– Piracy:who pays the bill? By Iro Theophanides –
Global shipping performs some 80% of the world’s trade, with 93, 000 merchant vessels, 1.25m seafarers, and roughly 7bn tons of cargo. Since the Second World War, the volume of sea trade has doubled every 10 years. However, from the beginning of the 21st century, the world is bearing witness to the rise of one of the oldest crimes in the book, piracy.
Maritime piracy affects the transport chain in several ways, but mostly, imposes a steady increase in costs. The direct financial costs, such as piracy insurance premiums, shipping delays, ransoms, re-routing, deterrence plus security equipment, and humanitarian responsibility, are all borne by the ship owners.
The most serious risk for ships passing through the Gulf of Aden is delay caused by piracy, crew kidnapping or re-routing. Thus owners and charterers face loss of revenue and further increase in charter costs. Not meeting the delivery dates can be detrimental to cargo owners as they see a decline in the value of their cargo or even cancellation of contracts. Ships travelling through high risk waters and carrying oil may have their cargo value tied to fluctuating prices in the commodities markets.
In an attempt to avoid contract frustration and losing out on charter revenues, ship owners and cargo owners have been taking out, according to the major insurance broking house Aon, a policy designed in 2008 to cover the “financial impact of business interruption or loss of earnings”. Aon says that coverage begins from the first day of an attack with no deductible and is contained in a standalone policy to complement existing hull, war, cargo and P&I policies.
The big question, however, is uncertainty over who is to pay the bill: is it in the insurer or the insured? Who meets the cost, when the pirates seize a ship’s cargo, and then it is released, but because of piracy-related delay, the cargo cannot be sold or faces dramatic loss in its value. Should the insurer pay and try to subrogate to recoup the money after the cargo is released?
There is no answer yet to this matter because risks at sea come with no end. Thus, in the light of the importance of meeting delivery dates by ships sailing through the Gulf of Aden, whoever faces the risk of their vessel being seized is advised to seek specific coverage for delay damages before they begin their voyage.
Insurance premiums for ships traveling through the Gulf rose in 2011 to between 0.05% and 0.175% of the value of their cargo, from between 0% and 0.05% in May 2008 according to a report cited by Risk Management, the magazine of the Risk & Insurance Management Society. This is an increase of 350% since 2008. It must be noted that kidnap and ransom insurance policies have risen 1, 000% during the same period.
Rerouting may be an option for lower value cargoes, and for example routing a vessel from Saudi Arabia to the United States via the Cape of Good Hope will add nearly 2, 700 miles to the voyage. This option increases the annual operating cost, by reducing the delivery capacity of the ship from six round trip voyages to five. Plus, the additional fuel cost is approximately US$3.5m a year.
For vessels known as ‘low and slow’, avoiding the risk zones may be safer and cheaper but a total excess cost of re-routing is estimated to be between US$2.4bn and US$3bn annually.
The level of ransom has increased from an average of US$ 150, 000 in 2005 to US$ 5.4m in 2010. In 2010 alone, nearly US$ 238m was paid in ransoms to Somali pirates. The total cost of the ransom process is estimated to be double the amount handed over to pirates, because the cost of negotiations, psychological trauma counselling, repairing the damage to the ship while held and the ransom delivery mechanism all add up.
The shipping industry is trying to protect itself as much as it can against piracy attacks by purchasing and fitting security equipment on their vessels. One leading operator, Wallem Shipmanagement in Hong Kong, which manages nearly 350 vessels, installs physical barriers such as razor wire or concave drums around the periphery to prevent pirates from climbing on board.
In the meantime, the worsening situation has pushed authorities and ship owners to change their position on the use of armed guards on board. The International Transport Workers’ Federation (ITF) is now sanctioning the use of guards, as are insurance companies, subject to agreement involving the flag state, and subject to a reputable consultancy being chosen. Hugh Martin, director of Fox Delta, a London-based risk management company that specialises in waterborne security, says, “No ship that has security guards on board has been hijacked in the last three years. So the view between all stakeholders is becoming more united.”
But deterrent measures are far from uniform and companies have to adopt different levels of security in order to protect their ships, cargoes and crew. The industry has many governing bodies; the vessel’s security policy is determined by the flag state, and the protection of the crews is a matter for the national seafarer’s organisations.
The overall cost of piracy is extremely hard to calculate… Analyses by expert bodies including the Rand Institute, and the International Maritime Bureau put the cost in a wide range between US$ 1bn US$16bn a year.