The price of piracy

Piracy in the waters off the coast of the failed East African state – particularly in the critical Gulf of Aden which connects the Red Sea to the Indian Ocean – set a record of 120 attacks in 2008.

Attacks in 2009 are on course to top those records.

The dramatic increase in activity by Somali pirates has led to almost double the number of attacks during the year's first quarter compared with the same period in 2008, according to a report issued by the International Chamber of Commerce's International Maritime Bureau (IMB).

A total of 102 incidents were reported to the IMB Piracy Reporting Centre (PRC) in the first three months of 2009 compared to 53 incidents in the first quarter of 2008. The quarterly report also said attacks increased by almost 20 percent over the last quarter of 2008.

The increase in the first three months of 2009 is due almost entirely to increased Somali pirate activity in the Gulf of Aden and off the east coast of Somalia. The two areas accounted for 61 of the 102 attacks during the first quarter compared to six incidents in the same period in 2008.

The Gulf of Aden, a body of water the size of Texas, is one of the world's busiest trade lanes, funneling Saudi oil, Chinese computers and Japanese cars from Asia and the Middle East to the European Union. Because of its importance as one of the main east to west waterways, the Gulf has become the main hunting ground for the modern-day buccaneers.

As the number of attacks increases – and the pirates become more daring, hijacking larger and more valuable vessels – so have the rates of shipping insurance.

Insurance companies have increased surcharges for sending a cargo shipment through the Gulf of Aden to about $9,000 (6,429 euros) from $900 (643 euros) a year ago.

Given the increased threat, shipping insurance firms, mostly based in London, have been charging hefty premiums to go through the Gulf of Aden and Suez since last spring. Big oil and chemical tankers, several soccer fields long, are especially vulnerable. They must pay tens of thousands of dollars a day in extra "war zone" insurance to cross the Gulf.

War zone insurance policy adds hefty surcharges

Until recently, shippers have been unable to buy insurance policies to guard against the loss of ships, cargo or crews to pirates. But now companies have begun offering such policies.

"Shipping insurance comes in three parts: you insure the cargo, you insure the ship itself which is called hull insurance and you insure the ship against liability like collisions with other ships," Herbert Fromme, shipping expert and insurance correspondent for the Financial Times Deutschland, told Deutsche Welle. "Each is supplied by different companies. But the piracy issue is a different kettle of fish; it can be covered under war risk policies which have been standard for centuries. You declare an area a war zone risk and you charge ships a surcharge on top of the premium you normally calculate."

Herein lies another problem for ship owners and insurers. War zone risk policies are gray areas when it comes to pirates. They are, however, clear on the issue of terrorism but this only muddies the waters further. Despite Somalia's reputation as a breeding ground for terrorists, it is clear that most Somali pirates are acting for economic, not political, gain. Getting insurers to see it this way is sometimes difficult.

A question of terrorism

"The problem with war risk policies is they exclude terrorism from their cover so the question is then whether the insurer thinks of the pirates as terrorists or not," says Fromme. "This is a definition problem; do the pirates have an ideology or are they fundamentalists of some sort? Do you take the risk, get war risk and hope your insurer will see an attack as an act of piracy, not terrorism? This is why more owners pay for insurance for a single trip through the Gulf of Aden with a $3 million ransom clause, at around $30,000. These policies are called K&R – Kidnapping and Ransom – which are sold to the ship owner for one trip."

On top of the increased surcharges and expensive one-trip policies, ship owners face other potential costs.

"Another cost on top of this insurance is a policy against possible claims against owners by crew members in cases where the crew claim the owners acted negligently," Fromme adds. "This happened on the container ship Maersk Alabama where the first steward sued the owner because he claimed there wasn't enough security on board to prevent the hijacking. That case and settlement was paid from that added insurance policy."

Alternative routes come with own financial burdens

These hikes in high insurance prices and added costs have pushed many companies to skip the Gulf of Aden and Suez Canal, and instead some plot a course around the Cape of Good Hope. But that voyage adds an extra two to three weeks to the trip, which in turn can add to the financial burden.

"The route round the Cape only makes financial sense depending on what your cargo is," Fromme said. "If your cargo is not time critical then this is an option but you have to do a simple calculation; a container ship carrying electronics from the Far East has a cargo easily worth around $1 billion. If you take two weeks longer to deliver this, you are liable for the interest on that $1 billion for those two weeks you are late. You have to weigh this up against the risk and the added cost of traveling through the Gulf."

Some shipping officials do just that and dismiss the threat, deciding to take their chances in the Gulf. They point out that, since only a fraction of the more than 50 commercial ships that still pass through the Gulf of Aden every day are attacked, the risks remain minimal.

They also rely on the fact that since various international naval missions have been launched in the area, the odds will be even more in the shipping companies' favor, improving security and therefore lowering insurance costs in time.

Problems need solving on dry land first

However, one of the most surprising elements of the modern-day piracy problem is that the world's most powerful countries have been so powerless to stop it. Attacks have persisted, and a dozen ships have been held for ransom at any given time, even though the European Union has sent a flotilla of warships, China has promised naval support, the Indian navy last fall sank a pirate "mother ship," and the United Nations is developing plans to combat piracy.

Once the US Navy joined the mission, the hope was that this would finally end the pirate threat but even the powerful United States has not been able to stop the attacks.

The general consensus is that, as long as Somalia remains a failed and lawless state on land, the waters off its coast will continue to be plagued by pirates. Until stability is brought to the launch site for these attacks, piracy and the high prices the international shipping industry has to pay because of it, will remain an issue.

Author: Nick Amies

Editor: Michael Knigge/Susan Houlton