Over the course of 2011, piracy, particularly off the seas of Somalia, has refused to die down and continues to cause disruption to international trade and all enterprises involved in it.

In the nine months to September 2011, there were 352 actual and attempted attacks with 138 vessels boarded and 35 hijacked. More worryingly, 619 crew have been taken hostage and there have been eight deaths reported so far this year.

In 2011, there has been a marked increase in additional security measures, such as armed guards, razor wire, citadels and improved crew training. This is arguably having a positive effect on the ratio of successful hijackings but there has also been a noticeable change in the level of aggression and daring from the pirates.

The release of BMP 4 (Best Management Practices for Protection against Somali Based Piracy Version 4) in 2011 has also sought to help ship owners and operators safeguard their vessels, cargo and crew.

And recently, the UK announced that it would license armed guards on board UK vessels. The reaction of this in the UK has been mixed, but the general response has been a cautioned welcome.

Generally speaking, it remains the case that lower premiums from the War and Kidnap & Ransom (K&R) markets are available where vessels have increased security on board vessels.

Whilst there are no radical changes, this being a progression from BMP3, there are some important new amendments. The major change is the reclassification of the previous ‘recommendations’ to the ‘3 Fundamental Requirements of BMP’ they are:

• Registering with MSCHOA (Maritime Security Centre Horn Of Africa)
• Reporting to UKMTO
• Implementing Self Protection Measures

The purpose of the Best Management Practices guides are intended to provide shipowners with advice on procedures and protection which can be put in place for the safety of the crew, vessel and cargo when transiting high risk areas.

The measures can, when implemented in conjunction with an appropriate policy structure and insurer, provide premium savings for War and Kidnap & Ransom insurance policies to owners and charterers.

Please contact us if you would like any additional information.

As we wrote in our opinion piece Piracy – How Covered are You?, the methods and style of piracy have moved on from its “traditional” routes where pirates would board ships and steal cash and equipment. This didn’t present any particular problems for insurers. The new method sees Somali pirates only interested in the ransom, demands for which have run into the millions of dollars, and it is the settlement of these ransoms that are likely to push premiums higher.

There are further fears that the Somali methods of hijacking will spread to other regions, including South East Asia and Latin America. Whilst this is possible, current circumstances suggest the need for a specific set of geo-political characteristics to make this work, i.e. a sea lane near land in calm waters without any issues as to sovereignty, a passive government or legislature, a lack of concern of that government of outside pressure to take action, and an inability of external governments to take action.

However, if other hot spots were to occur, then we would likely see a quicker shift of Piracy from the Hull to the War policies. Whilst there is the increase in premium to contend with, there is also the question as to who is going to pay for it.

It means owners and charterers should be paying increased attention to their War clauses and obligations under the charterparty, and account for the increases accordingly, irrespective of the anticipated trading pattern.

International security efforts have increased, but their presence is having minimal impact on what is unquestionably a lucrative crime.

Somali pirates are making ransom demands of up to USD10million, threatening the crew and warning the shipowners that they will ground the ship if their demands are not met.

Understandably, the safety of the crew and the release of the vessel take priority. However, whilst the affected shipowner does what is necessary to secure the release of the crew and vessel, cargo owners can be significantly affected.

The cargo is often more valuable than the vessel itself, yet in the event of a hijacking, cargo owners may not be alerted to the situation and are unlikely to be involved in the subsequent negotiations and ransom payment.

Recent hijackings have lasted between seven and 100 days; 58 days is the average duration of a hijack in Somali waters. Cargo owners can see disastrous delays particularly affecting any seasonal or other time-critical cargo, and in the worst case, deterioration or material damage to the cargo itself.

We are also witnessing an increasing number of shipowners attempting (some successfully) to recoup a share of the paid ransom from cargo interests in General Average.

Given the cargo is more often of significantly greater value than the vessel it is being carried on, ship owners will seek to recover the significant majority of the ransom payment and any other general average charges from them.

Irrespective of the ultimate position, shipowners are likely to have a prima facie right to demand general average security and we would expect owners to exercise their lien over the cargo in order to obtain that security where they consider it necessary to do so. Unsurprisingly, we are also aware that cargo interests are attempting to resist the claim in General Average.

