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An insurance industry solution for Somali-based piracy is to become operational soon, offering an insurance-backed guarantee combined with an armed convoy escort service that some argue may raise other risks.
The Convoy Escort Programme Ltd., developed with support of London-based brokerage Jardine Lloyd Thompson Group P.L.C., is in discussions with potential backers.
Once up and running, CEP is to use patrol boats and rigid inflatable boats for an armed escort service for ships navigating the Gulf of Aden.
The insurance-backed guarantee is to be placed with London market insurers including Marketform Managing Agency Ltd. and Ascot Underwriting Ltd., which leads the insurance.
While backers intended to have the service in operation last year, CEP remains in discussions with investors. Once an agreement is reached, the program should launch fairly quickly, said Angus Campbell, chief executive of the Newcastle upon Tyne, England-based company.
Shipowners have expressed interest in the convoy concept, he said. “There has been an increase in the use of armed guards on board vessels, but some shipowners would prefer to keep guns off their ships and are looking for an alternative,” Mr. Campbell said.
“We have used the time wisely and are ready to move forward,” he said. “CEP will register the patrol boats in Cyprus and expect to begin operations by the end of the second quarter 2012.”
While CEP has the support of shipowner body Baltic & International Maritime Council, not everyone in the sector is convinced about the approach.
It is the role of government, not industry, to provide freedom of the seas, said a spokesman for the International Assn. of Independent Tanker Owners. “CEP sounds good in practice, but there are too many uncertainties. It is unclear who certifies them and what authority they have to act in international waters, in terms of opening fire or if they were to capture pirates,” the spokesman said.
The shipping sector needs to look at all the options, but “the logistical issues are troubling,” said Neil Smith, London-based head of underwriting at the Lloyd's Market Assn. “Any private navy will have to be robust if it is to avoid legal issues.”
However, Mr. Campbell disagreed. “We have taken the time to make sure that we what we are doing is legally appropriate,” he said. “We have the same rights as other vessels in international waters to defend ourselves.”
“There has been a misapprehension that we will act as a naval force. Our remit is to escort merchant vessels through dangerous waters, but we are not in the business to arrest pirates,” said Mr. Campbell.
The U.K.-based CEP's offering is unique, said Sean Woollerson, partner with JLT Specialty in London, a unit of Jardine Lloyd Thompson P.L.C. “Shipowners will be provided with an indemnity for damage to vessels caused by piracy and hijacking across the Indian Ocean,” he said. “We will charge a fee based on a vessel's speed, and not its value, and offer convoy protection that will include an insurance guarantee,” he said. The chance of attack is lower as the vessel travels faster, but faster travel uses more fuel and requires more costly ships.
“CEP is not selling insurance, but it will offer a guarantee as part of the service. It is not an insurance contract; rather, it is an insurance-backed guarantee offered by CEP,” said Mr. Woollerson.
Initially, CEP will look to cover 10% of traffic—or 220 vessels—per month rising to 25% of traffic, or 470 vessels, when operating at full capacity.
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.