Tuesday, December 8, 2009

PIRACY OFF SOMALIA - THE INSURANCE PERSPECTIVE


Can you make out something about this impressive parading ships, known as CTF – 150.  Have you heard of Bartholomew Roberts or have you ever been concerned of a small country lesser than the size of many our States having 637657 Sq km with land boundary of only 2340 km.

Chances are that you might have not shown interest when Virender Sehwag plundered at will close to 300 and Indians reached the summit of Test playing Nations to get the No. 1 status.

There was some news of Indian Navy foiling piracy attempt on a Norwegian flagged tanker off Gulf of Aden. Does not all this sound incongruous ?





This is an area located in Arabian sea between Yemen on South coast of Arabian Peninsula and Somalia in the Horn of Africa. This is a very important shipping route between the Mediterranean sea and the Arabian sea with tens of thousands of ship crossing the gulf annually. This has come to be known as Pirate alley.

In good old days, there were legends about kadal kolliars (sea pirates) Remember the 1965 tamil movie ‘Aayirathil Oruvan” where MGR played the slave’s head and fought for their rights. Well Bartholomew Roberts also known as Black Bart was known as violent plunderer of ship rumoured to have hit 400 ships. He was described as a tall, attractive man wearing expensive clothes, jewellery and dressed in gorgeous crimson waistcoat with expensive hat.   On his chests hung a heavy gold chain.




The modern day buccaneers are much different using heavy duty fire power including automatic weapons, mortars and rocket-propelled grenades.

Pirates are also often equipped with cell phones and other tech gadgets to keep in contact with organizers who feed them information about ships and their locations. There is grave concern as it is not lawless goons holding something to ransom once – the issues run deeper as the Country has no effective administrative Govt for 18 years. Here is how concentrated it has been.



For young Somalis, piracy offers a life of adventure and money. At sea, they are armed with automatic weapons, rockets and grenades and on land they lead luxurious life style with grand houses, luxury cars, wine, women and… There little respect for human lives or other values as the life expectancy is 46 and a quarter of children die before they reach 5.

The UN Security Council met recently to discuss the growing problem and determine some ways to protect the ships sanitising the route.  Piracy is a matter of grave concern for Shipping Industry, Commodity traders and of course Insurers. I have shared something on piracy earlier also but here is something more on it. Piracy is a war-like act committed by private parties (not affiliated with any government) that engaged in acts of robbery and/or criminal violence at sea. The term can include acts committed in other major bodies of water or on a shore. It does not normally include crimes committed against persons traveling on the same vessel as the actor (e.g. one passenger stealing from others on the same vessel). 

By definition “Piracy consists of any of the following acts:
(a) any illegal acts of violence or detention, or any act of depredation, committed for private ends by the crew or the passengers of a private ship or a private aircraft, and directed:
(i) on the high seas, against another ship or aircraft, or against persons or property on board such ship or aircraft;
(ii) against a ship, aircraft, persons or property in a place outside the jurisdiction of any State;
(b) any act of voluntary participation in the operation of a ship or of an aircraft with knowledge of facts making it a pirate ship or aircraft;
(c) any act inciting or of intentionally facilitating an act described in sub-paragraph (a) or (b).”

There have been  very many instances of Somali pirates but they are not isolated to this geographic area alone . While the political upheaval in Somalia does provide an ideal, lawless hideout for pirates, the fact is pirates are often found in many places around the globe. Piracy in the Strait of Malacca has historically been an unresolved threat to ship owners and the mariners who ply the 900 km-long (550 miles) sea lane. But presently the area of  concern is Somalia.

 In November 2008, Somali pirates began hijacking ships well outside the Gulf of Aden, perhaps targeting ships headed for the port of Mombasa, Kenya. The frequency and sophistication of the attacks also increased around this time, as did the size of vessels being targeted. Large cargo ships, oil and chemical tankers on international voyages became the new targets of choice for the Somali hijackers. Reportedly, Somali Pirates are now holding over 10 ships on the shores of Somalia.


Recently (4/12/09)Somali Pirates have released ship MV Charelle that was held captive for the last Six months on the Somali waters. This was confirmed by Commander of Eunavfor forces though he did not divulge anything on the ransom that was paid. This vessel was earlier captured off the coast of Oman in an attack 60 NM south from the city of Sur of Ash Sharqiyah region.  In another instance, a Greek Cargo vessel Ariana and its Ukrainian crew were released after a payment of US $ 3.7 M. This vessel was carrying 10000 tonnes of soya beans and was held as hostage for more than six months.

The abductors had treated the hostages very badly as recalled by the crew of Al Meezan cargo. Some mystery shrouded as this vessel was reportedly carrying big cargo of small arms. Last year, a 1090 foot oil tanker carrying $100 M of crude was captured; none seem to have learnt lessons as a very large crude carrier – Maran Centaurus was captured  800 miles east of Magadishu fully laden and carrying 2 M barrel of oil heading towards New Orleans from Jeddah.

Big Nations coming together having fleet base still seemingly not able to stop this group of armed youth plundering at will. A Piracy Expert stated that the big international naval deployment is concentrated in the Gulf of Aden, where there is a clearly defined, narrow shipping corridor, which is a much easier area to police; but Pirates are operating deeper into the Indian ocean as well. Besides some thought on armed security guard, some ships have draped barbed wire around their decks, especially on fully loaded super tankers which would be low in water making it easier to board.



