Somali pirates force insurance premiums up

April 13, 10:21 AMInsurance Industry ExaminerDanny Workman

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AP Photo/Shane Michael Murphy

When snipers from the American destroyer USS Bainbridge shot and killed three Somali kidnappers, the immediate threat to hostage Captain Richard Phillips ended.

But with increasingly violent pirates still holding captive more than a dozen ships and 230 foreign sailors, maritime insurance risks for using one of the world’s busiest shipping lanes continue to grow.

Yvette Essen of the UK Telegraph reports that kidnap and ransom insurance has already spiked to 1% of a ship’s value for trips past the Somalian coast through the Gulf of Aden, also known as Pirate Alley. Seized by the pirates last November, the $120-million oil tanker Sirius Star carrying over $100 million worth of cargo would today require at least $2.2 million in premiums for a specialty piracy insurance policy. Somali captors eventually released the Sirius Star after her owners paid a $3-million ransom.

Special Pirate Attack Insurance
Piracy policies represent a relatively new type of maritime insurance. Insurers like Chicago’s Aon Corp. and London’s International Security Solutions launched this specialized form of war risk coverage specifically to cover losses due to ransoms and cargo delays from pirate attacks. Pirate-attack policies cover consultant and negotiator costs, ransom demands and medical care.

About 20,000 vessels pass through the Gulf of Aden each year, an international trade route through which some 11% of the world’s seaborne petroleum passes. The Aden passage links Mideast oil producers with the Indian Ocean and Mediterranean Sea via the Suez Canal. Since January 1, 2008, pirates have attacked well over 120 international cargo ships in the Gulf of Aden.

Other Forms of Marine Insurance Affected
In less than a year, two other types of more traditional marine insurance have also seen premium rates jump more than ten times. Shippers now pay much steeper rates for hull insurance which covers physical risks such as grounding or damage from heavy seas. As well, costs for protection and indemnity policies covering crew liabilities have also spiked.

Physical damage so far to attacked ships has been less than catastrophic with relatively few crew member injuries. Still, insurance companies argue that they need to build up their reserves before increasingly desperate pirates cause severe losses projected to cost hundreds of millions of dollars.

Piracy Effect On Future Premiums
The Joint War Committee has already added the Gulf of Aden to the list of world’s riskiest transportation routes. That May 2008 action puts Pirate Alley risks on par with the likes of war-torn Iraq and Afghanistan.

With furious Somali pirates vowing terrorism, violence and bitter revenge on American and French ships, maritime insurance rates may have just started on an accelerated path to much higher premiums. Soon, even the remarkable 1000% spike in costs may seem modest.