Piracy Insurance Is Still Available, At A Higher Price

Despite a surge in piracy off the coast of Somalia in recent years, capped by the dramatic rescue of a U.S. cargo ship captain there Sunday, insurers are still willing to offer piracy insurance, although at dramatically higher prices.

"In general, the price is up five- to 10-fold from 18 months ago," when the surge in piracy off Somalia began to take off, said Peter Townsend, executive director for the marine practice group at insurance broker Aon Corp. (AOC). "The demand is there."

Piracy insurance generally covers physical loss or damage to the ship or its cargo, along with kidnap and ransom coverage for the crew. Townsend said he helped develop coverage that also includes the daily loss that comes from having a detained ship sit unused while the owners negotiate ransom with pirates.

Piracy-insurance prices are usually set per shipment no more than a week before a planned passage through the area plied by Somalian pirates, which includes the Gulf of Aden and parts of the Indian Ocean. Though prices vary widely, it might cost a shipper $30,000 to $50,000 for $3 million to $5 million of coverage for a single voyage through the area, Townsend said.

Townsend said prices tend to dip immediately after a spate of hijackings. "Underwriters feel that, if several vessels are being held, the likelihood is decreased" that there will be another pirate attack in the following days.

He said Sunday's rescue of the captain of the American-flagged cargo ship Maersk Alabama by U.S. Navy Seal sharpshooters probably won't decrease piracy, despite the death of three of the pirates during the rescue.

"The rewards [of piracy] outweigh the risks, in their view," Townsend said. "The loss of three pirates will harden their resolve. It is a risky business."

Townsend said he couldn't say if the Maersk Alabama was insured, but he said many shippers play the "percentages" and hope their ship will be one of the many that make it through unattacked. However, the surge in piracy in the past two years is increasing interest. Most piracy insurance is underwritten through the Lloyd's of London insurance market, where groups of insurers take on risks.

One insurer that offers the coverage, Chubb Corp. (CB), said last month that prices generally were up around 20%. A Chubb spokesman said the company didn't break out its total premiums of profitability on the coverage, but that it wasn't a major part of its business.

Townsend said pirates off the Somali coast detained 111 vessels and 800 seafarers in 2008, which was about a 200% increase from the year before. So far in 2009, 40 vessels have been detained.

In 2008, Townsend estimated, around 30,000 vessels traveled through the area, which he called a "major artery" for shipping.

-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141; [e-mail]