Marsh insurance consultants
HONG KONG SHIPPING GAZETTE- 16 August, 2011
PIRATE insurance costs can be cut 50 per cent for ship operators that have armed guards aboard their vessels while traversing pirate infested waters off the Horn of Africa, according to insurance risk consultants Marsh Marine Practice.
The Marsh report said cost reductions of 50 per cent to “typically quoted war risk additional premium” for a ship at risk from Somali pirates can be had, provided it is separately covered by kidnap and ransom (K&R) cover with a limit of at least US$5 million. Pirate ransoms are averaging $4 million these days.
The New York-based maritime risk and insurance consultancy, Marsh, has issued a study in collaboration with major maritime law firm, Ince & Company, which explores involved with piracy and the hiring of armed security contractors.
While conceding armed guards are controversial and illegal in some flag states, the report said that attitudes are changing because no ship with armed guards has been successfully attacked by pirates.
In the Ince & Co section of the report, the law firm said: “The employment of an armed security team on board throughout the ‘at risk voyage’ can secure reductions from war risks underwriters. Small reductions may also be achievable if razor wire is deployed to protect the ship and if an unarmed security team is on board or the ship has a fully equipped citadel.
“What might be an incentive to win a reduction from one underwriter might well be a bottom line necessity to another. Compliance with Best Management Practice 3 will normally be an underwriting requirement,” said Ince & Co.
Said Marsh: “War risk insurers will often reduce rates for voyages through listed [as dangerous] areas if they are satisfied with the piracy prevention measures in place and/or if K&R [kidnap and ransom] cover is purchased.
Typically, underwriters assess a ship’s characteristics such as its speed and free board and whether it is laden or in ballast when adjusting costs. “If an underwriter considered that a ship’s speed or freeboard might increase the risk of seizure, the additional premium might be loaded unless a separate marine K&R policy is purchased,” said the Marsh report.
There is a range of insurance policies ships take out, hull & machinery (H&M) war risk (WR), property & indemnity (P&I) and kidnap & ransom (K&R) to name a few. But with the exception of K&R, there is little chance the others will pay if a ship is seized and if the kidnapped crew is released unharmed.
Comparatively few ships are seized by pirates given the 20,000 vessels that traverse waters off the Horn of Africa, few seek K&R coverage. So if the hull and machinery is not damaged and the crew and cargo are no worse for wear, then all the shipowner has done is pay bribe – an expense of the voyage as underwriters see it, which is not covered by normal policies.
“The United States and members of the European Union specifically prohibit any payment of funds that could be used to fund terrorism. Any suggestion that ransoms were being diverted to terrorists could result in both shipowners and underwriters being at risk of prosecution,” said the Marsh report.
Ince & Co pointed out that shipowner is not legally obliged to pay ransom. “P&I [protection & indemnity] insurance will only respond where insured shipowner has a legal liability. In the absence of a legal liability, the P&I clubs in the International Group have all made it clear that ransom demands are not covered by them,” said the maritime law firm.
Nor will P&I clubs pay for war risks. Typically “weapons of war” is sufficient to trigger exclusion. There is no definition of “weapons of war”, but there is an understanding that they are something more than small arms using conventional ammunition. “The use of rocket propelled grenades might be sufficient to trigger exclusion, but this is untested in practice,” said Ince & Co.