As hijackings by Somali pirates persist, new insurers have begun offering kidnap and ransom insurance, observers say.

But the increase in market capacity during the past year has not yet resulted in a significant softening in the price of K&R coverage, the observers say.

Before the start of the southwest monsoon season in June, pirates near Somalia had hijacked 20 ships and attacked 54 other ships in 2010, according to figures from the International Maritime Bureau's Piracy Reporting Centre in Kuala Lumpur, Malaysia. After monsoon season ends in September, observers expect attacks to increase. Pirates near Somalia use small skiffs that are difficult to operate in inclement weather.

The nature of K&R coverage, which includes a clause voiding the coverage if it's disclosed, makes obtaining specific information on K&R insurers and policies difficult.

As Somali piracy has remained intractable, the market for marine K&R insurance—previously a niche field—has seen new market entrants. Two years ago, there were only two or three specialist markets at Lloyd's of London that offered K&R to ship owners and maybe two or three outside of Lloyd's, said David Partner, a London-based broker at Miller Insurance Services Ltd.

“We've probably seen four, five new entrants over the past year and a half into this area of business,” Mr. Partner said.

Guillaume Bonnissent, a special risks underwriter at Hiscox Ltd. in London, said that three or four new players have entered the K&R market during the past year or two. He and other observers said many of the new market entrants are smaller players.

In some cases, marine insurers have begun to offer K&R cover in addition to the traditional hull and war risk coverages, observers said.

“If (insurers) have major clients that are already working with them on the hull and war (risk) side, perhaps their clients may want the continuity of having K&R insurance through the same company,” Mr. Partner said.

But despite the increase in capacity, observers said pricing has remained about the same.

One reason is that the frequency and severity of losses has increased during the same time period. Two years ago, most observers put the average ransom payment at about $2.3 million. One observer said that figure is up to $4.3 million.

“If it were five years ago and there were five new entrants into this market, it definitely would have diluted the pricing,” Mr. Partner said. “But the limit of ransom demand is on the increase.”

Thomas Brown, managing director of Seacurus Ltd., a dedicated marine K&R broker, said the largest, most experienced underwriters have doubled rates in the past year in response to some significant losses.

“I think it was a move by some of the large players to try to harden the overall market,” Mr. Brown said.

Mr. Brown said he thinks it will not be clear until the fourth quarter of 2010 whether newer players will follow suit with higher prices. But he said he doubts it.

“I tend to think underwriters are now better educated (and) most market underwriters are less likely to quote on high-risk inquiries where it's obvious that there is no real risk management going on onboard,” he said. “Whereas before, nearly all risks presented to the market could find a home, that's not true today.”

Mr. Bonnissent said Hiscox can write up to $50 million in limits. Hiscox writes 65% to 70% of the K&R market worldwide, he said.

Mr. Bonnissent and other observers declined to discuss prices, citing the extremely sensitive nature of such policies. In the past, observers have said that K&R coverage can cost about $30,000 for a single voyage through the Gulf of Aden near Somalia, for example.

Observers also said K&R underwriters largely no longer subrogate against other insurers.

When a ship is hijacked, the ship owner pays the ransom and seeks reimbursement, often through a process called “general average.” Under general average, the hull, cargo and other interests involved in a ship's voyage contribute their proportionate share to expenses incurred to save the ship. Brokers say K&R insurance, which provides immediate indemnification, was meant to replace the general average process, which is uncertain and often takes a long time to complete.

But in the past, K&R underwriters often subrogated against the hull, cargo and war risk insurers, after they indemnified the ship owner. Ship owners disliked this practice because it meant the ransom payment counted on their loss record, which could increase hull and war risk premiums significantly.

“It was felt by the customer who was purchasing the policy that there wasn't much point in buying (K&R) if it was still going back to general average,” Mr. Partner said. “They might be getting their money quicker through the K&R policy claim payment, but it was still affecting the other insurances they were buying.”

Brokers say they and ship owners have convinced K&R insurers to largely discontinue that practice. But Mr. Brown said two markets now seek to retain subrogation rights against cargo interests.