PIRACY | Report says average cost per attack is $9 million

A REPORT from the Actuarial Profession puts the average cost of each piracy attack on shipping at about $9m, although estimating the real cost is still uncertain.

The report by the Profession’s General Insurance Research Organisation said that the scarcity of statistics on maritime piracy makes the estimation of risk difficult.

Neil Hilary, a staff actuary with the Profession and one of the authors of the report said: “The challenge to the actuaries involved in pricing maritime insurance products is considerable. Firstly, actuaries are used to working with statistics which number thousands and tens of thousands. Despite the increase in piracy attacks, the numbers are still relatively small. Secondly, the information about the attacks issued by shipping owners is often vague. Understandably, shipping owners don’t wish to encourage further acts of piracy, but without knowing the full details we cannot come up with the true cost.”

However, the authors came up with an estimated figure of about $9m for each attack, based on publicly available data. With a success rate of six per million their calculations produce a kidnap and ransom rate of about $57,000 per vessel using the Suez Canal. “But this is based on judgement, not on strict modelling. Without accurate figures uncertainty will remain and future costs may be significantly different,” Mr Hilary said.

The report was intended to identify trends, look at rating and risk management issues relating to piracy and establish a framework for actuaries to manage new emerging risks.

It warned that although the authors collected data from a range of sources, some of the analysis is based on data that may be unreliable and is based on assumptions that may or may not hold.

It highlights the fact that several new features specific to modern piracy are becoming more acute, in particular crew members and ships being kidnapped for ransom. The number of hostages held globally remained steady until 2007 but has increased sharply since then, almost doubling in each of the two subsequent years.

Pirates’ use of weapons has increased, using proceeds of ransom payments to purchase more weapons. It warns that as shipowners employ armed security guards an arms race is developing. “This situation shows no sign of abating and the trend is expected to continue, with potential consequences to the safety of ships’ crew.”

Its analysis showed that although the overall number of hijacks has increased, they do not represent an increasing share of globally reported attacks. It suggests that the perception of hijacks becoming a more prevalent method of piracy is due to increased media coverage.

A number of additional costs are generated from increased piracy activity, arising due to the need to provide increased protection, risk mitigation and losses caused by piracy incidents.

The report acknowledges that it is not in the best interests of the shipping and insurance industry to publicly divulge pirates’ demands, whether a ransom has been paid or actual ransom amounts. Some payments have been reported in the press, but their accuracy is uncertain.

In addition to actual ransoms there are other related costs such as delivery of ransom payments, negotiation costs, repair costs and earnings losses. These add-on costs are thought to double the actual amount paid to pirates. Estimated average ransom as at end June had risen to $6.8m, although some reports have indicated higher ransoms being demanded.

Additional costs bring the total average cost to about $9m. Based on an estimated hijack success rate of 28% this equates to a claim frequency of 0.77% in 2010, up from 0.27% in 2009. This means the estimated kidnap and ransom cost is about $57,000 per vessel and a total cost of over $1bn.

Adding up the costs of sailing safely

* Alternative transport routes

Additional costs due to: ports and terminals loss of earnings due to reduced transit activity; local economies loss of earnings; increased costs to charterers and cargo owners; disruption and increased costs to supply chains; additional costs to shipowners of using longer routes to avoid high risk areas. For example, V.Ships Management estimated that avoiding Somalian pirates in the Indian Ocean added an average three days to a voyage. Using the Cape of Good Hope instead of the Suez Canal will incur further time and costs. Some of these costs are net costs, while others can result in benefits to others, such as ports on the alternative shipping route

* Security and Protection

Hiring a team of security guards costs an estimated $25,000-$100,000 for crossing the Gulf of Aden. There are further potential costs in the event of casualties, such as legal costs.

* Insurance

Contracts are available to protect stakeholders. The cost of insuring a container passing through the region increased ten-fold between 2007 and 2008 to $9,000. Munich Re estimated that Kidnap and Ransom payments premiums also rose ten-fold between 2008 and the first quarter of 2009, though Hiscox reduced premiums for ships with armed protection.