because for them this is just business — some $100 million was handed over for crews and vessels in 2008.
“Hitherto, Somali pirates have merely treated hijackings as a business transaction and have been fairly consistent about not purposely harming anyone,” said James Gosling, a London-based partner at Holman Fenwick Willan, who has advised ship owners in nearly 30 ransom negotiations off the Horn of Africa. “My hope is they will just continue as before … But obviously we are very concerned about what impact the latest events will have.”
CHANGING BUSINESS MODEL
Industry insiders frequently refer to the pirates in corporate terms and in particular their “business model.” “There is no political agenda at play here,” said Michael Marks Cohen, a lawyer at Nicoletti Hornig & Sweeney, who specializes in marine insurance and maritime arbitration. “The pirates are only in this to get as much cash as they can.”
The pirates have worked to upgrade that model. According to Aon’s Townsend, the pirates have “reinvested much of the money they’ve made in better equipment” including rocket-propelled grappling hooks, faster boats and higher-quality weapons.
That has expanded their reach to 500 miles (800 km) from the Somali coast, forcing an international flotilla of navy ships to patrol a vast area of 1 million square miles. “Catching pirates in an area like that is like trying to grab a bar of soap in the bath,” Townsend said. “They can just keep slipping through your fingers.”
He said that in March 1,429 ships passed through the Suez Canal, a 16 percent decrease from March 2008. Part of the drop is due to the global recession, but some is because many ships are sailing around the Cape of Good Hope instead to avoid the risk of capture.
But he estimated that detour could cost up to $2 million for a Suezmax — the largest vessel allowed in the canal — so “the economic costs far outweigh the ransom costs.”
A “significant number” of ship owners have so far not bothered getting insurance against attacks, but the greater reach of the Somali pirates and coverage of the Maersk Alabama drama may force more of them to buy coverage, Townsend said. “The events off the Somali coast have heightened awareness and upped the ante.”
Nicoletti Hornig & Sweeney’s Cohen noted more insurers are classifying Somali piracy as a war risk rather than a general risk, as war risk premiums can be raised regionally.
The rise in the number of ransoms being paid has also intensified an unresolved 400-year-old insurance industry debate on who covers the release of hostages, Cohen added.
At the moment, insurance underwriters who cover cargoes and vessels end up covering crew ransoms, but argue that underwriters who cover crews should foot some of the bill.
“There has been a lot of discussion in the market recently over the fact that there is no provision for splitting up the ransom between property and life,” Cohen said. “There are definitely going to be lawsuits coming out of this.”