The shipping industry and its customers are suffering ever rising costs because of piracy. Michael King discovers that insurance hikes are becoming an additional burden. The human and business costs of piracy are well documented. One Earth Future, for example, estimates that the global economy pays a toll of some $7–12bn per annum because of piracy.
Over the past five years the number of global pirate attacks on vessels has doubled, reaching 445 in 2010. Of recorded attacks last year some 50% led to boarding of the vessel by pirates, although it is believed that almost half of hijacking attempts are not reported.
The large majority of piracy incidents are now linked to Somalia and the range of attacks originating from there has been extending — from the Gulf of Aden into the Arabian Sea, and onto the Red Sea and Indian Ocean.
The situation seems set to deteriorate further with attacks forecast to reach a new record this year. A total of 142 pirate assaults were reported worldwide in the first quarter of this year, 97 of which were linked to Somalia, according to the International Maritime Bureau’s (IMB) global piracy report. In the first three months of 2010, Somalia-linked attacks totalled just 35.
Globally, during the first three months of this year pirates murdered seven crew members and injured 34. Eighteen vessels were hijacked and 344 crew members taken hostage, while a further 45 vessels were boarded and 45 fired upon.
Of the 18 ships hijacked worldwide in the first three months of the year, 15 were captured off the east coast of Somalia, in
and around the Arabian Sea and one in the Gulf of Aden. “Figures for piracy and armed robbery at sea in the past
three months are higher than we’ve ever recorded in the first quarter of any past year,” said Pottengal Mukundan, director of IMB. “We’re seeing a dramatic increase in the violence and techniques used by pirates in the seas off Somalia.
In early April some 56 foreign vessels and two barges were being held by Somali pirates, along with almost 900 hostages or captives, according to Ecoterra.
The ferocity of attacks has not only increased, but so has the immediate cost. The average ransom paid last year for the return of hijacked vessels was over $5m; five years earlier the average ransom paid was just $150,000.
Apart from the price tag of deploying the world’s navies to patrol the afflicted areas, there are also clear operational costs for owners and operators. The price of protecting a VLCC (very large crude carrier) plying waters at risk areas is reckoned by industry analyst PIRA Energy Group to total over $1m extra per voyage in higher bunkers costs caused by diversion, the deployment of armed guards and other defensive measures. Basic rates for a team of four armed guards can add up to over $5,000 a day and a standard transit might take ten days. Danger money for crew is also now an established and rising cost.
As with any risk, most owners seek to offset a piracy incident by insuring against it. PIRA puts the price of war risk premium hull insurance for a single voyage by a VLCC through threatened sea lanes at around $30,000. While no specific figures are available for bulk carriers, one source said that lower, but still exorbitant, figures would also apply to a Capesize bulk carrier.
And each year the price of insuring against piracy is increasing as the range of trading lanes threatened spreads. Last November the Panama-flagged bulk carrier Renuar was boarded after an attack by pirates manning two skiffs supported by a mother ship. The 70,156dwt vessel, which was en route to Fujairah in the United Arab Emirates from Port Louis in Mauritius, was attacked 1,200 nautical miles from Mogadishu in Somalia, but just 550 nautical miles from the Indian coast.
As reported in DCI earlier this year, the Gulf of Aden was classified as a war risk area by Lloyds Market Association Joint War Committee in May 2008. Since then the cost of war risk premiums has increased from $500 per ship/per voyage to up to $150,000 per ship/per voyage. As pirate mother ships start operations further afield, so premiums are rising there too. Last December underwriters extended the region covered by war risk premiums to include the Indian Ocean, the Arabian Sea, the Gulf of Oman, the Gulf of Aden and the Southern Red Sea.
Indian ship owners, for example, recently said that the war risk insurance premiums they were forced to pay international reinsurers for hull cover had shot up by around 400% for vessels passing through danger zones; zones which are now increasingly close to India’s west coast, a key destination for coal exports from Indonesia, Mozambique and South Africa.
The Indian National Shipowners’ Association also claimed that the war risk premium for vessels plying the Indian Ocean had gone from $500 per ship, per voyage, to $150,000 per ship, per voyage.
Global kidnap and ransom insurance premiums have also been rising — up ten-fold between 2008 and 2009, according to Munich Re.
The total cost of extra insurance related to piracy that the shipping industry is now bearing is not entirely clear — and insurance companies contacted by DCI for this article were less than forthcoming on the issue, not least perhaps because, as one source put it,“it’s quite a lucrative business these days” — but one estimate puts the figure at somewhere between
$2bn and $3bn. While in some categories of piracy-related insurance
competition between providers is driving the cost down, reductions are generally only available for those vessels capable of fast speeds and boasting high freeboards [the distance between the water line and the uppermost full deck]. Bulk carriers tend to have limited speed capacity and low freeboards making them relatively easy to board.
Klaus Nyborg, CEO and executive director of leading Handy operator Pacific Basin Shipping, told DCI that piracy was pushing up the overall cost of insurance for bulkers. “Some operators are diverting which increases bunker costs,” he said. “As pirates expand their range, then these costs and insurance costs also rise.”
Although maritime insurance premiums seem certain to be subject to further hikes in the coming 12 months, exactly how high they will go remains unclear at present.
“Moore Stephens’ latest Future Operating Costs survey predicted that hull and machinery and P&I costs were likely to rise by 2.2% and 2.4% respectively this year,” said Richard Greiner, Moore Stephens Shipping Partner. “Given the continued incidence of piracy, and the spate of natural disasters, it would not be a surprise if these figures were exceeded.”
Ss Teo, President of the Singapore Shipping Association and MD of Pacific International Lines which
will take delivery of ten new bulkers in 2013, told DCI that unless governments and inter-governmental agencies took the problem more seriously, piracy would spread even further, ramping up costs for the shipping industry and its customers.
“There is nothing to stop pirates going beyond the Indian Ocean or for other people from failed states elsewhere in the world replicating the Somalis.”
Mukundan said the overwhelming number of vessels hijacked off Somalia took place east and north east of the Gulf of Aden and the positions of some of the attackers’ mother ships were known.“It is vital that strong action is taken against these mother ships to prevent further hijackings,” he added.
‘Orna’ bulker remains hostage
The clear threat that piracy poses to key bulk trades was illustrated graphically in December by the seizure of the UAE-owned, Panama-flagged, bulk carrier Orna. The 27,915dwt vessel was shipping coal from Durban to Okha in India when it was attacked 400 nautical miles North East of the Seychelles by two skiffs firing small arms and rocket propelled grenades.
The Orna was insured by the Swedish Club, although a report from Ecoterra said Nippon Kaiji Kyokai had withdrawn its safety management certificate and crew were not covered by an International Transport Workers’ Federation agreement. 19 crew were onboard — one Sri Lankan and 18 Syrians.
As of early March, according to IMO Piracy Snapshot, all 19 of the seafarers and the vessel were still being held hostage in Somalia.
A further nine bulk carriers and their crew were also being held captive.