Expert Risk Articles

Piracy - an Allianz Study

Recent headline cases have caused a renewed concern about one of the most ancient transport risks: piracy.

Too slow, too late, too indecisive: for Noel Choong, head of the Piracy Reporting Center in Kuala Lumpur, the steps taken in recent months by the international community to counter piracy have been rather unconvincing.

A lack of deterrents sends the wrong messages to pirates, says Choong: "Where the risk is low but the chance of lucrative booty high, piracy is bound to boom."

There's not a great deal that a ship's captain can do to ward off a pirate attack. "You just have to scour the seas around the clock and keep a watchful eye on the radar screen," says Noel Choong, who for the past ten years has been in charge of the Piracy Reporting Center set up by the International Maritime Bureau (IBM). If a suspect vessel approaches, the only thing you can do is take evasive action and go full speed ahead to shake off the attackers – who are equipped with rocket launchers nowadays.

Choong and his eight-strong team are often among the first to learn that a ship is being targeted on the high seas. This was the case when the Wadi al-Arab, an Egyptian freighter, came under fire off Somalia in December.

A passing ship relayed a distress message to the Reporting Center in Kuala Lumpur, which immediately alerted the international naval coalition force in the Gulf of Aden and passed on the Wadi al-Arab's exact coordinates.

The German frigate Karlsruhe was the first on the scene and fended off the pirates. But the assailants weren't pursued. In September, the Danish Navy seized two speedboats with ten heavily armed Somalis but released them a few days later along with their boats. At least their weapons were confiscated. Even taking into account the complicated legal situation when dealing with suspected pirates, in Choong's eyes this strategy is not very helpful: "It's like when the police catch a bank robber, take the money he's stolen and then promptly release him. That's not what I'd call a deterrent."



In the hijackers' hands

Whereas the number of attacks around the piracy strongholds of Indonesia and the Malacca Strait has continued to fall in the past few years, attacks on commercial shipping at the Horn of Africa rose steeply in 2008. Between January and December the Piracy Reporting Center recorded more than 110 attacks off Somalia and in the Gulf of Aden with the seizure of over 40 ships. Most were released in exchange for a ransom, but more than a dozen with over 200 sailors on board were still being held captive by the pirates at the end of last year.

Apart from the immediate victims, insurance companies who underwrite hull and goods-in-transit policies have also been hit by the wave of piracy, as they are asked to foot the bill for any damage to ships or cargo.

"According to the terms and conditions of international marine insurance, piracy was usually included in the coverage in the past," explains Sven Gerhard, Global Product Leader Hull & Liabilities of Allianz Global Corporate & Specialty (AGCS) in Hamburg. But due to the significantly higher risk level it's been excluded now from hull insurance altogether.

"But we offer our clients the reinstatement of those risks under a War policy," says Gerhard. This is also how the industry responded to the spate of pirate attacks that occurred in Southeast Asia in 2005.

However, the attacks off the East African coast and in Asia follow a completely different pattern, says Choong: "Pirates in Asia abandon their captives in a boat or on a remote island or at worst they kill them." Whereas the Asian pirates concentrated on goods and ships, the new pirates off Somalia are more focused on ransom.

Piracy risk mitigation measures

Piracy risk mitigation measures. Click here to enlarge image.

Syndicates and clients

Choong is also skeptical about the waters around Malaysia and Indonesia, which are relatively quiet at the moment.

Past experience has shown that there is a time lapse between the beginning of a recession and an increase in piracy, he explains. "People make ends meet for a while, but when all their resources are exhausted, they get what they need from passing ships." Statistics confirm the link: At the beginning of the Asian crisis in 1997/98 the Center reported just one attack in the Malacca Strait. Two years later that figure had risen to 75.

Experts believe that there are pirate syndicates behind many of the raids, particularly in Asia, where informants look out for ships and cargoes in port. Choong's main concern is that Mafia-like groups will enter the business big time: "Profit margins are certainly very enticing." The Somali pirates, on the other hand, are attached to paramilitary groups in a largely lawless space.

Choong lays great store by the piracy reports released by the International Maritime Bureau every three months, which are less than flattering for some countries.

"The states that are listed as negative examples in the reports sometimes object," he says. "But we've found that this often prompts them to introduce effective measures to combat piracy."

In critical cases Noel Choong often relies on his own informants. The risk seems to be worth it since Choong hasn't been short of informers so far. "Our success rate is high," he says. "We've already saved a lot of lives through our work, found missing ships and recovered valuable cargoes." This saves the insurance industry quite a bit of money: Once a ship has been missing for a certain time, the owner is entitled to claim the full insured value.

Download the AGCS report "Piracy: An Ancient Risk with Modern Faces" (4 MB)

Download "Global Risk Dialogue" spring 2009 (3 MB)

  1. Expert Commentary

    Piracy continues to be a major concern. The Gulf of Aden, Indian Ocean, and The Gulf of Guinea off the coast of Nigeria are particularly troublesome areas.

    Claims arising from piracy have exceeded an estimated $300 million, and there does not seem to be a viable solution in the short term.

    However, there are some management practices to deter piracy off the coast of Somalia: there is a list of preventive measures shipowners can employ and the European Naval force in the Gulf of Aden has proven to be able to help mitigate the threat.

    Nevertheless, piracy will not go away in the short term as the root of the problem lies on the shore and not the sea. Until a comprehensive solution is undertaken, crew, shipowners, cargo interests and insurers will need to be vigilant.

    /assets/Thumbnails/Thumbnails%20for%20Experts%20and%20Contacts/BarnwellJohn-thumbnail.jpg John Barnwell

    John, who has 20 years of insurance experience, started his career as a Property and Liability Underwriter before moving onto inland and ocean marine underwriting. He joined Fireman's Fund Insurance Company in 1993, where he served in various ocean cargo underwriting and management roles and is now serving in a dual role as Global Marine Head Americas and Global Cargo Product Leader. He works in the New York office.