Danger on the high seas

Piracy is big business in an area plagued by lawlessness, and insurers are paying the price. It is little wonder that the market wants to turn the situation around


Ever since ships first set sail, pirates have followed in boats to claim the cargo. Piracy is an age-old problem, and it does not look like receding when there are golden opportunities to exploit from heavy sea traffic and inadequate policing in one of the world’s busiest shipping lanes – the Gulf of Aden, which leads to the Suez Canal and connects the Far East with the Mediterranean.

A dramatic increase in attacks by Somali pirates has led to a near doubling in the number of ships attacked during the first quarter of this year compared with the same period in 2008. According to a report issued by the International Chamber of Commerce’s International Maritime Bureau (IMB) there was a total of 102 incidents reported to the IMB Piracy Reporting Centre (PRC) in the first three months of 2009 compared to 53 incidents in the first quarter of 2008. The quarterly report also said attacks increased by almost 20 percent over the same period last year.

The increase in the first quarter of 2009 is due almost entirely to increased Somali pirate activity off the Gulf of Aden and the east coast of Somalia. The two areas accounted for 61 of the 102 attacks during the first quarter compared to just six incidents for the same period in 2008.

Last year pirates hijacked 49 ships, took 889 crew members hostage and fired on another 46 vessels, according to the IMB’s Piracy Reporting Centre, with 111 incidents taking place in the Gulf of Aden off the coast of Somalia. Furthermore, the types of attacks have changed, with pirates – more heavily armed than in previous years – attacking larger ships and going farther out to sea.

The IMB reported that in the first quarter of this year worldwide a total of 34 vessels were boarded, 29 vessels fired upon, and nine vessels hijacked. A total of 178 crew members were taken hostage, nine were injured, five kidnapped, and two killed. In the majority of incidents, the attackers were heavily armed with guns or knives. In addition, violence against crew members continued to increase.

Forty-one incidents were reported in the Gulf of Aden region, including the hijacking of five vessels. In January 2009, one in every six vessels attacked was successfully hijacked, with the rate decreasing to one in eight for February 2009 and one in 13 for the month of March.

On average, one in eight vessels attacked was hijacked during the first quarter. The last quarter of last year saw a total of 41 incidents, in which the ratio was one in three vessels attacked being hijacked, the IMB reported.
Piracy risk is not just confined to the Gulf of Aden and Somalia. Nigeria continues to be a high risk area. In the first quarter the IMB received reports of only seven incidents, although unconfirmed reports would suggest that at least a further 13 attacks had occurred in the same period.

Oiling the spoils
Nearly all incidents have taken place on vessels supporting and connected to the oil industry. The IMB is urging vessels to report any attacks so that the Nigerian authorities can better prioritise and resource their law enforcement agencies to respond quickly and efficiently.

One marine risk consultant at a large European insurer says that “under-reporting from vessels involved in attempted – or actual – piracy incidents is still a great concern. Many vessels dismiss the idea that pirates have followed them or tried to engage as just boats that have come too close to them. The real reason may be a lot more frightening. Any boat that speeds up on approach or that circles the ship, for example, should be reported to the authorities.”

However, some countries have made great strides in reducing piracy risk. Indonesia, which held the record for the highest number of piracy attacks between 2003 and 2007, saw only one incident reported in the first quarter of 2009, compared to five incidents in the corresponding period in 2008.

The Malacca Straits – a major strategic trade route and another former piracy hot-spot – has reported only one incident this quarter. The drop in attacks is due to increased vigilance and patrolling by the littoral states (Indonesia, Malaysia and Singapore) and the continued precautionary measures on board ships.

The situation has also improved in Bangladesh (Chittagong) and Tanzania (Dar es Salaam), with a slight decrease in the number of incidents reported in the first quarter as compared to the corresponding period last year. During the same period this year, only one incident was reported for Bangladesh compared to three during the same period last year. Vessels calling at Tanzania reported two incidents as compared to four during the same period last year.

Insurers and risk experts suggest that piracy risk has moved from Far and South East Asia to Somalia and the Gulf of Aden. Malaysia and Singapore have worked well with the Indonesian authorities to cut down on piracy around Indonesia and the Malacca Straits.

However, such co-operation does not appear to be an option in the Gulf of Aden and Somalia, say insurers. As Somalia is virtually lawless and without an effective government, there are no agencies there that are prepared to police against pirate attacks.

As a result, insurers can only foresee a worsening situation in the area.

Increased presence
In response to the increased frequency of pirate attacks, several nations—including the US, the UK, other European Union Member States and other countries —have increased their naval presence in the Gulf of Aden, which vessels must traverse to get to the Suez Canal. But the logistics are against effective naval intervention.

