Pirate Ransom Premiums Fall

Insurance premiums for kidnap-and-ransom coverage stemming from a piracy attack have dropped by as much as half this year. The decline is attributed to costlier but less frequent attacks as insurance companies vie for shippers’ business.
“Piracy is a peak risk with a relatively low probability of happening, but with an immensely high damage potential,” Niels Stolberg, managing director of Beluga Shipping GmbH, told news reporters recently.

Beluga paid US$1.1 million to ransom the Trinidad and its crew in 2008 after the vessel was hijacked by Somali pirates in the Gulf of Aden. Beluga now buys kidnap-and-ransom coverage every time one of its ships crosses the dangerous waters that run from Bab-el-Mandeb at the southern end of the Red Sea through the Gulf of Aden to a point north of the Yemeni island of Socotra. The corridor carries about a fifth of world trade and is the center of Somali pirate attacks.

Shipping companies today can purchase US$5 million of coverage for as little as US$15,000 per voyage, half the peak rate in 2008, according to William Miller, divisional director of Willis Group Holding Plc’s kidnap and ransom unit in London.

Overall, piracy incidents have dropped, but ransom demands have grown. The kidnap and ransom manager for Chubb Group of Insurance Companies, Greg Bangs, told news reporters recently that the average ransom has almost doubled to between US$3.5 million and US$4 million compared to ransoms paid in 2008. The insurance company expects to expand its piracy business.

Premiums are calculated according to the ship’s speed, height of its deck above sea level and measures taken to protect the vessel, including the use of razor wire and high pressure hoses to stop pirates from boarding.

Somali pirates are responsible for more than half the world’s piracy attacks. Because Somali pirates usually return hijacked vessels undamaged, kidnap-and-ransom insurance fills the gap left by war-risk insurance, which only covers damage to a ship and its cargo. Kidnap-and-ransom insurance covers the ransom of the ship and its crew, including negotiations with pirates and hiring ex-special forces teams to deliver the money.

Pirates are currently holding 18 ships and 379 hostages, up from 11 ships and 261 hostages at the beginning of the year. More attacks are possible when the monsoon season ends this month, according to the International Maritime Bureau.