The risk of piracy has put marine insurance firmly on the map in recent months. Peter Davy looks at the effect this growing threat has had on pricing and capacity of marine and K&R cover

No one really thought it was over. Back in September analysts warned that the temporary lull in piracy was just that - temporary. So it proved: after the monsoon season, the Gulf of Aden once again saw ships being seized and ransoms demanded. The last quarter saw another hundred attacks reported to the International Maritime Bureau to bring the total for the year up to 406, against 293 in 2008. It was the third successive year the numbers were up, and the highest total since 2003.

For the insurance industry, let alone the ship owners or the 1,052 crew taken hostage throughout the year, it remains a huge problem, says Sean Woollerson, a partner in the Energy and Marine Division at Jardine Lloyd Thompson. Nor is it one that was foreseen when the peril of piracy was first put into marine insurance contracts, which aimed to cover the potential for damage to the ship or cargo.

"It was never envisaged they would be paying out millions in ransoms," he notes.
Yet, by and large, it's a challenge the market has risen so successfully. As the Lloyd's Market Association notes, for example, the last few years have largely seen cover for piracy move from hull and machinery to war. About 90 per cent of the policies in the London market covering piracy now sit under war, where underwriters have the flexibility to charge an additional premium for trips through high-risk areas. And, while these initially rose quite substantially, they are now stabilising, says Woollerson.

Elsewhere, plenty of capacity has meant premiums have been largely unaffected.
Similarly, prices have also come off as capacity has moved into the specialist kidnap and ransom policies that have been developed to address some of the uncertainties in coverage and uninsured costs. And owners and charterers also have access to policies covering loss of hire or earnings resulting from hijacking, rather than the vessel damage covered traditionally.

The result, says Neil Roberts, senior technical executive at the LMA, is that if ships want it, insurance is available. "The market is pretty much covering everything that is going on."

NO LET UP

However, what's worrying for the insurers and the shipping industry as a whole is simply the growing scale of the problem. The concern, says Roberts, is both the potential for a game changing series of total losses, with vessels sunk, or an escalation that sees the pirates go "wider, further or becoming more violent". And in fact, this escalation already seems to be happening.

"It's not just the number of attacks that's rising but also the level of violence," says Dieter Berg, senior executive manager for Marine at Munich Re. The IMB figures show 120 vessels were fired upon last year, compared to 46 ships in 2008. Sixty eight crew were injured and eight killed.

Similarly, the naval presence in the Gulf of Aden has seen the attacks spread geographically. In December, Rear Admiral Peter Hudson, in charge of the European Union Naval Fleet (EU NAVFOR), said his flotilla's range needed to increase because attacks were being launched up to 1,000 miles off the coast, nearer India than Africa. "The pirates are now covering nearly the whole of the Indian Ocean by using mother ships," remarks Berg. Another worry is that pirates in other countries may also come to adopt the same business model.

And as the frequency, range and level of violence have grown, so too have the ransom demands. Mike Booth, a marine and aviation analyst for political and violent risks specialists Exclusive Analysis, says there's an upward trend: the average ransom in 2008 was $1 million; for the majority of 2009 it was $2 million; and in the last quarter of the year it jumped to $3 million. Nevertheless, the ransom paid in January for oil tanker the Maran Centaurus still represented a step-change as it's believed to have been up to $7 million. Not only will this push up the average, but it could have an effect on ransom demands elsewhere.

"When the next load of ransoms are paid it will be interesting to see how big they are," says Booth. It's true that statistically, the threat remains fairly small. After all, each year about 20,000 ships sail through the area. But even last June, Lloyd's report on political instability was warning that companies everywhere would face a growing 'piracy tax' to maintain their global trading networks if the current piracy levels continued. With the level increasing, insurers and their clients could be hit somewhat sooner. "We are seeing more and more incidents and going forward that is going to put more and more pressure on insurers," says Jonathon Bruce, a partner in the Marine Insurance Group of solicitors Elborne Mitchell.

DEFENSIVE MEASURES

Of course, there is still more that could be done to mitigate the risk. Insurers point to the defensive measures some ships are now adopting: razor wire, sonic blasters and water cannons (not to mention the vexed question of armed guards to stop pirates getting on board; secure panic rooms for the crew to flee to if they do. These have proved effective in resisting attacks, says Richard Close-Smith, executive director at Willis Marine. Anti-piracy training is also a key issue, and some already argue that it should be considered standard for crews prior to a Gulf of Aden transit in order for a vessel to be considered 'seaworthy' under the Marine Insurance Act 1906. "There's no doubt that ships that are prepared and know how to react to attacks are safer," says Close-Smith.

Perhaps most significantly, many are still failing to follow the best management practices on piracy, and EU NAVFOR says as many as a quarter of the ships passing through the gulf have not registered with its coordination centre, The Maritime Security Centre. That's despite the fact that it's free, gives ships access to advice and puts them on NAVFOR's radar.

The industry would also like to see some movement internationally to develop a legal basis for prosecuting the pirates. Simply sending them back to the mainland means there's little deterrent to encourage them to stop, even if caught. "For the pirates, it's still virtually a no-risk game," says Berg.

Yet that points to the real reason this is a continuing worry for insurers and their clients: the solution is largely out of their hands. As Roberts says: "This can't be resolved by the insurance industry or the Navy because it is an on-land problem, and it will continue until the situation in Somalia is improved." Unfortunately, as he admits, there's little sign of that happening, and the country remains lawless as ever. As Woollerson puts it: "The problem is not going away anytime soon."

THINKPIECE: PIRACY - A DISARMING RISK

The issue of armed guards is a difficult one for insurers. For a start, there's the risk of legal liabilities if pirates or, more seriously, fishing boat crews mistaken for pirates end up wounded or killed (although legal moves from the likes of Spain and the US are making it easier for ship owners to use guards).

Second, there's also the fact that the quality of those offering such services varies, and some sort of vetting system is probably something the shipping industry should be looking at, reckons Woollerson.

But even with that, many insurers would remain against them. At Munich Re, for instance, Berg says that while it's keen to encourage defensive measures, he's not convinced of the case for bringing firearms on board.

"We advise against it," he says. "The fear is that it could cause an escalation of violence."

Booth, though, as an ex-Navy man is unconvinced. First, that's because armed guards have already proved effective for ships that have used them - hardly surprising, he says, since the pirates are in fiberglass skiffs 30 or 40 feet below those standing behind steel plate on board. "Every indication is that as soon as a few shots are fired from a commercial ship the pirates high tail it," he argues.

Second, though, it's because it's difficult to see how the violence could be increased, given that the pirates are increasingly firing at ships anyway. They are not, he points out, going to get bigger weapons than the ones they already have, and even if they wanted to sink the ships there's little chance they could do so.

"Everyone talks about an escalation but how do you escalate it when they're firing an RPG or an AK-47 at you already?" he says. "You can't actually get much worse than that."

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