04 Insurance aspects

The victims of piracy are the crews, the shipping companies or the owners of the vessel, the parties with an interest in the goods carried, and the insurers. At first glance, the shipping companies, shipowners, and parties with an interest in the goods carried only appear to suffer a slight loss, because they are indemnified by insurers. If such incidents become more frequent, however, the insurance premiums will inevitably increase.

Marginal chances of obtaining recourse

To minimise the loss arising from acts of piracy, the insurers will seek to recover the lost cargo and, where possible, bring the offenders to court. In most cases, however, these efforts will be nipped in the bud by the frequently unclear legal basis for prosecuting these acts and by the associated cost. The insurance sector stands little chance of minimising the incurred loss — and therefore pays up.

Lines of business affected

The losses attributable to piracy primarily affect marine hull, marine cargo, and protection & indemnity (P&I) insurance. Losses may also be indemnified under loss-of-hire (LoH) insurance. A special kidnap and ransom insurance for shipowners is a new type of cover.

Financial burden for the insurance sector

The IMB's statistics give an indication of the number of attacked vessels, insofar as the incidents were reported. But there are no reliable figures documenting the economic consequences. In hull insurance, the insured losses have fortunately remained largely manageable to date, apart from the occasional total loss of a vessel. Most quick raids merely cause damage below the shipowners' deductible threshold. In the majority of cases, robbery or damage to insured cargoes by pirates is statistically recorded along with the claims expenditure for all other robbery losses at sea and on land. Losses due to piracy are rarely recorded in separate statistics. The same applies to loss-of-hire insurance.

Unless piracy is insured as a separate named peril, the associated hull loss will be recorded as the grounds for indemnification regardless of the actual cause. For reasons of confidentiality, there are no figures regarding the amount expended by kidnap and ransom insurers or the P&I clubs at the discretion of their directors.

The worst-case scenario

Notwithstanding the historical claims experience, a worst-case scenario must naturally also be considered. If a gas tanker were to explode or an oil tanker were to run aground, the resultant loss could run into the billions. The environmental damage caused by the two most expensive tanker accidents to date, namely the Exxon Valdez in 1989 and the Prestige in 2002, totalled US$ 9.5bn and US$ 1.2bn respectively. Although the actual indemnity paid was considerably less on account of limitations permitted under applicable liability conventions, these two incidents nevertheless dealt a severe blow to the insurance industry, because the estimated worldwide premium income for P&I is currently only around US$ 2.2bn a year.