The targeted area now encompasses over a quarter of the Indian Ocean, which means that it is impossible to police.
The alternative route to using the gulf – steaming around the southern tip of Africa – would add around two to three weeks to the journey time, and would hike transportation costs.

In mid-December 2008, the UN Security Council approved a resolution allowing countries to pursue Somali pirates on land as well as at sea – an extension of the powers countries already have to enter Somali waters to chase pirates.
But as long as Somalia continues to exist without an effective government, many believe lawlessness within the country and off its lengthy coast will only grow.

Some countries have tried to take matters into their own hands. While there is no international legal system for people accused of piracy, some states have started to put pirates on trial, such as in Kenya and France. The US, while also threatening pirates with criminal prosecution, has also started to meet the problem with force. When the Maersk Alabama was captured in April and the ship’s captain was held for ransom, US Navy Seals intervened and shot dead three pirates.

As the number of piracy incidents increase, marine underwriters are looking to cover piracy under war risk policies rather than the current hull and machinery coverage. According to those working in the London market – which underwrites most marine risk policies – in about 80 percent of cases, piracy is moving in this general direction.
Before 1983, piracy generally was covered under war risk policies and excluded from hull policies but since then, it has generally moved back into hull coverage.

In 2005, the Joint Hull Committee of the Lloyd’s Market Association introduced optional clauses that excluded piracy from hull policies and were intended to transfer the peril back to war risk. However, most underwriters did not adopt the optional clause, largely leaving piracy to remain under hull policies.

Marine insurers now want that to change. They want to see piracy risk moved into war insurance policies, as is the case in countries like Japan, Sweden and Norway.

War risk policies are typically paid per transit and underwriters often charge additional premium for trips through high-risk areas. The Gulf of Aden has been on the LMA Joint War Committee’s high-risk list since May 2008.

Increased insurance
Underwriters and other observers say the transition to war risk coverage of piracy risks could be helpful for insurers and policyholders alike because it would clarify ambiguity about how piracy is covered. Currently, shippers that do not have separate kidnap and ransom insurance often have piracy ransom covered by “general averages”, a voluntary agreement by the owner, charterers, insurers and other interests to pay a proportionate share of a vessel’s expenses. A declaration of general averages is made in cases of extraordinary sacrifice made to save a ship, cargo or crew – such as jettisoning cargo during an emergency. As a result, it can be difficult to determine what level of exposure insurers have to such risks under such policies. Moving piracy risk to a war insurance policy would help clarify this, say insurers.

But transferring these risks from one policy to another is not going to ring-fence insurers from receiving large claims, or from legal action because of disputed claims arising from piracy. In April Amlin, part of the Lloyds’ market, announced that it is facing an £8.9m claim after Somali pirates hijacked a tanker loaded with biodiesel. It is also claiming damages and interest running at $2,920 a day.

The ship, Bunga Melati Dua, was on its way from Malaysia to Rotterdam when it was attacked by pirates last summer while travelling through the Gulf of Aden. One of the crew members was killed during the attack, and the remaining crew were taken, with the vessel, into Somali waters.

Six weeks later, Malaysian shipping line MISC Berhad paid a $2.7m ransom to the pirates for the return of the ship, and her sister tanker Bunga Melati Lima, hijacked ten days later. The crew of 29 Malaysians and ten Filipinos had been held with the 32,000 tonne ship during its captivity. The pirates released the vessel after owners paid the ransom and she arrived in Rotterdam on October 26 where her cargo was placed in storage.

Now, Swiss commodities trading company Masefield AG is suing Lloyds underwriters Amlin Corporate Member over her cargo.
Masefield says as soon as the pirates seized the ship the two parcels of palm oil became a total loss, and that it served a “notice of abandonment” on September 18, seeking payment of its value from insurers. But according to a High Court writ, Amlin has breached its insurance deal by refusing to meet Masefield’s claim.

In its writ, Masefield says that when the cargo was discharged at Rotterdam, it could not be sold immediately: with the approach of winter, the amount of palm oil that can be blended with other oils to make biodiesel falls and its price drops dramatically.

The cargo is currently being stored until it can be sold on behalf of insurers for a reasonable price, the writ claims. Amlin says that it is defending the claims vigorously.

One insurer in the London market who asked not to be named says that the number of disputes between insurers and their insureds is likely to grow until policy wordings are clarified and piracy is moved to war risk insurance.

“At the moment, there is a problem with the percentage of liability that insurers and their clients carry with regards to piracy risk, as each incident can trigger clauses in their hull and machinery policies, war insurance policies and cargo policies. Furthermore, these can be underwritten by several insurers. The easiest solution for the insurance industry is to move piracy to just one policy – war insurance – where it can be covered by just one insurer. Then, insurers and their clients are clear about what risks are being covered and to what degree.”