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Marine Piracy: An increase in insurance premiums

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Alexia Protopapa

Alexia Protopapa

We devote a great number of articles, news, views, reports and analysis on Piracy and Terrorism from all over the globe. We also support the new generation in our industry to also have their say. Here on the crucial issue on Marine Piracy and on the increase in insurance premiums,  
Alexia Protopapa* writes: 

The reappearance of sea piracy in the 21st century has caused great concern and reaction in the international community. Since 2005 and within a few years the pirate phenomenon has flourished into an organized criminal activity of a large scale.

It is now a serious international threat characterized by the expanding and violent action of pirate groups that use more advanced weapons, flexible operational tactics and effective methods. This is a real problem afflicting the world economy and trade, shipping, regional security and stability. Most importantly, piracy poses a constant threat to the lives and safety of thousands of seafarers sailing daily on high-risk sea areas off the coast of Somalia and in the Gulf of Aden. The increasing geographical spread of the piracy threat hinders the mission of naval forces that have been allocated by Member States of the international community to prevent and face pirate threat.

The cost of piracy is tremendously high resulting in a rise of shipping costs and shipping insurance premiums. Those affected directly are mainly the ship-owners, marine insurers and charterers. Shipping companies not only have to bear the cost of the loss of cargo and functional objects, equipment of the ship and mainly money but any delays that result from the attack cost greatly to the ship-owner since they have to pay compensation for not arriving at the agreed time.

At the same time insurers have to charge additional premiums when ships they insure are sailing to high-risk areas. Moreover, if the ship falls victim from an act of piracy or is totally stolen by armed pirates, the perspective insurance amounts that will be paid by the ship-owner will be increased excessively due to exorbitant amounts that the insurers have to pay for compensation.

Charterers as well, are greatly affected financially by piracy. The target of pirates is mainly the goods that are transported, thus the charterer must cover any losses and charged with any liabilities that are established in contacts.

Consequently, It should be stressed that the ship’s insurance is essential. The marine insurance policy is divided into four categories:

  • War risk: it is a type of insurance that covers losses presented due to a military attack, including invasion, insurrection, mutiny and piracy. Some types of insurance cover additional cases of mass disasters. It consists of two main parts: a) War Risk Liability, which covers people and objects inside the ship and it is mainly for compensation and b) War Risk Hull, mainly covering the vessel and is based onits actual value: premiums are calculated according to the value of the ship and the route that each ship follows, including the high-risk areas where premiums will be higher.
  • Kidnap & Ransom (K & R): In general, the insurance covers the ransom demanded for crew but not for the ship or the cargo in high-risk areas such as Somalia, Venezuela, Nigeria, Mexico. Basically, it covers the risk of kidnapping, illegal detention and extortion. It is a compensation policy – it returns the actual amount of loses to the policyholder. The policyholder has to pay the ransom first and then seek compensation from the insurer. Mainly it covers the cost for ransom and some additional costs, such as medical coverage or potential loss of ransom in transit. It also covers other cases such as injury or death of any member of the crew.
  • Cargo: The safety of the cargo carried by a ship. It covers the value of the cargo in the event of a loss.
  • Hull Insurance: It is the safety for the ship against physical damage for the vessel’s construction and for its engineering parts.

All vessels should be insured under the above types of insurance and in the case of a vessel crossing Aden it is essential that it should be insured by kidnap & ransom and war risk insurance. However, some ship-owners do not buy marine kidnap and ransom insurance coverage because they consider it an unnecessary expense due to the fact that there is an increase in insurance premiums for kidnap and ransom. It is essential though that ship-owners are covered by this type of insurance because the pirate threat is continually increasing.

*Alexia Protopapa, Msc Insurance and Risk Management Cass, Intern at Maran Gas Maritime Inc.

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