Piracy insurance rates fall with countermeasures

Pirate attacks remained a major problem for shippers last year, but countermeasures by shipowners and governments in piracy hotspot the Gulf of Aden are limiting the number of successful attacks, experts say.

At the same time, the cost of piracy insurance has fallen due to those loss-prevention efforts as well as greater competition among insurers.

In recent years, specialist kidnap and ransom insurance has emerged as the most effective way to cover the costs of a hijacking, experts say (see related story).

There were 439 recorded incidents of piracy and armed robbery worldwide in 2011 compared with 445 in 2010, according to the International Maritime Bureau Piracy Reporting Center in Kuala Lumpur, Malaysia.

Somali pirates were responsible for 54% of all attacks, it said.

While 10 vessels and 159 hostages were being held by Somali pirates at the end of January, figures for last year show a potentially positive trend is emerging. According to the IMB, while the number of attempted hijackings by Somali pirates increased to 237 in 2011 from 219 in 2010, the number of successful hijackings declined to 28 last year from 49 in 2010.

The reduction in successful hijackings reflects efforts by naval forces to address piracy and the shipping industry's tactics to limit their losses, said Erik Rabjerg Nielsen, head of daily operations for container operations at A.P. Moller-Maersk A/S in Copenhagen.

“At Maersk, we have been monitoring piracy for a long time, but we have drastically stepped up our efforts. Last year, we recruited a dedicated piracy manager and conducted extensive risk analysis,” he said.

Maersk, the world's largest shipper, according to Alphaliner, also has been working with its closest rivals—Geneva-based Mediterranean Shipping Co. S.A. and Marseille, France-based CMA CGM Group—sharing information on piracy, said Mr. Nielsen.

However, it still is too early to tell if the decline in successful pirate attacks will be sustained, said Neil Smith, London-based head of underwriting at Lloyd's Market Assn.

“Statistics suggest that preventive measures have had an effect and that the trend is headed in the right direction, but poor weather conditions may also be behind the improvement, and it is still too early to say if this is a long-term trend,” Mr. Smith said.

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Claims are linked to the monsoon season and the number of vessels held at pirate strongholds, said Andrew Moulton, marine hull and war underwriter at Ascot Underwriting Ltd. in London.

“The use of armed guards on board vessels appears to have been a very effective deterrent. However, pirate demands are escalating as the rate of successful attacks reduces,” Mr. Moulton said.

Fewer hijackings means less available claims data, said Will Miller, London-based divisional director of Special Contingency Risks Ltd., the kidnap and ransom division of Willis Group Holdings P.L.C.

However, the cost of claims typically reflects the type of vessels being hijacked, with tankers and very large container vessels yielding the highest ransoms for pirates. And there have been no such vessels—which are more likely to have armed guards and other preventive measures—successfully hijacked for some time, according to Mr. Miller.

The use of armed guards is among factors helping shipowners benefit from reduced piracy insurance premiums, he said. “Exposure has reduced for shipowners that have invested in preventive measures, and we see premium rates reduce accordingly,” he said.

Reductions are being given for the use of armed guards and for bulk purchases, said Sean Woollerson, London-based partner at JLT Specialty, a unit of Jardine Lloyd Thompson Group P.L.C. “Premiums have also come down as capacity and competition have increased, in particular with the development of K&R insurance for piracy, he said.

Underwriters still consider the speed of a vessel and the height of its freeboard—the distance from the water to the upper deck—but they will look to apply a discount for mitigation measures, such as a robust citadel, which is a fortified hiding place for the ship's crew, or using an experienced armed team, Mr. Miller said.

In some cases, reductions in premiums have been significant, he said. Where a premium in 2008 may have been $25,000 per transit for a fast ship with a high freeboard, today it has declined to $6,500 for the same vessel.

However, the security measures pose a shipowner cost, he said.

Piracy cost shipowners and governments $6.6 billion to $6.9 billion last year, according to the One Earth Future Foundation. Fuel and rerouting cost shipowners $3.4 billion; security equipment and armed guards, $1.1 billion; and insurance, $635 million, the Broomfield, Colo.-based OBP said.

Maersk alone spent $200 million to battle piracy last year, which includes insurance and risk mitigation efforts—double its 2010 spending, Mr. Nielsen said.

While no vessel with armed guards aboard has been successfully hijacked, this means the risk has increased for vessels not using armed guards. “Pirates tend to look for the weakest and least protected vessels,” Mr. Miller said.

Regarding a standard contract that shipowners could use to contract with maritime security firms, the Baltic and International Maritime Council is working on GUARDCON, a standard contract developed with the involvement of insurers and protection and indemnity clubs. The contract is to be published in March, said a spokesman for the international association.

Insurers will welcome GUARDCON as it should make it easier for underwriters to get more information from shipowners on the use of armed guards, Mr. Smith said.