Piracy – An Ancient Risk with Modern Faces Sven Gerhard LLD, Global Product Leader HML BMUSF...

Piracy – An Ancient Risk with Modern FacesSven Gerhard LLD, Global Product Leader HMLBMUSF 5/6/2010

© Copyright Allianz Global Corporate & Specialty 2

Disclaimer

This presentation is intended for educational purposes only and does not replace independent professional judgment. Statements of fact and opinions expressed are those of the participant(s) individually and, unless expressly stated to the contrary, are not the opinions or positions of Allianz, its respective affiliates, or subsidiaries. Allianz does not endorse or

approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that sessions may be published in various media, including print, audio and video formats without further notice.


The modern face of Piracy doesn’t look like this …


… It looks like this!


What is Piracy?

Art. 101 UN Convention on the Law of the Sea 1982 defines “Piracy” as

- Illegal acts of violence, detention or depredation

- Committed for private ends by a private ship against another private ship

- On the High Sea outside the jurisdiction of any State

For insurance purposes, Piracy is not limited to acts outside the jurisdiction of a State

As far as Marine insurers are concerned, Piracy can result in:

- Injury, illness or death of crew or passengers or loss of their effects

- Damage to or loss of cargo

- Damage to or loss of ship

- Pollution

- Wreck removal

- Delay or waste of time, plus expenses


Somalia – Successful and attempted hijacks by vessel type (06/2007 – 12/2009)

There are no safe vessel types as such!

Source: Exclusive Analysis 2010


Why are piracy risks part of Hull and Machinery cover?

What was the face of “Piracy” in the 1970s/80s?

- Few attacks

- Remote areas (except Malacca Street)

- Use of rather “simple” weapons (rifles, knifes, machetes)

- Directed towards valuables, money and crew effects, or cargo on board

- Less organized grade of pirates

Few hijackings of vessels (some attempts in the 1980/90s in remote South East Asian waters) with little or no effect on the international H&M insurance market

For Hull and Machinery insurers back then Piracy was a visible, but

rather low-cost risk


What has changed in the Piracy picture in the 2000s?

What is the face of Piracy today?

- Frequent attacks

- More strategic areas

- Somalia Basin and Gulf of Aden are worldwide trading routes

- Nigeria is a target area for oil exploration in West Africa

- Use of heavy weapons (rocket propelled grenades etc.) with huge potential of damage to vessel, plus high aggressiveness of pirates (esp. Nigeria)

- Extracting ransom is the target

- 7 digit amounts plus costs

- Ransom “prices” are going up

- Well organized “Business model”

For Hull and Machinery insurers, a frequent, costly risk with more potential

of collateral damage up to and including Total Loss


Conclusion: Piracy is war

Piracy is now seen as a War rather than a H&M risk

Underwriters can steer their own risk

- By exclusion of defined navigational areas from standard cover

- By charging risk-adequate AP

Those who sail in piracy infested waters should pay

- They are a limited risk group

Higher premiums?

11/19/2008

10/24/2008

04/10/2006

03/18/2010


AP on Hull and Machinery War Insurance: Do insurers over-charge? Vessels under German management transit Gulf of Aden in 2009 = 1600 1

- Number of those hijacked

= 4 1

- Average amount of ransom paid

= US$3.5 million 2

- Average amount of costs for managing pirates, negotiations, money-transport etc.

= US$2.5 million 2

Claims burning cost per transit

- US$3.5 million + US$2.5 million x 4 ÷1600 = US$15 thousand

- Plus brokerage, risk margin, return on capital, etc.

1 Source: EinsFüKdoBw 2010

2 Speaker’s best estimate


Ransom-payment


Ransom Payments and General Average

Ransom is not an insured peril under an Hull and Machinery policy

The Marine insurer was never intended to become a ransom insurer

Ransom is paid by Hull and Machinery insurer in order to reimburse the owner for his GA contribution

But:

- Is there always GA situation?

“A common danger: a danger in which vessel, cargo and crew all participate; a danger imminent and apparently 'inevitable’”

- What if “Maersk Alabama Reloaded” – crew on land?

- Has the owner declared GA?

- Is the owner interested in declaring GA?

- Reimbursement of owner’s GA contribution, not the full ransom

- Insurer reimburses - who provides the cash upfront?

“Will only continue to work if all parties accept it”

Uncertainties due to President Obama’s recent Executive Order


Ransom Payments and Kidnap & Ransom (K&R) Insurance

The “Ransom-GA-model”

- In a way it is a “quick-fix”

- Shows cooperation between Hull and Machinery insurers and owners to mitigate loss

- Has structural weaknesses

- Gives no guarantee to work forever or in every situation

Again: The Marine insurer was never intended to become a Ransom insurer

K&R insurance should be an option for the Owner

Charter-Parties may allow for additional costs for K&R insurance

Mandatory for K&R coverage: A pre-arranged pre-agreed

What’s needed is a prevention plan


Prevention

IMO MSC Circular 932 – IMB, IMO, IUMO and others:

- “Best Management Practise To Deter Piracy in the Gulf of Aden and off the Coast off Somalia”

OCIMF:

- “Piracy – The East Africa/Somalia Situation - Practical Measures to Avoid, Deter or Delay Piracy Attacks”

IMO June 2009:

- “Guidance to Ship-owners and Ship-Operators, Shipmasters and Crews on Prevention and Suppressing Acts of Piracy and Armed Robbery”

All “Must-see, Must-have, Must-do” guidelines

- Mandatory, not a “nice-to-have”

Again: Mandatory for K&R coverage: A pre-arranged, pre-agreed-upon

- PREVENTION PLAN

Mandatory for War coverage: A pre-arranged, pre-agreed-upon

- PREVENTION PLAN


Somalia – “State” of Puntland

Source: “Die Zeit” Oct 26, 2010


Conclusions

The cause is onshore

- Poverty and political instability

Ransom payments ease the pain of ship-owners

- But don’t cure the symptoms

A ban of ransom payments will lead to a long-term battle of rich against poor on the back of seafarers

- Pirates have nothing (!) to lose

- Ship-owners, charterers and freight-forwarders have much to lose

Wilful “abandoning” of kidnapped crews will result in legal consequences for ship-owners

- A modern “Greek tragedy”

Naval support is crucial

- But limited (and costly)

The solution can only be a political one

- Political/social stability in the Horn of Africa and Nigeria (plus work, food and education)

Thank you for your attention.

18

2010: Piracy in international H&M insurance conditions

Named peril, but excluded per War, Strikes and Related Exclusion clause in the AIHC Hull form dated 9/27/2009

Included in Hull, War Risk and Strikes Clause as per Form 87C-108

AIHC

Feb. 6, 2007

ITC Hull

Jan. 10, 1983

Named peril (only since 1983)

Excluded as per JHC Circular JH 2005/46 Violent theft, Piracy and Barratry Exclusion Clause excluded

Norwegian Plan Excluded

German

ADS 1919

DTV-KK 78/92

New ADS 2009

All risk

Excluded as per market wordings

- (Similar for Par. 35.1.4 of the new German ADS 2009)

Piracy – An Ancient Risk with Modern Faces Sven Gerhard LLD, Global Product Leader HML BMUSF...

Documents

Transcript of Piracy – An Ancient Risk with Modern Faces Sven Gerhard LLD, Global Product Leader HML BMUSF...