Marine Insurance Buyers, Sellers Join To Thwart Modern-Day Pirate Threats

Pirates have long been romanticized, either as swashbuckling daredevils who steal hearts or buffoonish villains easily vanquished by stalwart heroes. But pirates are no mythical figment for today's marine insurance underwriters. Modern-day piracy stubbornly persists in several areas of the world, endangering crews and driving up claims for cargo loss and ship damage.

In fact, at a recent conference on cargo shipping, participants discussed the emerging trend for pirates to be much more aggressive than in the past, using sophisticated vessels and high-powered weapons to take control of large ocean-going ships carrying valuable cargo.

Their goal is often ransom, and they show no reluctance to use violence in their pursuit of treasure.

Just how likely is an individual shipment to be threatened by pirates? The International Maritime Bureau tracks attacks on a weekly basis (www.icc-ccs.org/prc/overview.php) to flag dangerous shipping corridors.

While the number of attacks remains small–263 worldwide in 2007, and 114 in the first six months of 2008–the losses can be large.

In mid-July, an Economist article noted that in the prior 10 days a Ukrainian vessel and a German ship had been freed after ransoms of close to $1 million each were paid to Somali pirates.

In late August, an IMB press release noted that two bulk carriers and a chemical tanker were hijacked during a single 12-hour period in the Gulf of Aden, bringing the total of crew members held hostage since the beginning of year to more than 260.

What can insurers do to help their ocean marine customers address piracy? They can encourage them to take proactive measures, including:

o Selecting routes carefully.

Several areas of the world are increasingly viewed as hot spots to avoid, according to the IMB. High-risk areas in 2007 included Indonesia, Nigeria, Somalia, Bangladesh and India. This year, Tanzania joined the list.

o Adopting the latest security measures and training.

With the proper instruction and tools, ships are better protected and crews can take action to repel attackers. Recent anecdotes indicate that pirates may give up if they meet resistance. It is also important to notify local authorities of the planned route and to alert them about any suspicious activity encountered.

o Purchasing appropriate coverage.

By educating customers, underwriters can help them understand the importance of adding war risk coverage, as well as riders for strikes, riots and civil commotion. When combined with basic hull or cargo policies, these coverages will provide broad protection, regardless of where the incident occurs or what the attackers' motivation was.

On the movie screen and in amusement parks, pirates may offer thrilling entertainment. But on today's high seas, they continue to be a threat that shippers and their underwriters need to pay attention to.

Meanwhile, taking a broader look at the state of the market, despite gloomy headlines about the economy, no one in the ocean marine industry was surprised recently when the United Nations annual report on trade showed substantial growth in both exports and imports around the globe.

Shippers already know they are at the center of an unprecedented boom in the exchange of raw materials and manufactured goods.

It's a bright spot for the U.S. economy–but it's also a challenge because of the strain on capacity to meet demand and the increased risk that often goes hand-in-hand with rapid growth.

As the ocean marine industry's partner in addressing risk, insurers have their hands full as well. Underwriters not only have to cope with limits that have dramatically increased as the value of cargo has risen, but also have to be acutely attuned to the many new exposures that shippers are facing.

By working closely with ship operators and cargo owners, underwriters can add value to the relationship as knowledgeable experts who keep their customers protected, even during evolving conditions.

Two trends are contributing to the heavy demand for maritime transportation. The first is increasing globalization.

The U.N.'s “Trade and Development Report, 2008,” released on Sept. 4, found that the worldwide volume of exports grew 5.5 percent and imports by 5.8 percent in 2007. The growth was spread across every region in the world, and was particularly strong in China (growth of 23.3 percent in exports and 16.1 percent in imports) and Eastern Europe (19.3 percent in exports and 22.2 percent in imports).

In addition, the U.S. Chamber of Commerce reported in April that one-third of the U.S. economy is now dependent on international trade, and the majority of raw materials, component parts and finished goods move by sea in cargo containers.

The second trend is the robust increase in U.S. exports, driven by a weak dollar and the demand for goods by emerging economies in developing countries.

When the U.S. Department of Commerce released the export figures for June 2008, it noted that the month's $164.4 billion in exports was a jump of more than 21 percent over June 2007–growth that far outstripped the 13.5 percent increase in the imports that the American consumer economy is more typically known for.

The statistics paint a vivid picture of growth, but they also are indicators of increased risk.

As more companies engage in overseas trade, they enter unfamiliar territory, connect with partners they know little about and operate with less than their usual certainty about conditions they may face.

Even those who have long traded abroad may find themselves in unknown areas of the world as they pursue opportunities where economies are surging with explosive growth.

It pays for underwriters to be keenly aware of the level of experience and knowledge their customer brings to international trade.

In addition, there are a number of infrastructure factors that underwriters should understand since they also tend to increase risk in the shipping industry overall. These include:

o Capacity:

Whether it is ships, containers or terminals, the unceasing flow of goods is creating strains that the industry is struggling to meet.

Record-breaking numbers of ships are under construction, with reports of a three-year backlog at shipyards and frantic construction schedules that raise questions about quality.

Many ships are being retained in fleets long after their normal retirement age, causing concern about their seaworthiness.

For many exporters, containers are difficult to find on short notice, and those that are available are not always in the best condition. Port expansion is under way, but the pressure to both load and offload cargo quickly sometimes leads to injuries or damages.

o Manpower:

Well-trained seamen are increasingly difficult to find, especially as owners bring more ships online and compete for crew members. With the modern sophistication of ship operations, the old approach of training sailors on the job is often inadequate.

Marine institutes are working on expanding their capacity, but currently there is a shortage of experienced seaman. Underwriters need to be aware that inexperienced crews are an issue that increases risk.

o Higher values:

Ships today often carry cargos that are worth far more than in the past. A decade ago, a ship was considered large if it carried 2,000 containers. Today, it is likely to be capable of handling 6,500 containers, each with an average value of $100,000.

In addition, the price of commodities has escalated in recent years, making the value of what is in each container far greater. When something goes wrong with a ship, the loss can be much greater than in the past.

Like any rapidly growing industry, marine owners and operators are struggling to meet demand without diminishing quality.

Although the economic slowdown is now rippling out from the United States and impacting other areas around the world, there is no end in sight to the growth in cargo shipments.

The higher price of oil is having an impact on the cost of transportation, but shipping by sea remains a bargain compared to air or land.

Despite the stress that the marine industry is undergoing, there is little doubt the positive aspect of increased opportunity far outweighs the negative potential of greater risk and liability.

The fundamentals underlying the insurance industry exposure to world trade are strong, and with appropriate caution, there is no reason to back away from our traditional role of helping the marine industry deal with risk.

By understanding the challenges facing ship owners and operators, underwriters can help guide their customers to take necessary precautions and pay attention to details they might otherwise overlook. Their mutual goal: smooth sailing despite rough seas.