01 June 2009
The Costs of Piracy Are Passed Along
Some ships take the long way to reduce costs, slowing deliveries
Redlands, California — The world’s largest container line says piracy is increasing its insurance costs and forcing it to pass those costs along to customers in the form of “piracy surcharges.” But for cargo owners and vessel operators alike, the costs of armed, and sometimes deadly, attacks go beyond insurance to time, new expenses and business disruptions.
Maersk Line is increasing the amount it charges customers whose cargo goes into or out of East African ports by $50 or $100 per container. For cargo on vessels that merely travel through the Gulf of Aden to another destination, Maersk says new “war risk charges” will be $25 for each 20-foot container and $50 for each 40-foot container. The Danish carrier said the increase is needed to offset additional insurance costs it faces because of the escalating piracy problem in the region.
Increasing numbers of pirate hijackings and hijack attempts are driving up insurance premiums in ways that are hard to calculate across the board. The Congressional Research Service says in a recent study that one group of London insurance brokers and underwriters estimates extra premiums at $10,000 to $20,000 per trip through the Gulf of Aden.
Richard Manson, spokesman for the Allianz Group’s corporate and specialty lines of insurance, said the effects of the attacks vary too widely to give even a range for voyages into or through the Gulf of Aden. Some carriers and cargo owners fear that the increased insurance premiums will translate into higher costs for all vessels, no matter what trade route they travel, but that is not yet happening. “Across the board, we aren’t seeing increases,” said Manson, whose group insures clients with different risk levels, different size vessels and different types of cargo and routes.
The most discernible industry trend is one of moving the piracy-benefits coverage for commercial ships from general liability policies, which include hull insurance, to war policies, Manson said.
Compared to the standard war risk insurance rate, premiums being levied for voyages across the Gulf of Aden are about five times higher, according to Bob DeMotta, managing director of the marine practice group for Aon Risk Services, an insurance broker.
The rates are a percentage of the insured value. For example, a vessel insured for $50 million would have a standard annual war risk insurance of about $10,000. The additional war risk premium for transit across the Gulf of Aden would be $62,500 per voyage. DeMotta said rates are higher now, not only for war risk insurance, but also for primary hull and liability insurance.
Some insurance carriers offer separate kidnap and ransom policies (pirates were paid an estimated $30 million in ransoms in 2008), but most companies won’t discuss it publicly. “That is so sensitive,” Manson said. “Lives are at stake. We won’t do anything to signal to the hijackers one way or the other.”
Piracy got a jolt of attention in the United States in April, when pirates seized the Maersk Alabama, a container vessel operated by Maersk Line Ltd., the U.S.-flag subsidiary of Maersk Line.
Yet the overall risk of attack, even off the Somali coast, is relatively low, according to a spokesman for Maersk Line Ltd. “There are 22,000 to 30,000 vessels that transit the Gulf of Aden each year,” said Kevin Speers. “With several dozen ships seized each year and about 100 vessels fired on, that’s a 0.167 percent chance that a vessel will be involved [in a pirate incident]. Bad weather presents a larger risk, and that’s the sort of thing insurance companies look at.”
But the head of a freight forwarder with business around Africa said piracy is causing severe harm to transportation now. “We are one of the lucky ones and thus far have not been directly caught in the melee,” said Peter Schauer, chief executive of Orion Marine. “It’s not just the value of the ship or cargo [at risk], but there is danger for personnel. All of that directly translates into higher costs. The insurance increases are so substantial that some carriers are considering rerouting their vessels and sailing around the Cape of Good Hope instead of going through the Suez Canal.”
For economically pressed carriers, the long way around has two advantages: avoiding higher insurance rates and avoiding the Suez Canal toll. The average toll for container vessels using the canal is $600,000. With fuel costs down and hundreds of surplus vessels laid up around the globe, the slower route has economic allure for the shipping industry.
But rerouting vessels and other delays — for example, those caused by the need to join a military convoy – add to supply chain disruptions, which are costing manufacturers. Robert Mawanda, spokesman for the Uganda Manufacturers Association, said delays can cause factory shutdowns if parts or raw materials don’t arrive on time. And if carriers avoid certain ports (Mogadishu, Somalia, or Mombasa, Kenya) to give wide berth to pirates, it may force companies to elect an even longer and more expensive alternative: ground transportation.
Some manufacturers in Uganda have resorted to paying air freight charges for critical parts, even though it might be more than 10 times as expensive, Mawanda said. With the global economic slowdown and a weak Ugandan shilling, any pirate-related disruption of the supply chain increases production costs and presents “a difficult and complex problem for our manufacturers,” he said.
That is why, he said, despite the fact that most association members “never bothered with cargo insurance before, now they can’t afford to forego the expense.”
For more on the economic cost of piracy, see “Economic Impact of Piracy in the Gulf of Aden on Global Trade” (PDF, 36 KB) on the U.S. Maritime Administration’s Web site.
Also see “Global Cooperation Can Stop Pirates” on America.gov.
