Shipping lines to face insurance premium hikes

Nov. 21, 2008
Experts say piracy off Somalian coast will lead to higher rates

LONDON_Piracy on the high seas used to be a simple affair: Climb on board, take the valuables, and go.

But now on the volatile waters off east Africa, pirates are carrying rocket launchers, demanding multimillion dollar ransoms and hijacking 1,080-foot (329-meter) oil tankers. So the cost of insurance for ships is rising along with the risk.

Underwriters and brokers said Thursday there's no question that shipping operators will face more expensive premiums as a result of the increased danger in navigating areas such as the Gulf of Aden and along the east coast of Africa.

The weekend hijacking of the oil tanker Sirius Star, the largest ship to be captured by pirates, has focused global attention on a problem area that has troubled people in the shipping industry for years.

"We would have estimated that a ship that size was off limits, but now it appears that no ship is off limits," said Brendan Flood, a marine underwriter at Hiscox, an international specialist insurer with a syndicate at Lloyd's of London. "This one takes it to a new level."

Exactly how much rates will go up is commercially sensitive material in a highly competitive industry, said Neil Smith, the senior manager for underwriting for Lloyd's Market Association.

Still, Flood said Hiscox would be reviewing rate levels "because our perception is that the risk is enhanced."

While insurers will be revising the rates for the high-risk area, he said ships' operators are not going to find themselves in a situation where they can't obtain insurance.

Large ships generally carry three separate types of insurance. Marine - or hull - insurance covers physical risks, like grounding or damage from heavy seas. War risk insurance covers acts of terrorism, and, increasingly, piracy. A third type of policy, protection and indemnity, covers issues with the crew.

The war risk policy includes a clause that requires extra insurance charges for ships that venture into high risk areas like the Gulf of Aden, said Peter Townsend, head of marine hull insurance at London brokers Aon.

"They'd still cover a vessel which visited those parts of the world," Townsend said, "but they'd charge an additional premium."

The Gulf of Aden, which connects the Indian Ocean to the Red Sea and the Suez Canal, is one of the busiest waterways in the world. Over 20,000 vessels pass through it each year.

The Gulf of Aden was flagged as an area of concern by Lloyd's Market Association in May, Smith said. The coast of Somalia had been problematic for several years before that, with ship captains urged to stay at least 200 miles off the coast.

But the Sirius Star was 450 nautical miles off the coast of Kenya, well south of Somalia, when the pirates climbed aboard. The tanker, which is carrying $100 million worth of crude oil, and a Ukrainian ship with a load of battle tanks and weapons are among the 12 ships still in the hands of pirates.

Ship owners can purchase separate kidnap and ransom insurance for their crew, Flood said. And delays to cargo could be covered under a separate insurance policy, Smith said.

Flood said one of the reasons insurers were willing to provide insurance for ships in the Gulf of Aden was that the hijackers have behaved relatively sensibly.

"Everything so far has been unfolding in an orderly fashion," Flood said. "Ransoms have been paid, and hijackers have gone out of their way not to damage ships, not to injure people."

He said his firm isn't yet recommending that ships hire private security, something that has been suggested by U.S. and British officials.

"We remain unconvinced that it makes any difference," Flood said.


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