Somali piracy a boost for London's shipping insurers

As the frequency of attacks rises, so, too, does cost of coverage for vessels plying pirate-infested waters.

London's shipping insurers are emerging as big winners from the surge in piracy across the Gulf of Aden. As the frequency of attacks rises, so, too, does coverage of vessels plying pirate-infested waters.

London has been home to the world's marine underwriting market since 1688 – when Edward Lloyd's coffee shop became the meeting place to sell coverage for slave ships. And it is theLloyd's of London syndicates that make money insuring ships routed through the Gulf. (US insurers do not cover piracy. Figures released last month by marine broker Aon reveal the surcharge for separate kidnap and ransom coverage could mean a shipowner pays an extra $30,000 per journey – for every $3 million worth of coverage – through high-risk seas – 10 times that charged last year.

Insurance firms are sensitive to suggestions that they benefit from the actions of pirates wielding rocket-propelled grenades, more so when their shipowning clients are wheezing from the impact of recession. But with 22,000 Gulf transits a year, additional premiums could be worth up to $400 million, says J. Peter Pham, a piracy expert at James Madison University in Harrisburg, Va.

"We've seen inquiries for [coverage] escalate as shipowners seek to protect their employees and businesses," explains Ashley Leszczuk from Aon's crisis-management team. "The cost of insurance is simply rising in correlation with the risk of kidnap in piracy hot spots."

For decades piracy was deemed a low-level risk and designated as a "marine peril" covered by insurance for loss or damage to the ship's hull. But the success of Somali pirates has forced insurers to weave new policies. Piracy is now a "war risk" – a pricier coverage – and shipowners must either pay up or brave traveling with poor coverage. There are also additional protection and indemnity premiums covering crew safety – an issue of increasing importance as shipowners weigh the risks of hiring armed guards.

One shipping broker for a leading market player, who spoke on condition of not being named, says the firm is surcharging a minimum of 0.125 percent of the hull value, rising to 0.2 at the top. War policies without the amended piracy clause cost around 0.025 percent early last year.

"Take the Sirius Star – it is worth about $85 [million] to $90 million. At the upper end you are looking at perhaps an extra $180,000 per transit," says the broker. "That's good money being made."

"Piracy does provide opportunities for some underwriters and premiums are higher," concedes Neil Smith, senior manager of underwriters at the Lloyd's Market Association, which represents the shipping industry. "But there's a very real risk of a total loss on the insurers' side when you have pirates operating with machine guns and RPGs."

Mr. Smith urges caution in quantifying the profit from piracy, as premiums change on an almost daily basis, keeping pace with the risk.

Insurers with a lot of vessels in the Gulf of Aden at any given time will also charge higher premiums for the greater exposure.

– Monitor staff writer Scott Baldauf contributed