INSIGHT: Piracy is the cost of doing business near Somalia

21 April 2009 16:50  [Source: ICIS news]

By Lane Kelley

HOUSTON (ICIS news)--US secretary of state Hillary Clinton noted with a chuckle recently that Morocco, once a pirate outpost, "was the very first country that recognised us....and we worked together to end piracy off of the coast of Morocco all those years ago".

That was then - 1786, to be exact. But Clinton may have a tough time getting other nations onboard with her idea of wiping out piracy near Somalia. The east African country does not recognise other countries or much of anything these days except a method for exploiting the Western world's definition of the cost of doing business.

Maritime sources contacted about the recent surge in piracy kept coming back to that term, the cost of doing business. That's how ship owners view paying ransoms of $1m (€770,000) here and $2m there to get their ships back. And why not? The money is coming from their insurers in London, New York and Chicago.

There have been news reports of insurers possibly raising premiums because of the new incidents, but before expending too much sympathy on them it seems only proper to consider the price tag of the problem.

According to three major news outlets, the Somali pirates collected between $50m and $150m in ransoms in 2008. There were 42 ships captured in the Horn of Africa region last year. That puts the average ransom at $1.2m a vessel based on the low estimates (Los Angeles Times, Chicago Tribune), and $3.5m per vessel based on the high estimate (USA Today).

It might be a $100m-a-year problem, but maybe not.

Ship owners are not forthcoming about their ransom payments, as with Stolt-Nielsen's announcement that Somali pirates had released the chemical tanker Stolt Strength and its 23 crew on Tuesday after holding the vessel for more than five months. Stolt's announcement and news accounts of the release did not say whether any ransom was paid.

Whatever the price tag, it does seem timely to wonder if the pirate menace has provided insurers with a new excuse for boosting their rates.

A maritime attorney in New York said that insurance companies would have to hike rates because of the increasing prevalence of the hijackings. "The underwriters aren't going to keep taking a bath on this," he said.

One example is Aon Risk Services in London, which claims K&R (kidnap & ransom) insurance costs have jumped tenfold because of the Somali pirates. So Aon is selling a per-trip policy through the Horn of Africa region with a premium of $30,000 for $3m in coverage. An Aon spokeswoman said she could not reveal how many such policies the company has sold, only that the number of new policies placed was up 80% in the past six months over the same period last year.

Ship owners would pay the premiums, of course, but maritime lawyers said such policies sounded to them like double-insurance - in other words, a rip-off.

A London attorney said shippers already have hull and war-risk policies that cover them for piracy. He said there has been debate in recent months about whether the hull or war-risk clause covers the ransom, but he said he was amazed that per-trip insurance policies were being bought. The coverage is already there, he said.

Michael Marks Cohen, a New York maritime attorney, agreed. "It just sounded to me like double coverage," Cohen said.

But not to Aon spokeswoman Alexandra Lewis. She said specific kidnap and ransom policies provide separate insurance and are not duplicating hull and P&I policies. "You're definitely not doubling up," she said.

Some ship owners have decided to take a different route, literally, by choosing to take longer trips to get to Asia. Instead of going through the Suez Canal to get there they have decided to go around Africa's Cape of Good Hope.

It is a very costly detour, requiring that ship owners most definitely will have to pay more for marine fuel, crew and other operating costs for their solution to the problem.

Odfjell, one of the largest chemical carriers in the world, announced in November that it was adopting a no-Suez policy. That was before the recent spate of hijackings, and before the US Navy and a few other countries sent vessels to the region as a show of force. Odfjell's detours lasted less than three months.

One of the carrier's tankers, the MT Bow Asir, was hijacked off the coast of Kenya in late March, and released on 11 April for a reported ransom of $2.4m. An Odfjell spokeswoman said the company had resumed sailing through the Suez in February due to the increased naval presence in the Gulf of Aden. She did not comment on the reported ransom.

Cohen said ship owners are already in the midst of a "shipping depression" due to the global economic downturn. "So ship owners have no incentive to go around the Cape of Good Hope," he added.

Ship owners and their insurers undoubtedly know the cost and risk of doing business near the Horn of Africa. A British security consultant who advises ship owners on how to transit the Horn of Africa said that, despite all the new recent hijackings and violence, the odds of escaping capture still were very much on the side of the ship owners. In 2008, there were 111 ships attacked by Somali pirates, with less than half of them hijacked. Over 20,000 vessels transited the Suez, he added.

"The statistical risk of being attacked in the Gulf of Aden is less than 1%," he said.

 ($1 = €0.77)

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By: Lane Kelley
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