Ongoing Pirate Menace Triggers Special Coverage, Security Measures

By | October 25, 2011

“Pirates of the Caribbean” they aren’t. They are for the most part desperate men from a failed state that have discovered that one of the world’s oldest professions offers wealth and power, if you’re willing to take the risks. In a rather tongue in cheek award the Harvard Business School selected piracy as 2010’s best business model.

However, for every action there’s a reaction, and London’s marine insurance community is in the forefront of devising strategies to thwart the pirates, who operate mainly from untouchable bases in Somalia, from succeeding in their attacks on Indian Ocean shipping.

Catlin Group Limited, with operational hubs in London, Bermuda, the U.S. Europe and Asia, as well as being the managing agent of Lloyd’s largest syndicate, has therefore upped its efforts in the fight. Headed by Peter Dobbs, Catlin’s Asset Protection service offers coverage designed to deal specifically with the threats from pirates. In an interview with the IJ he described the move as a “natural extension” of Catlin’s marine and Lloyd’s business.

Lloyd’s roots go back to the need for marine insurance at the end of the 17th century, as the British Empire expanded its global reach. Until the end of the 19th century Lloyd’s was essentially a marine insurer. Although it’s a lot more than that nowadays, the marine tradition remains strong. But it needs to change.

“I think in the end the maritime industry is going to have to wake up,” Dobbs said; “in the same way that the aviation industry had to wake up 40 years ago.” He cited the rash of hijackings that took place in the 60’s, which imposed “fairly draconian, – or at least what we though at the time were fairly draconian – security measures to prevent hijacking.” More recent events have served only to increase those security measures.

“I think it’s no longer possible now to have a vessel, valued at a hundred million dollars, with cargo valued at two hundred million dollars, and to allow that vessel through some of the rougher waters of the world completely unprotected.” As a result the maritime industry has to recognize “the world has moved on; the world has changed, and I think possibly in the future we’re going to have to look at forms of security that the maritime industry haven’t been used to in the past.”

London’s leading role is a natural one, as “the whole piracy issue is uniquely British,” said Dobbs. “The majority of the insurers involved are British, the majority of the law firms are British, the majority of the better guarding firms are British, and the majority of the ransom delivery firms are English. Piracy is very much an insurance issue that’s centered in London, as opposed to anywhere else in the world. London is where it’s at, and where piracy has been [a concern] for three hundred years from the age of privateers in the 1700’s.”

Catlin has done a lot of work on the subject, which is summarized in an excellent 20 page booklet that sets out the basic facts, figures and potential solutions to the piracy problem. Peter Dobbs was one of the principal sources.

He described coverage related to piracy as “very much a niche business, as you need a fundamental understanding of the risk to really be able to understand how it should be written…profitably.” Marine insurance is complex, as there are different policies covering different risks. He also noted that when dealing with pirates, “there are a huge number of other factors that come into this.”

Owners or charterers of a vessel buy “hull insurance, and they have to buy war risk cover if they’re going through restricted areas, of which there are a number around the world,” Dobbs explained. In addition the cargo is insured – not necessarily by the ship owner – and it may also be subject to claims for delayed delivery. P&I [Protection & Indemnity] Clubs are the most common writers of liability coverage and for indemnity of crew members who are injured or die on voyages.

However, even with all that coverage, Dobbs said they are frequently “silent or vague on piracy or acts of piracy. That’s why there’s a niche piracy market to take into account all the expenses and issues around piracy.”

He also explained that Catlin’s policy offers “ransom reimbursement” (insurers are not permitted to pay ransoms directly), and the “risk of losing the ransom in transit,” which has occurred. In addition it covers “all of the legal expenses,” and the “personal accident expenses of the crew,” as well as “all sorts of additional expenses,” such as “re-bunkering – putting the vessel back into service, the costs of ‘response’ sums, cost of law firms handling the incident, communications costs, travel costs, salary costs.” In essence the policy covers those costs directly incurred as a result of a piracy incident that are not, otherwise covered. “Bear in mind,” Dobbs added, “that piracy incidents can last over a year.”

He described the situation in Somalia as “unique” in that piracy, while it’s a “worldwide problem,” is usually “robbery on vessels.” Incidents in such areas as the Caribbean, off of West Africa and in the Malacca Straits fit this pattern. However, in Somalia – a “failed state, and has been for twenty years” – and the Indian Ocean the situation differs. In addition Somalia “commands the longest coastline in Africa,” which is also strategically located along one of the world’s main shipping routes. “Over 20,000 vessels a year are funnelled into the Suez Canal.”

As a failed state Somali pirates can hold captured vessels, which is not the case in other areas of the world. They’ve “proven that they can hold vessels indefinitely,” and have done so in many cases “for over a year. In so doing they can ask for ransoms, instead of robbery. And those ransoms have escalated from a couple of hundred thousand dollars five years ago to up to twelve million dollars today.”

