With piracy up 17% along the East African coast, and rising fast in West Africa, managing the risk has become a challenge for shipping companies.
What has happened is cargo owners are forced to sign an open-ended guarantee note with most companies.
When ships are seized by pirates, it can take more than three months to get the vessel back and in some cases, this can drag on for years.
An Aon Risk Solution report says the number of ships being pirated is rising rapidly.
According to the report, cargo vessels are the most attacked type of vessels on the African coast.
But even more concerning for some companies are attacks inside the Gulf of Aden through to the Arabian Sea, which experienced a 267% increase in attacks.
The report highlights the need for those operating in the marine industry to manage the risk of piracy by ensuring robust preparation and preventative measures are in place to reduce the potential exposure to liability, says Jeffry Butt, head of marine at Aon SA, He says that in some ransom cases the average guarantee or bond that is submitted to each cargo owner for signature and return, is open-ended which does not stipulate the proportionate amount to be guaranteed. The cargo owner’s liability at the time of signing is therefore an unknown.
"Should a vessel be pirated, costs are incurred almost immediately. Prior to finalisation of ransom settlement, investigators, legal counsel and average adjusters are brought in to assist with ransom negotiations, determining the value of the vessel and the cargo she carries as well as potential consequential risk to lives and the environment.
When piracy occurs, it can take up to 3 months before the pirates start with initial communications. Once it has been confirmed that a piracy has indeed occurred, the general practice thus far has been for the ship owner to declare a "general average". The average adjusters will provide each cargo owner with an average guarantee or bond to be signed and returned. This confirms the commitment from each cargo owner that they accept responsibility to pay their proportionate share of the collective cost of the ransom being negotiated.
In some cases the cargo owner pays about 60% of the value of the cargo on board.
This is compounded by 3rd parties involved such as negotiators, average adjusters and security companies.
"Although there are commodities that pose a environmental threat, especially in the case of bulk oil, piracy in general is not commodity-driven as the cargo on board often has a limited monetary value, however the ransom value can be almost limitless due to the people that are taken hostage," says Butt.
Insurance costs for tankers passing through Aden and the Gulf have risen 7,5% this year which is faster than the average increase of 4%.
That can amount to around $1500 per day in fees.
Shipping insurance is broken down into hull and machinery and protection and indemnity. Both have risen from 23% in 2007 to 35% this year.
Date: September 24, 2011 Source: Business Day