What action can Cargo Interests take to protect themselves?

It would appear critical to establish a protocol for communications with shipowners in the event of an incident.

In addition, we suggest cargo interest obtain confirmation from shipowners regarding adequate Hull and Machinery, P&I, and War Risks insurance for the voyage in question.

There is specialist Marine Kidnap and Ransom Insurance available which provides not only cover for the ransom payment but, arguably more importantly, access to specialist security consultants who will assist in negotiations for any ransom payment. We recommend that cargo interests check with the shipowners to see if they have purchased this cover.

We are also witnessing collaboration between the parties involved in the voyage (charterers, owners and cargo interests) to purchase this cover for all interests.

Please see our separate news article on Marine Kidnap and Ransom Insurance for details or contact us to discuss your requirements further.

To keep up to date with reported piracy incidents and to learn more about prone areas, please visit http://www.icc-ccs.org/prc/piracyreport.php

Whilst attacks in the Malacca Strait and Indonesia have dropped by over 50% in the same time, the Somali coast and Gulf of Aden have seen a drastic rise from only 2 incidents in 2004 to 44 in 2007.

The data available for 2008 shows that between January and September there were 50 attacks off the coast of Somalia, 32 hijack incidents and over 260 crew members held hostage.

The pirates have hijacked vessels from over 20 countries, including Germany, Japan, Malaysia and France, and members of the crew are predominantly from the Philippines and Malaysia.

The pirates targeting vessels near the Gulf of Aden and Somali waters are predominantly local fishermen and disaffected youth from Puntland, a semi-autonomous region in the north east of Somalia.

They threaten to kill the crew and run the ship aground from the outset, and make ransom demands of between USD2m to USD10m for which they leave little room for negotiation.

Ten countries have sent in military forces to the waters surrounding Somalia and the Gulf of Aden to try and prevent further attacks, but with little success.

It is argued that as long as the issues internal to Somalia remain unresolved, piracy in the area will continue.

Avoiding the area entirely will limit a shipowners exposure to the risk of piracy, but it is also a costly and time consuming alternative.

Marine Kidnap and Ransom Insurance, on the other hand, ensures that if a vessel is captured and a ransom demanded, the shipowner is able to respond quickly and with the support of experienced crisis-handling professionals to ensure the safety of the crew and expedient release of the vessel.

The Cover

In summary, the Marine Kidnap and Ransom Insurance covers the following:

1. The ransom that has been paid

2. The loss in transit of the ransom

3. The fees and expenses of security experts who specialize in advising clients on how to handle crises such as kidnap-for-ransom

4. Additional expenses including those for an independent negotiator; a public relations consultant or interpreter; reasonable costs of travel and accommodation of the assured; plus all other reasonable expenses incurred subject to the insurer’s approval.

5. Legal Liability to cover settlements or awards, fees and judgments imposed upon and paid by the assured as a result of an action for damages brought by or on behalf of any insured person, or his / their legal representative or shareholders, as a result of the kidnap. Defence costs incurred by the underwriters are payable in addition to the limit for legal liability.

What would you do without insurance cover?

Without the necessary Kidnap and Ransom insurance, shipowners understandably find themselves unsure about how to proceed in the event of a hi-jacking.

They need to consider how to enter into effective communications, how to handle the demands and threats made by heavily-armed pirates, how to advise family members of the situation and how to raise and deliver the necessary ransom to guarantee a swift and successful release.

Most, if not all, owners would consider it an unprecedented strain on finances, resources and expertise to manage the crisis effectively.

However, with adequate Marine Kidnap and Ransom Insurance you have the necessary support from experienced professionals as soon as you need it.

They have the ability and know-how to advise you through every stage of the negotiations and release, their costs being covered by the insurance.

In addition, the insurance also covers the ransom itself along with a wide range of ancillary, but necessary, expenses that may be incurred either during and/or after the successful release of the crew and vessel.

The above information is intended solely as a summary of the cover – for full details regarding the conditions of cover, exclusions and definitions, please email or telephone your usual FP Marine Risks contact or call the Hong Kong office on +852 2544 3410, the London office on +44 (0) 207 397 4920 or email info@fp-marine.com