It was reported that in one case, the Pirates deliberately opened the hatches of bulk coal cargo allowing overheating of cargo simply to put pressure on owners during the negotiation.

Somalia has been marred by turmoil and anarchy. Some shipping companies have decided that the benefits of passing through the Gulf of Aden to reach the Suez canal are not worth the risk and have decided to send there vessels around the southern tip of Africa.




In a different perspective, some Private Security firms are offering maritime security as a viable solution. Some European Companies stress more non-violent means of Maritime security!!!

On the web there are some Attorney Firms who have offered their services in conducting negotiations with the abductors and release of cargo safely. The claim that they can work closely with the preferred ransom deliverer which include options of delivery by parachute or by tug – other options expanding to unofficial money transfer.







From the Insurance angle, there is Hull (the Ship) and various interests of Cargo that are at risk. For long, when a ship was hijacked, it was seen entirely as the ship owner’s problem. The owners were the ones who had to deal it entirely or with assistance of their Insurers. Of late there has been an increasing tendency for the owners to allocate the costs of ransom payments to their Hull and Cargo Insurers, going by the principle of General Average. It is also contended that P&I Insurers should also be obliged to cover a share in the losses, especially when the crew are targetted for ransom and less intent on Hull or the cargo contained therein.

In respect of Hull Insurance - 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, London Market is trying to exclude piracy risks from hull policies transferring them to hull war policies.

Historically, piracy has been a war risk but with the advent of ITC Hull clauses, piracy became a standard hull risk. If it is a war risk, it would enable the Underwriters to charge additional risk premium - ITC Hull 1983 Clause 6.1.5 explicitly names piracy one of the main policy perils.

In respect of Cargo Insurance, generally ICC (A) clause is used and this is driven by exclusions. The war exclusion reads “6.2 : capture seizure arrest restraint or detainment (piracy excepted), and the consequences thereof or any attempt thereat – and thus would include loss, damage or robbery caused by pirates. However, when the ship is held as hostage for months and then released, depending on the nature of cargo, there could be losses arising out of deterioration

Clearly the policy excludes ‘loss damage or expenses proximately caused by delay, even though the delay be caused by a risk insured against”.

There has been the practice of Annual Policies covering all transits of the insured occurring through the year and it would be difficult to amend the clauses relating to coverage of piracy. To ward this off, the London Market has recently introduced a Cargo Piracy Notice of Cancellation Clause which further highlights the concerns surrounding the escalation of these attacks. This is the response of the Joint Cargo Committee to the soaring ransoms by an optional clause allowing Underwriters to exclude the risk of piracy from floating policies by issuance of 7 day notice. This clause further provides reinclusion on a renegotiated premium, subject to special conditions and exclusions.

Though the incidence of piracy is alarming, perhaps the impact on the Marine cargo insurer (especially Indian segment) is not high enough to make them respond !!

The International Market is trying to seize opportunity by providing new LOP cover concept in addition to established form of marine trade disruption insurance. This would provide the ship owner special cover for loss of charter hire or freight income arising out of hijack and holding of the vessel. One of the foreign Underwriters talked about considering claims on ‘sue and labour’ basis and paying the ransom to get the ship back to mitigate loss.

It is possible, after all, to get insurance against piracy. If a Somali pirate shoots a hole in your ship, hull insurance covers the cost of repairs. A kidnap-and-ransom policy covers the cost of negotiating with the pirates, medical care if someone gets hurt and the expenses involved in getting the ransom payment delivered. The Indian market has not reacted in a big way and Marine Insurers have not reported substantial earnings in insurance premium.

If you still remember the question in the initial para : Combined Task Force 150 (CTF-150) is a multinational coalition naval task force with logistics facilities at Djibouti established to monitor, inspect, board, and stop suspect shipping to pursue the "War on Terrorism" Countries presently contributing to CTF-150 include Canada, Denmark, France, Germany, the United Kingdom and the United States.
If this article interested you, please do send your feedback to me at : samvijib17@gmail.com or more pleased if you leave your comments over here.

With regards
S Sampathkumar.

8 comments:

  1. Sir, I work for a PSU. though I have serviced some clients on their marine policies, never knew of these. thanks - Saravanan

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  2. sampath,

    thanks for the wealth of information...i liked your simple style of presenting issues which concern more for persons in the insurance industry..a good read...keep blogging

    rajaram

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  3. very interesting Sampath Sir. Do you have any claims of GA arising out of piracy ? - Ganesh

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  4. Why so many powerful Government armies are not able to neutralise such vandals ? What will happen if one country atlest have the courage to bombard Somalia, if this were to happen to their country ship - Kumar

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  5. Thugs should be brought to book. By doing looting, their economy is lop sidedly growing which is not good for any body - Ramudu

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  6. Understand there is also another side. The rich western world have been using the third world countries as their dumping yard - Bala

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  7. Good exhaustive write up dear and I liked it - Rakshana

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  8. I am new to Insurance and this provided lot of insight - thanks for posting on Marine forum site of linked in - Patel

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