17 September 2009

Piracy today — a "million dollar business"

Sirius Star, Faina, Hansa Stavanger – ship hijackings have continued unabated, despite the military presence in the Gulf of Aden and off the coast of Somalia. Indeed, in the first half of 2009 alone, more attacks were recorded in the region than in the whole of the previous year. Kidnap and ransom is "the big business" for pirates.

Back in 2007, the ransoms demanded by pirates were generally still under the US$ 1 million mark. The sums which were ultimately paid amounted to several tens of thousands of US dollars. In 2008, the initial demands rose to well above US$ 1 million. And the sums actually paid out were correspondingly higher. Press reports indicate that the sum total of all ransom payments made in 2008 came to some US$ 80 million. On top of this, the costs associated with negotiations and ransom hand-overs alone reached an estimated US$ 40 to 50 million.

Which insurance product covers ransom payments?

Until recently, when a ship was hijacked, it was seen as entirely the owner's problem. The owners are the ones who must deal with the matter either alone or with the support of their marine insurers. In the course of 2008, there was an increasing tendency for owners to allocate the costs of ransom payments to their hull and cargo insurers according to the principles of a general average. Hull and cargo insurers are arguing that P&I insurers should be obliged to cover a share in the losses, too, particularly in the light of the situation off the Somalian coast. For the pirates in this region are specifically targeting the crew for ransom and are less interested in the ships and their cargos. As the welfare of crews was the main issue at stake here, according to the case put by hull and cargo insurers, P&I insurers should participate in the payments unless there were other express reasons for excluding them.

Is piracy a standard hull risk or a hull war risk?

At present, piracy is either covered by a standard hull cover or by a hull war cover, depending on the market involved. Prompted by continuing incidents in 2008 and the first quarter of 2009, underwriters in the London market have been increasingly insisted that piracy risks be excluded from hull insurance contracts and transferred to hull war policies. Up to 1982, piracy was classed as a hull war risk within the English insurance conditions. When the "Institute Time Clauses Hulls 1982" were drawn up, piracy was included as a standard hull risks. Already in 2005, the committee responsible introduced optional clauses stipulating the exclusion of piracy from hull policies and their inclusion in the correpsonding hull war policies. Only after the situation escalated in 2008 this option was used more widely. The systematics of the hull war policy permits underwriters to exclude certain regions with an increased risk profile from standard cover or to charge additional risk premiums per individual trip for these regions. Since the middle of 2008, the Gulf of Aden has designated as such an "area of enhanced risk". Munich Re supportis this change as an effective measure for risk control which permits underwriters to charge risk adequate rates from those transiting these areas.

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