Last Updated: Tue Nov 02, 2010 19:17 pm (KSA) 16:17 pm (GMT)

Piracy boosts insurance, business costs: report

Crew ransoms and the cost of transferring cash to pirates pose the highest cost for insurers (File)
Crew ransoms and the cost of transferring cash to pirates pose the highest cost for insurers (File)

Pirate raids on shipping off East Africa have already pushed up insurance and business costs and threaten greater harm to trade if the tactics are copied elsewhere, Munich Re said on Friday.

"The Somalis have discovered a more efficient model," said Dieter Berg, head of Marine division at Munich Re, the world's biggest overall reinsurer and marine reinsurer.

"It's easier to make money if you kidnap people. And the danger is that this technique spills over to other countries, which would be a much more serious threat to world trade," he said.

Hot piracy spots

 The costs for kidnap and ransom policies have risen 10-fold over the last year as a result of increased attacks 
Dieter berg, Munich Re


Somali pirates have grabbed headlines for years with spectacular attacks on ships, from supertankers and passenger liners to yachts, but fears of violence have grown after U.S. snipers killed three pirates who had been holding an American ship captain hostage last weekend.

Attention in recent months has focused on three hot spots for pirate attacks - the Gulf of Aden, the East coast of Somalia and the Indian Ocean as far as the Seychelles.

Many shippers have begun buying kidnap and ransom policies -- which cover costs for ransom payments generally up to 3 million pounds ($4.5 million) -- and hiring security firms which may conduct hostage negotiations and arrange ransom payments, Berg said.

According to the U.N. top envoy for Somalia, the pirates have raked in more than $120 million

"The costs for kidnap and ransom policies have risen 10-fold over the last year as a result of increased attacks," he said.

Crew ransoms and the considerable cost of negotiating with and transferring cash to pirates pose the highest cost for insurers, with damage to goods and ships relatively less.

Hijacked ships are frequently stuck for two to three months off the Somali coast while negotiations drag on, ruining cargoes and disrupting ship hiring schedules, further adding to costs.

Taking alternative routes

Anti-piracy patrol

Some companies already choose to travel around the Cape of Good Hope in South Africa, rather than risk the Gulf of Aden, which adds nearly two weeks to their travel time, fuel, charter and crew costs.

Estimates for the broader economic damage of piracy range from $3-16 billion per year, but the frequency of incidents is on the rise, with 74 attacks off the coast of Somalia so far this year compared with 107 in the whole of 2008.

Loss claims linked to piracy have been limited so far for reinsurers like Munich Re or Swiss Re, which help their insurance company clients shoulder risks, but the sinking of a container ship or tanker could trigger an environmental disaster and prompt claims in the hundreds of millions of dollars.

Pirates using "mother ships," from which speedboat attacks can be launched, are extending the range of activity well into the Indian Ocean from Somalia.

"This creates new dangers for example for ships heading around the Cape of Good Hope," Berg said.

Learning from Somali pirates

 As long as there is no functioning government in Somalia, we won't be able to stop the piracy 
Dieter Berg

Other pirates may learn from the Somalis, Berg said, noting that 40 attacks had been registered off the coast of Nigeria this year, with the actual number probably closer to 100-150.

Pirates have also become increasingly innovative, attacking a freighter with 5-10 small boats simultaneously or using feints to distract military escort ships, Berg said.

Security experts say that multi-million-dollar super yachts could be the next high-profile targets.

Navy ships from 20 countries have taken up positions to fend off the Somali pirates, whose expansion into the Indian Ocean leaves the military patrolling an area as big as western Europe.

Navy ships typically have a window of only 15 minutes to stop a pirate attack and there has been no international agreement on what to do with any pirates who do get caught.

"The piracy problem has to be solved on land. As long as there is no functioning government in Somalia, we won't be able to stop the piracy," Berg said.

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