Insurers on board with piracy risks

A suspected pirate skiff off the port of Bossaso, Somalia, in June. With the number of pirate attacks growing over the past year, several insurers have started offering policies designed to cover the risk. Previously, claims from piarate attacks fell under several different coverages. PHOTO: REUTERS

As pirate attacks against commercial vessels continue near Somalia, shipowners have seen a proliferation of new insurance products designed for the specific challenges presented by this type of piracy.

Traditionally, piracy was covered under hull and war risk policies, but that is changing as marine underwriters encourage owners of ships traveling pirate-infested waters to buy specialty coverages that typically are grouped under a kidnap and ransom policy.

In recent decades, the typical attack involved pirates boarding a ship, stealing cash and valuables, and fleeing. But in 2007, gangs of Somali pirates began hijacking commercial ships, holding the vessel and crew hostage—often for months—before releasing them for a ransom often in the seven-figure range.

Since then, pirates have expanded their reach from the Gulf of Aden, a choke point near the Suez Canal, to an estimated 1 million-square-mile area of the Indian Ocean.

In the first half of 2009, pirates near Somalia attacked 130 ships compared with 24 in the first half of 2008, according to the International Maritime Bureau's Piracy Reporting Center.

This type of piracy presents a challenge for marine underwriters and policyholders because, in most cases, the vessel, crew and cargo are returned relatively unharmed after a hijacking. Shipowners' major expense in such cases is not the damage or the lost property, but rather the ransom.

Only a small minority of shipowners carry kidnap and ransom insurance and experts say it is unclear what other insurance may cover ransom payment. To date, shipowners without K&R cover have sought reimbursement for ransom expenses through voluntary agreements among various insurers to contribute a share, observers say.

But there are signs those voluntary agreements are becoming more contentious. In June, London-based shipowner Navalmar (U.K.) Ltd. took a Chinese cargo shipper to arbitration for its refusal to contribute to ransom reimbursement for the April hijacking of the MV Malaspina Castle (BI, July 27).

“The difficulty is the uncertainty,” said Mark Cracknell, London-based chief executive officer of Aon Marine in the U.K. “You have to wait a long time for the (reimbursement) process to roll out....Some shipowners are concerned about...whether they get reimbursed if they have to pay ransom and what they would do if (a hijacking) actually happened.”

Brokers and other observers say more marine underwriters are encouraging shipowners to buy separate K&R cover to provide clear-cut coverage for hijackings, ransom and related costs. In some cases, they are offering premium discounts.

K&R policies are not new, but historically they were designed for land-based kidnappings. Brokers and underwriters began offering marine K&R cover in late 2007 and early 2008, and this year added endorsements and provisions to cover various costs beyond the ransom payment.

K&R policies typically cover all expenses related to negotiating and delivering a ransom, which can be considerable. Often the money itself must be insured in case it is lost or stolen in transit; in the case of pirates off the coast of Somalia, the ransom often must be dropped from a helicopter or plane onto the hijacked ship.

Most K&R policies also pay for medical attention and psychological counseling for victims after the hijacking. The Malaspina Castle paid $1.8 million in ransom and incurred an additional $1.8 million in related costs, according to court records.

Some K&R policies, including one offered by broker Willis Group Holdings Ltd., also pay for the cost of refueling or making an unexpected port call after release. The K&R policy offered by Warren, N.J.-based Chubb Group of Insurance Cos. covers interest on loans taken out to pay a ransom.

But brokers and underwriters say one of the most important elements of K&R cover is that it provides an experienced security consultant to shepherd the shipowner through the process of negotiating and paying the ransom. Many K&R products come with the services of a particular security contractor. Hamilton, Bermuda-based Hiscox Ltd. works with London-based Control Risks Group Ltd. Chubb works with Miami-based Ackerman Group L.L.C., although its policyholders can choose a different firm if they desire. Willis' Special Contingency Risks division has partnered with London-based Maritime & Underwater Security Consultants.

Doug Milne, London-based CEO of Willis' Special Contingency Risks practice, said the vast majority of clients ask the broker for help only a day or two before a voyage through pirate-infested waters. On that short notice, he said the security consultant helps plan a ship's route based on recent data of pirate attacks and sightings, provides security information, tracks the vessel and communicates regularly with the captain in transit. In addition to deterring or avoiding attacks, he said the program can help avoid liability lawsuits by crew members who felt the shipowner did not do enough to prepare.

“If you've identified the risk and are doing something about it, that helps your defense,” Mr. Milne said.

In May, Daytona Beach, Fla.-based Brown & Brown Inc. began offering a general liability “wrap” policy covering armed security officers aboard ships as well as any liability for the shipowner that hires them. Katey Noonan, Brown & Brown's Seattle-based marine division manager, said she believes the product, written by a Lloyd's of London syndicate she declined to name, is the first liability policy that covers security consultants with firearms on ships. Most shipowners, trade groups and insurers dislike the idea of putting arms on ships, because they could endanger crew or cargo, escalate the violence with pirates, and create legal and other problems. But some shipowners reportedly have employed armed security guards on their ships, and Ms. Noonan said the persistent hijackings and the prospect of general liability coverage may change some shipowners' minds.

“We called nine security firms; they all wanted applications,” Ms. Noonan said. “They've got a lot of requests from (shipping) carriers. We think it's really going to step up. Especially as governments get tired of stepping in (to combat piracy).”

Other insurance that has become available during the past year is loss-of-hire cover for hijackings. Loss-of-hire insurance has long been available but previously excluded hijackings, said Gregory Bangs, Warren, N.J.-based vp and worldwide product manager for crime and K&R insurance at Chubb.

Chubb plans to launch a Loss of Hire endorsement in September, he said. For an additional premium, a shipowner can add a loss-of-hire endorsement to its K&R policy. If a ship is hijacked, the insurance pays the shipowner a daily limit—for example, $10,000 a day—for a specified number of days as compensation for the charter revenue lost while the ship is detained and inactive. The Malaspina lost $605,000 in charter revenue—$11,000 a day for 55 days—according to court records.

Similarly, broker Aon Risk Services Inc.'s suite of piracy products includes coverage for costs associated with a cargo delivery delayed by a hijacking. A delay-of-delivery policy covers a shipowner if the cargo recipient says that it lost money in the delay. A loss-of-market policy covers cargo owners if the value of the cargo drops while detained by pirates.

The Saudi oil tanker MV Sirius Star was hijacked Nov. 17, 2008, and released Jan. 9. In that time, the value of the 2 million barrels of crude oil it was carrying dropped from $109.9 million to $81.66 million, according to figures from the New York Mercantile Exchange.

Brokers say while interest in K&R policies is increasing, only a small portion of shipowners buy the coverage.

“It's another cost for (shipowners) when they can do without it,” Mr. Cracknell said.

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