It could be said that piracy gave birth to the property and casualty insurance industry. When ship owners and cargo shippers met at Lloyd’s Coffee House in London in the late 1600s, the talk was about the many perils of the sea, including the large numbers of pirates roaming the oceans.

Then as now, piracy was not strictly a private matter. While some piracy is undertaken simply for financial gain, often it is a politically motivated venture. Sir Francis Drake was a pirate when attacking private Spanish vessels and stealing their cargo,s but was a British hero when he helped defeat the Spanish Armada in 1588. To the Spanish he was always a pirate, but to the British he was always a hero.

Today the pirates of Somalia are also viewed in two ways. The citizens of the region’s coastal areas see the pirates bringing much needed money and goods into their communities because Somalia has a failed government that does very little for the local citizens. The rest of the world views the pirates as ruthless terrorists who are thwarting international trade.

Similar incidents are taking place in Nigeria, where pirates are holding oil tankers and their crews not only for ransom money but also to make a political statement about the government’s removal of valuable oil resources from a very poor region and its failure to return any of that money to people who are suffering.

This is not just an African concern. Bangladesh had serious piracy problems in 2003 and, although the situation has improved, it continues to be a highly monitored area.

Extremely valuable property combined with poverty and unstable political climates leads to piracy, and piracy leads to significant disruption to international trade.

This month we spoke with two experts to provide a bird’s eye view of this topic. Sarah Katz is a kidnap/ransom underwriter for Victor O. Schinnerer & Company, and Captain Darren Collins commands vessels owned by the Maersk Line.

Ms. Katz says, “the number one risk factor is waters plied [sailed], as exposure is significantly higher in the Gulf of Aden [Somalia], portions of the Red Sea and Gulf of Guinea [Nigeria] than in other areas.”
In those areas, not all ships are equally targeted by pirates.

Captain Collins explains, “The two predominant factors that increase a vessel’s likelihood of being attacked by pirates are slow speed and low freeboard [distance between the water line and the deck of the ship]. A slow-moving ship that has 10 feet of freeboard is far more likely to be targeted than a faster moving ship with 60 feet of freeboard. The slow-moving ships with low freeboard are easier to ‘catch,’ and pirates can gain access to the ship more quickly.”

Once a vessel is boarded, there is often very little resistance by the crew. “Ship captains can no longer carry guns on board a vessel to protect themselves from pirates, as once was the custom. Because of the increased level of violence around the world, countries will not allow a ship to enter their port if they know the ship is armed,” according to Captain Collins.

The goods news is that there is coverage for the vessel once captured. “Piracy insurance provides coverage for the kidnap and ransom of crew members and others on board the vessel whether they are held on the vessel or are removed from the vessel and held hostage elsewhere,” according to Ms. Katz.

Coverage features include illegal seizure, kidnap, ransom lost in transit, and legal liability, plus access to and coverage for fees and expenses of a crisis management firm to provide advice and assistance. An important coverage enhancement is called Loss of Hire. Ms. Katz explains, “The cost of a pirate attack also involves the loss of business that would otherwise be generated by the hijacked ship during the average 50 days it is out of hire. A loss of hire extension endorsement covers this loss.”

Pricing has increased over the same period last year because the exposure has increased. Ms. Katz states that “piracy attacks around the world more than doubled during the first six months of this year as compared to the same period in 2008, primarily due to an increase in attacks by Somali pirates. Pricing is dependent on many factors including cargo, freeboard, speed, and security measures in place on a vessel. These are evaluated individually.”

According to Captain Collins, “The act of piracy is committed for different reasons, depending on the part of the world in which the ship is sailing. In Asia and South America, piracy is all about the money. In Nigeria, Somalia and Lagos, piracy is committed to elicit political response from the government. “

He adds that a single event can quickly change the piracy situation. As an example, “Several years ago, piracy in the Malacca Straits was totally wiped out in one day as the result of the massive tsunami in December 2004. Before the tsunami there were four to six attacks a day, but for the next five years there were very few attacks. In the last six months, however, the attacks have resumed. In that area of the world, pirates are extremely violent. They board the ships, rob the sailors and will kill them if they think it is necessary.”

Ms. Katz explains some of the differences between piracy insurance and coverages that are part of the standard hull, cargo, P&I [Protection & Indemnity] and war risk policies. While the standard policies may pick up the costs of ransom, she says, “They do not cover the many ancillary expenses associated with an act of piracy.” Among these are the expense of security consultants to provide crisis communication consulting, to advise on negotiating with pirates, and to liaise among the various government and law enforcement agencies involved in the incident. “Other costs associated with a piracy incident include legal fees for the duties that are owed to cargo owners, liability against lawsuits, public relations, medical and psychiatric care for the crew members and their families, travel costs, costs incurred at port authorities for the vessel appearing at an unscheduled port, fuel used during the incident, and interest on loans raised to cover the incident,” Ms. Katz says. “All of these costs should be covered by piracy insurance.”

Piracy is an extremely serious threat. Captains and sailors may lose their freedom or their lives. Ship owners may lose the use of the vessel for a time or may even lose the entire vessel. Cargo owners may have their goods waylaid for a short time or may have them stolen and sold on the black market. Individual countries and the world economy also suffer because of the increased cost of shipping and the restraint of trade.

As it has from that first meeting at Lloyd’s Coffee House, the insurance industry is ready and willing to help not only with insurance coverage but also with safety services so that marine commerce, though compromised, will be able to continue.