Shippers sending cargoes across the Atlantic via the Suez Canal would do well to insure their goods against piracy rather than trying to reroute cargo as the latter may turn out to be more costly.
BY: Val Leveson
They are closer than you think. New Zealand exporters need to be concerned about pirates plying the coast of Somalia raiding ships and holding cargo ransom for millions of US dollars.
Kevin Allen, chief executive of Tasman Insurance Consultants, says while Ne
w Zealand exporters may feel far removed from events around the Gulf of Aden, it’s quite likely that their goods go through that waterway en route to markets in Europe.
“A marine insurance policy covers cargo – this is all-risk cover that covers the perils of the sea such as stranding, sinking, burning and pilferage.” He says in conjunction with the standard policy, you can get piracy protection.
“The message is out: it’s advisable to check with insurance advisers if you are sending or receiving cargo that needs to pass through waterways that have a reputation for piracy.”
Allen says other countries in the region, such as Syria, are also growing risks for piracy, as the Somalian pirates prove successful. “Piracy has been around for as long as mankind has embarked on shipping. In the early days shipping used to deal with the perils of the sea by creating shore load – 10 shifts would leave Portsmouth with 10% of cargo on each vessel. If seven managed to arrive at the destination, that would mean 70% of the cargo was saved.
“This was the advent of insurance – it’s about sharing the load. It’s now, of course, a multimillion-dollar business. But insurance companies often share the load as the early shipping companies did. A company may insure a ship, and then reinsure by buying insurance protection off others. This enables them to pay out when big events, such as the huge losses of 9/11, occur.”
2008 Attacks
Allen suggests exporters consider the numbers: 20,000 ships go through the Suez Canal and Gulf of Aden each year.
About 500 pass through a day. Some 400km offshore, pirates wait in their motherships and disperse crews to attack unsuspecting vessels.
In 2008 there were 111 attacks and 42 successful hijackings. It’s looking as if the 2009 figures could reveal a 10-fold increase in activity. “The pirates seem to be increasing their range and even attacking from the coast of Kenya, in the Indian Ocean.”
So, what happens when a ship gets hijacked? The pirates board the vessel and seize it. “It is a highly sophisticated exercise,” Allen says.
The vessel and crew are detained. Negotiations get under way. The insurance company employs sophisticated negotiators for the job. The insurance company finds a way to get the “dirty money” (ransom) parachuted to the pirates, who then leave the vessel and crew unharmed.
“Of course what the pirates want is the cash – the loss of the ship or crew would only enflame the situation.
“Of utmost importance is the safety of the crew. A multi-national task force does have a presence in the Gulf – and they have become more aggressive, meaning the deaths of pirates has become more frequent.”
Tough Area to Police
Somalia is a country where there is no real government and no laws and where warlords take advantage of the anarchy and collapse of the state. Piracy in the region has been a problem since the early 1990s, the beginning of civil war.
Allen says the motives of the pirates are survival and entrepreneurism. “The risks are high, but the rewards are high and life is cheap. These people are prepared to take the risk of financial reward versus death.
“Many pirates disguise themselves as local fisherman. They have access to boats and weapons.” The Gulf of Aden is difficult to police and there’s a fear that if sailors arm themselves, there could be a significant upsurge in violence of attacks and therefore loss of life.
Salvaging The Cargo
It’s cheaper for the insurance company to pay the ransom than to lose the cargo, vessel or crews, says Allen. “In a way the insurance companies are in a no-win situation. They are forced to meet the demands. Kidnap and ransom insurance are not uncommon for shippers to take. Insurers have offered these for decades.”
Allen says that as incidents rise, and therefore risks associated with piracy increase, insurance premiums increase. The rate for protection from piracy has increased 10 times for ships that use that stretch of water. “However, it’s been worked out that avoiding the Gulf of Aden, and going the alternative route around Africa, costs far more in time and fuel than the extra cost of insurance,” he said.
Allen said that at the time of the interview for this article, 17 ships were in the hands of pirates. “The largest is aSaudi-owned oil tanker holding US$110 million in crude oil.”
Ransom payouts have ranged from US$1.5 million for a Danish cargo ship and crew, to more than US$3 million for a Balinese ship with weapons on board and EUR11 million for a French private yacht.
