Wednesday, June 24, 2009

Somali Pirate Attacks Boost Shipping Insurance Rates 20-Fold

The cost of piracy insurance has increased as much as 20-fold after attacks on shipping off the Horn of Africa doubled in the first quarter, insurance broker Marsh & McLennan Cos said.

Attacks on large commercial vessels such as the Sirius Star, a Saudi oil supertanker that was released in January, almost two months after it was hijacked with a cargo of 2 million barrels of oil, have spurred premiums and demand for coverage.

Piracy “is a pretty challenging piece of risk to underwrite,” Markus Baker, head of marine insurance at Marsh & McLennan in London, said in a telephone interview. “These pirates are attacking up to 700 miles off shore.”

The European Union extended its anti-piracy mission off the coast of Somalia by a year last week, warning of a “serious threat” to ships in the sea corridor that handles a tenth of the world’s trade. Armed gangs have seized at least 29 merchant ships this year and carried out 114 attacks, more than in all of 2008, according to the North Atlantic Treaty Organization.

“We had ships that were quoted at 0.05 percent on their value for a trip through the Gulf of Aden in the middle of last year, and we have had other ships recently quoted at 0.1 percent for the same trip,” Baker said.

Insurance prices depend on the type of ship, as the faster ships with the bigger freeboard are more challenging to get on, Baker said. “Anything over 14 or 15 knots tends to be fast as far as the pirates are concerned,” he said. Underwriting is agreed case by case, he said.

Baloise Holding AG, Switzerland’s third-largest insurer, has seen increased demand from Swiss clients for piracy coverage after attacks raised awareness of the risks.

More Discussion

“Though we cannot speak of a revolution in the insurance market yet, there is much more discussion between insurers and shipping companies,” Reto Frei, head of marine cargo insurance at Baloise, said in a telephone interview from Basel on June 12.

Pirate attacks off Somalia almost doubled to 102 in the first quarter from 53 a year earlier, according to a study published June 22 by the corporate and specialty insurance unit of Allianz SE. Owners of tankers and container ships pay as much as $40,000 per passage for security guards on vessels, Arild Nodland, chief executive officer of Bergen Risk Solutions, in Bergen, Norway, said earlier this month.

There is a trend toward higher costs for protection of shipping, Frei said. Modern piracy “is all about pirates demanding ransom and not much happens to the crew or the cargo,” Frei said. “The time of pirates who attacked ships to steal goods or even pretty women is over.”

Oil and Wheat

The volume of oil and wheat shipped globally means “these are commodities that are at risk of pirate attacks, also because they are transported on smaller ships that travel slower and have smaller railings,” said Frei. Delays in delivering commodities can incur penalties for shippers as changes in market prices can affect profitability for clients.

There is a higher concentration of piracy off the Somali coast, but there are also problems in Nigeria, where there were 40 attacks in 2008, and in Indonesia, said Frei. Still, the attacks need to be seen in the context of the 15,000 vessels that cross the Suez Canal alone each year, he said.

Nigeria may become a larger piracy hotspot, Allianz, Europe’s largest insurer by market value, said in its report. Attacks have declined in other areas such as Southeast Asia, often after a concentrated international response, the German insurer said.

To contact the reporter on this story: Carolyn Bandel in Zurich at cbandel@bloomberg.net

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