Pirates -- Like we needed something else to worry aboutBlog added by Paul Wilson on April 27, 2009
Paul Wilson

Paul Wilson

Denver, CO

Joined: May 30, 2007

Okay, be honest. Last year, as you were putting together your 2009 projections, you probably considered a huge number of potential risks and threats to your company and the industry at large, but how many of you listed “pirates” in the top 10? Sure, the threat of pirates off the coast of Somalia is nothing new and has been in the headlines for a while, but with reports of pirate activity increasing every day and the recent actions taken by the U.S. Navy, the issue is bound to remain in the forefront of the public eye for the foreseeable future. And now, it’s becoming increasingly relevant to the insurance industry, as well.

More and more companies (including insurers) are being forced to consider piracy in corporate terms. For example, during March of this year, 1,429 ships passed through the Suez Canal, a decrease of 16 percent from March of last year. While a portion of the decline is due to the recession, a growing number of ships are choosing to sail around the Cape of Good Hope to avoid the risk of piracy — a decision that comes at a huge financial cost.
Additionally, a surprising number of ship owners have neglected to purchase insurance in the past; however, the increasing sway held by pirates is causing many to rethink their decision. But because the area is currently such a hot spot, Lloyds of London has declared large parts of the Gulf of Aden a war risk, which translates into significant additional costs for those looking to buy insurance. According to Peter Townsend, executive director of Marine Aon, events leading up to the current climate, including recent actions by the U.S. Navy that killed three pirates, “have heightened awareness and upped the ante.” In fact, some insurers have begun to classify Somali piracy as a war risk rather than a general risk.
Interestingly, the attacks have also brought to light several controversies, including one that hasn’t seen the light of day for a long time.  For one thing, the idea of arming ship crews has gained popularity in some circles, although apparently not in the U.S. For obvious reasons, the idea is also nearly universally opposed by both shipping and insurance companies. Also, the increased number of ransoms has brought to light an age-old industry controversy regarding the coverage of released hostages. Currently, insurance underwriters who cover cargoes and vessels are responsible for crew ransoms, but they believe that those who cover the crews themselves should be responsible for the ransom.
Finally, the issue is opening even larger and potentially far-reaching issues. According to Crispian Cuss of London's risk mitigation Olive Group, “The international community has to decide whether the scourge of piracy is so bad that it is worth intervening directly or indirectly in Somalia or, if insurance companies are happy to pay ransoms and shipping companies are happy to pay premiums, shall we just continue with the status quo.”
Talk about a rock and a hard place.
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