Back in 2007, the ransoms demanded by pirates were generally still under the US$ 1 million mark. The sums which were ultimately paid amounted to several tens of thousands of US dollars. In 2008, the initial demands rose to well above US$ 1 million. And the sums actually paid out were correspondingly higher.
Press reports indicate that the sum total of all ransom payments made in 2008 came to some US$ 80 million. On top of this, the costs associated with negotiations and ransom hand-overs alone reached an estimated US$ 40 to 50 million.
Which insurance product covers ransom payments?
Until recently, when a ship was hijacked, it was seen as entirely the owner’s problem. The owners are the ones who must deal with the matter either alone or with the support of their marine insurers. In the course of 2008, there was an increasing tendency for owners to allocate the costs of ransom payments to their hull and cargo insurers according to the principles of a general average. Hull and cargo insurers are arguing that P&I insurers should be obliged to cover a share in the losses, too, particularly in the light of the situation off the Somalian coast. For the pirates in this region are specifically targeting the crew for ransom and are less interested in the ships and their cargos. As the welfare of crews was the main issue at stake here, according to the case put by hull and cargo insurers, P&I insurers should participate in the payments unless there were other express reasons for excluding them.
Is piracy a standard hull risk or a hull war risk?
At present, piracy is either covered by a standard hull cover or by a hull war cover, depending on the market involved. Prompted by continuing incidents in 2008 and the first quarter of 2009, underwriters in the London market have been increasingly insisted that piracy risks be excluded from hull insurance contracts and transferred to hull war policies. Up to 1982, piracy was classed as a hull war risk within the English insurance conditions. When the “Institute Time Clauses Hulls 1982” were drawn up, piracy was included as a standard hull risks. Already in 2005, the committee responsible introduced optional clauses stipulating the exclusion of piracy from hull policies and their inclusion in the correpsonding hull war policies. Only after the situation escalated in 2008 this option was used more widely. The systematics of the hull war policy permits underwriters to exclude certain regions with an increased risk profile from standard cover or to charge additional risk premiums per individual trip for these regions. Since the middle of 2008, the Gulf of Aden has designated as such an “area of enhanced risk”. Munich Re supportis this change as an effective measure for risk control which permits underwriters to charge risk adequate rates from those transiting these areas.
New cover concepts
New: The special piracy termination clause in cargo insurance
In response to soaring ransoms and the associated general average claims, the Joint Cargo Committee drew up an optional clause allowing underwriters to exclude the risk of piracy from a floating cargo policy at seven-day’s notice. The clause provides for a subsequent reinclusion for a renegotiated premium, subject to special conditions and exclusions. Up until now, underwriters have not made much use of this option. This may be due to the fact that – despite the dramatic rise in the number of pirate attacks off Somalia – only a fraction of the worldwide cargo shipments is actually affected. Added to that, the administration involved in handling the clause is cumbersome in connection with the omnipresent marine cargo open policy, which is adjusted on an annual turnover basis.
New LOP cover concepts
In addition to the established forms of cover such as Transmarine Trade Disruption Insurance, several insurers and insurance brokers introduced a series of new LOP products in 2008. These offer shipowners special cover for loss of charter hire or freight income, should the charterer be able to terminate a charter party due the hijacking of the chartered vessel. They also protect charterers who are not entitled to terminate the charter party and must continue to pay charter hire, even though they cannot generate income or transport cargo with the ship.
The problem of piracy can only be solved “on dry land”
Almost all experts and governments agree that the problem of piracy off the coast of Somalia and in the Gulf of Aden can only be solved by political means. Initial efforts are under way to identify long-term solutions. This includes, for example, the declaration of intent of the international community of states to give Somalia over US$ 200 million in aid or to form a UN contact group on piracy. The “Djibouti Agreement” was concluded just recently. It aims to help Somalia out of its crisis through dedicated long-term strategies.
Even if the success of the measures adopted so far is only limited, these are still the right steps towards solving the problem. The local military presence ultimately only offers an expensive remedy for the symptoms. We therefore call upon the community of states to take decisive action against piracy – in order to increase the safety for mariners and the shipping trade and to sustainably protect trade on the oceans of the world. As reinsurers, we feel it is our responsibility to raise greater awareness of the current situation – on all levels. We will therefore continue to monitor this complex issue and aim to achieve safe and peaceful maritime navigation.