With that kind of exposure, security measures have become increasingly important, as the best solution to prevent acts of piracy is to avoid a ship being seized in the first place. In this regard a portion of the premiums on a policy are for measures to make it less likely that a ship will be taken. “There are many methods of ‘hardening’ a vessel,” said Dobbs, “whether that’s razor wire or putting in grills or welding doors shut.

“But more recently in the last three months the industry has been moving over to using armed guards on vessels. There’s been a huge shift in 2011.” Previously most ships didn’t have armed guards, “but it’s now accepted by most of the ‘flag nations’ of the world that the way around piracy is to use armed guards on vessels.”

However, their increased use raises the question of their qualifications. Dobbs is an expert on this subject. He actually served as an armed guard on a vessel in this area some 30 years ago. The use of weapons and potentially deadly force raises a host of legal issues. Catlin is committed to assuring that guards on any of the vessels it covers are of the highest quality. Dobbs has met with naval officers, in order to ascertain “exactly what the licensing requirements [for security personnel] are.

“We’re making sure that the guards that we’re allowing on vessels are fully licensed and fully trained, and that the right rules of force, rules of engagement and procedures, are in place,” he said. Catlin has prepared an 8 page questionnaire, which, Dobbs said, “asks the right questions.” He also explained the role of the Security Association for the Maritime Industry (SAMI), a recently formed organization in reviewing the experience and qualifications of potential armed guards. “The better regulated armed guard companies are applying for membership.”

Dobbs thinks that, as armed guards become more common, it will create three classes of shipping in the Indian Ocean – ships with guards, ships “with a degree of hardening,”- razor wire, water jets, ‘citadels’ for the crew – and “those with no precautions at all, and they are certainly being pirated.” While ‘hardening has proved reasonably effective in deterring pirates, Dobbs said “so far no vessel with an armed guard on it has been hijacked or pirated.”

Vessels which are alert to piracy threats can also take evasive actions, and let the pirates know they are prepared for them, which “sometimes in itself can stop the pirates from attempting to board a vessel.” The situation is analogous to “burglars on land,” he continued. If they see “heavy locks on doors and burglar alarms they tend to look at the neighboring property; shipping is exactly the same thing.”

Armed guards are an extension of this deterrent principle. They aren’t there to blow the pirates out of the water. For the most part, Dobbs explained, they are equipped with bolt action rifles with telescopic sights and night vision. Their range is up to around 700 yards; whereas the pirates are usually armed with AK-47’s and rocket propelled grenades, which, although they are more powerful weapons, have an effective range of around 200 yards. Being exposed to accurate rifle fire for 500 yards serves as an effective warning.

The type of vessel also carries its own deterrent. “No vessel with more than eight meters [about 25 feet] of freeboard has been pirated, said Dobbs. Likewise “no ship capable of speeds over 18 knots (around 21 mph) has been pirated.” This includes most container and cruise ships. He cautioned, however, that if the ship is stopped, it could then be taken.

Catlin’s policy evinces the seriousness of the situation. It has “an upper limit of ten million dollars per transit, while most insurance has a limit of five million dollars per transit,” said Dobbs, adding that the average ransom – at the moment – “is around five point four million dollars.” The change to a “transit basis” shows how the pirates’ threat has changed coverage terms, “whereas five years ago they were written on an annual basis.”

The weather in the Indian Ocean also has a bearing on coverage terms. Dobbs explained that during the monsoon season in the summer months rough seas – over two meters [over 6 feet] – serves to make piracy impractical; “so clearly in the summer months pricing takes into account sea state in the Indian Ocean.” Software in Catlin’s office monitors these sea conditions. As the monsoon season has ended, Dobbs said “there are now piracy attacks every day of the week.”

However, even though there are more attacks, Dobbs pointed out that the success rate “has actually gone down . The main reason being that “vessels are better protected from a hardening point of view and from an armed guard point of view. There’s now about a one in five hundred and fifty chance of being pirated in the Indian Ocean – successfully.”

Although there will be an end, or at least a respite to the piracy threat, Dobbs doesn’t see it happening any time soon. For one thing “many of the major powers in the world are over-committed in other places.” There’s also been “a considerable amount of regime change; there’s been a global meltdown. Global leaders have a lot of things to worry about, and, unfortunately the issues off Somalia aren’t the highest on the list, although they are very serious.”

He also noted that “piracy over the centuries has always operated in a cycle; it comes and goes depending on how it’s policed, and I do think that this is a phenomenon that will go away.”

However, while it’s in a state of growth it encourages piracy in other areas of the world, as shown by recent attacks off the coast of West Africa. Dobbs said it’s in some ways “similar to kidnapping, and other forms of crime where you get copy-cat incidents.” Given the speed at which news travels, if it’s successful, “it will almost certainly get copied.”

In addition the possibility that there will be more “failed states” in Africa heightens the danger that it will spread. “But,” he said, “in the long term I’m hopeful that it can resolve itself.” A lot of people in London and elsewhere share that hope.

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