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Piracy spawns booming insurance sector

November 23, 2010

A finance industry publication called Out of the Storm News published an illuminating interview on Nov. 8 with executive Greg Bangs about the growing market for piracy insurance.  Rather than get slowed down, shipping companies would rather pay ransoms as quickly as possible to their crews’ Muslim captors, necessitating a typical insurance policy of $3-5 million in coverage.

Naturally it’s a good market for insurers.  But it’s even better for the pirates.  In its entirety:

Pirates and Piracy Insurance

By Lena Goodwin

The majority of pirates come from Somalia, which has not had a functional government in more than 15 years.  At current, pirates in this region are holding 19 ships with 428 hostages.

The primary industry at target appears to be oil tankers — however it is not the oil the pirates are after, but something more valuable, the people.  The loot these days is in the ransom.

If there is a delay in shipment, companies lose money, so the reality is that most companies choose to pay the asked ransoms.

And as a result, piracy insurance was born.

We recently captured an interview with Greg Bangs, Worldwide Product Manager for Crime and Kidnap and Ransom Insurance, at the Chubb Group of Insurance Companies, regarding his thoughts on pirates, insurance and the current trends in this market.

OOTS:    Do you feel piracy is on the rise? If so, why?

GB:        Piracy is definitely on the rise and is a huge problem in Somalia. As of nine months 2009 there were 34 hijackings, compared to 35 hijackings for the same period this year.  Although this is a seemingly slight rise in hijackings, the organization of the attacks is better both in development and execution. The region suffers from two distinct monsoon seasons which hampers the pirates’ efforts during the summer and the winter periods. But, as soon as the monsoon seasons pass, the attacks increase.  We are also seeing the attacks increase in Nigeria and Indonesia.  The pirates are getting more aggressive; they are boarding vessels, assaulting crew members and stealing from the ship itself.

OOTS:    What are the main items stolen, the most valuable loot, as it were, and why?

GB:        The most valuable “item” is clearly the crew. The vessel and the cargo are important, but the pirates’ primary reason for hijacking the ship are the people on board and the hefty ransom they hope these individuals will bring.

OOTS:    What kinds of pirate insurance is available?

GB:            Historically, this type of risk was covered in a traditional marine hull insurance policy, and eventually customers began to look to their war risk insurance policy as another means to help cover this risk.  But, there were gaps in insurance protection since these policies really weren’t created to handle this type of risk.  A few years ago, insurance companies began developing kidnap and ransom insurance to specifically address the risk of piracy and hijackings. So this is a new and rapidly developing insurance market.

OOTS:    What do the policies cover?

GB:            The policy helps cover the expenses associated with a kidnapping and ransom associated with a pirate attack.  The average ransom demand is about $4 million dollars, an amount that has more than doubled in the last three years.  Kidnap and ransom insurance for piracy risks helps provide reimbursement for: ransom and extortion demands; loss of charter income for ship owners and charterers due to a pirate attack; fees for hiring a hostage/ransom negotiator; lawsuits stemming from a covered event; expenses associated with medical and psychiatric treatment; interest costs on loans taken out to cover ransom demands; and more.

OOTS:    Are the policies expensive?

GB:            Considering the alternative, the policies are very affordable.  A standard policy offers $3 to $5 million dollars in coverage, or limits as it’s called in the insurance industry.  Without kidnap and ransom insurance protection, the only other option for many of these ship owners is to take a longer route which would inevitably drive up their operating costs substantially.  And there still is no guarantee that the pirates will not move to attack the new route.  Kidnap and ransom insurance allows the crews to be rescued quickly and efficiently.

OOTS:    What’s happening with the rates?

GB:            The industry rates for this insurance protection are increasing because the ransom demands are going up and there is a significant increase in pirate activity.   There are new insurers moving into the market to meet the demand for this coverage.  Currently, London is becoming a more of a player in this insurance market.

OOTS:    Is piracy becoming more organized like the mafia, or still comprised of rogue factions.

GB:            The Somali pirates are more organized and effective; they are like an army.  This is a country that has not had a functioning government since 1991.  The country is ruled by warlords.  Since the warlords have finished the majority of their infighting, they have an excess of warriors and are now turning to piracy.  The pirates hijack former fishing boats and fit them to act as “mother ships” with attack boats and weapons on board.  This permits the pirates to go further out to sea.  Then  other members of the pirate clan back on land handle the logistics of the ransom demands.  The warlords primarily handle the money sourcing and logistics of the attacks.  The organization is well-established.

OOTS:    Do you believe that there is infighting amongst pirates, and how is that affecting the insurance policies.

GB:            There is some infighting, but the pirates for the most part have reached a  non-aggression pact.

OOTS:    How do you think the market has been affected by the piracy?  Rise of bodyguards, rise of piracy rates?

GB:            More and more ship owners are turning to the use of armed guards to repel the pirates.  And we are seeing that when ships have had armed guards on board, they are often successful at repelling the attacks.  Ship can also avoid hijackings if they are fast enough to outrun the pirates until the Navy ships arrive to help.

OOTS:    Is pirate insurance an entirely private market, or are there any kinds of government pirate insurance?

GB:            So far this insurance coverage is only offered in the private market.  It’s unlikely that governments want to get involved in hostage negotiations, so they are leaving it to the private sector.

OOTS:    Do you think the media has glorified the life of the pirate or are these attacks entirely the result of economic need?

GB:            The media has been very even-handed on this matter. At first it seemed as if the pirates were the victims, a result of mass over fishing off the coast of Somalia, but the media has done a good job of explaining both sides of the story. The real issue is Somalia—there is no government and no laws, and the warlords are running amuck.

The public needs to be aware of this issue since piracy affects everyone from ship owners to consumers. These hijackings put the financial health of ship owners at risk and may ultimately cause the cost of goods to increase.  Eventually it could be consumers who will pay the ransom for pirate hijackings in the form of higher prices for the goods they purchase.

Unfortunately, as pirates learn that their victims are insured, they will increase their ransom demands to match or exceed the amount of their victims’ coverage.

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3 comments

  1. few more years down the road, and I can see monster alerts for Job openings as pirates in international waters.


  2. Before you showed this blog, I had no idea there was such a thing as piracy insurance


  3. wish more people knew this…



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