Marine - Post-IUMI: High seas scrutiny

This year’s conference of the 
International Union of Marine Insurance gave underwriters plenty to mull over as they 
returned to their day jobs in late September, with battling pirates dominating their thoughts.

Marine insurers have been covering piracy for more than 200 years and it features in the somewhat romantic language of the traditional Lloyd’s marine policy.

The perils that the assurers are contented to bear include pirates, rovers, thieves and takings at sea. However, any notions of viewing pirates through rose-tinted glasses would be ill-advised, with pirate activities escalating and ransom demands reaching new highs.

The major point of discussion following the conference has been how the cargo market 
addresses the risk of piracy. Neil Smith, head of underwriting at the Lloyd’s Market 
Association, says: “That really is a burning question 
at the moment. The ransoms are impacting cargo insurers as general average payments, and because the GA payment is based on the respective values of ship and cargo, significant exposures are falling into the cargo sector.”

Smith says that, most of the time, the value of the cargo outweighs the value of the vessel. However, because of the way the business is written, cargo insurers have little — if any — opportunity to price the piracy risk specifically.

In Paris, the issue was debated by Iumi’s cargo committee, with a number of 
overseas markets urging its consideration by the London market’s joint cargo committee. The meeting in October saw an open debate about alternative ways of dealing with 
the situation.

Brokers were keen to stress they did not wish to see the coverage for piracy taken out of the cargo clauses. On the other hand, 
underwriters believed a mechanism that would allow them to monitor exposures would be difficult in circumstances where the cargo owner was oblivious to the vessels in use and the routes being taken.

Range of options
Following the meeting, a range of options for the cargo market were proposed: delete piracy cover from the existing coverage; 
delete piracy and reinstate coverage through a suitable ‘write back’ clause allowing underwriters to charge a premium commensurate with the risk; or introduce a mechanism 
allowing underwriters to monitor their piracy exposures on appropriate contracts, within the existing framework.

Rather than excluding piracy, and then 
offering it as a write back, there was also a proposal to treat it like war and strikes risks, by reference to the Global Cargo Watch List, maintained by Exclusive Analysis – giving underwriters the option of charging additional premium and restricting cover for certain geographical areas.

While the JCC has produced draft 
wordings for underwriters to consider, Smith says discussions are not aimed at finding a single solution but rather to propose a range of options for underwriters.

He adds: “The JCC cannot suggest marine underwriters use any specific clause. It 
will have to be a series of options that 
underwriters can adopt or not, according to their own requirements.”

Practical issues
The debate has also raised a number of 
practical issues. Some market practitioners feel attempting to exclude cover would have its own problems, because, where there is no loss or damage, piracy claims are presently being paid in GA.

Regarding the ‘held-covered’ provision in the JCC’s draft wording, although it fits well with the Lloyd’s market tradition of flexibility it may not find favour with those insisting on absolute contract certainty.

In addition, others believe the draft wording would be unworkable at the high-volume low-premium end of the market, where importers and exporters know little about the routing of container ships, and have no control over them.

Adrian Marsh, a member of Hill Dickinson’s marine team, argues that the majority of cargo policies are sold on an annual basis, with no market mechanism to charge a premium for piracy on a voyage-by-voyage basis.

He says: “The reality is the market is 
exceptionally soft, incredibly competitive and, therefore, to try and recoup piracy losses with increased premiums is easier said than done. With non-container traffic, such as bulk or oil cargo, the underwriter has much more control, more idea about the potential 
exposures and is better placed to write that into the premiums.”

Dieter Berg, senior executive manager for marine at Munich Re, explains the discussion among cargo insurers could indicate that 
premiums no longer make adequate allowance for piracy, which could explain why premiums largely fail to reflect the trend in losses.

He adds: “Another issue is the question of whether GA is the appropriate instrument, considering that the pirates’ primary leverage for extorting a ransom is the threat to the crew. This is evident particularly because an ever greater number of seamen are being taken as hostages to locations on land.

“This draws into question protection & 
indemnity insurers’ unwillingness to participate in ransom payments, even though one can readily 
understand their reluctance thus far. That is why, along with the cargo insurers’ initiative to receive a premium commensurate with the piracy risk, it would be just as desirable to have P&I insurers share the burden.”

Berg believes the best option is for owners of shipping companies to obtain better protection for individual voyages under kidnap & ransom cover. Where the cover applies, negotiations with the pirates, claims settlement, payment and care of the crew following their release are handled by experts. The shipping company owners are not compelled to make payment in advance and do not have to recoup the money from insurers.

Berg adds: “Reinsurers are seeing more and more cargo insurance claims coming from GA because loss payments are increasing significantly, exceeding primary insurers’ retentions. The worst-case scenario, for example, is that pirates fire upon and sink an oil tanker, thus triggering a gigantic oil spill, but that has not 
occurred thus far.”

Armed guards
Since the September conference, the situation relating to protection of ships transiting areas with pirate activity has also developed with the announcement that it will now be legal for British flag ships to carry armed guards.

RSA’s marine director, Richard Turner, says the progression was highly likely. He adds: “The decision to deploy armed guards rests with the flag state of the vessel first and only then can the shipowner decide whether to have guards or not. It is not actually an area where the insurer should be making a decision one way or the other. The British flag was one of the last to endorse armed guards, so it is just the UK coming into line with elsewhere.”

Aviva UK marine trading manager Neil Tuvey adds: “As British ships only account for a small proportion of the world’s fleet, the reality of the situation very much requires an international solution – both in terms of enforcement and a clear legal understanding of what can be done.”

Kennedys’ marine partner, Martin 
Watson, welcomes the move. He argues that the 
presence of naval vessels, hampered as they are by terms of engagement, have not always been effective. Sooner or later the huge cost will prove prohibitive. Until a solution can be found shipowners will have no alternative.

Watson adds: “The mere visible presence, or advertised presence, of armed security will probably deter pirates. But while it is important that the guards are not prevented from doing their job by ‘terms of engagement’, there are hundreds of hostages ashore and a real fire fight, resulting in pirate casualties, would carry the risk of reprisals. It is essential that security companies are properly managed, vetted and signed up to the International Code of Conduct for private maritime security companies.”

Nevertheless, insurers are concerned about potential liabilities arising from the use of armed guards. Shipping bodies are keen to set up a standardised contract to prevent less experienced or less professional armed guards from being employed and doing more harm than good.

Demian Smith, global head of marine at Torus Insurance, says: “The use of armed guards is a useful adjunct to BMP3 and 4 for shipowners to prevent piracy. That is provided they are adequately qualified, that they contract on the right basis, and carry the right level of liability insurance.

“This is something that is necessary, 
particularly due to the potential for a 
reduction in naval support because of individual countries, particularly those within Europe, implementing austerity measures meaning they cannot afford to provide the naval protection that they do now.”

However, Berg expresses a common anxiety among insurers when he says the use of armed guards onboard vessels will increase the risk of escalating violence, with the potential of major harm to crews, the environment, hull and cargo. In his view the problem of piracy cannot simply be passed onto shipowners or insurers.

He says: “The community of states has yet to crack down on piracy with the necessary resolve. Sustainable concepts for pacifying the affected regions are still very patchy. Military measures to improve the situation in the short term may be a step in the right direction but, unfortunately, they are not effective enough.

“Legal systems must be adapted to interlock more effectively. Only international regulations allowing the systematic criminal prosecution and conviction of criminals can act as a deterrent. And only the existence of a functioning state and legal system linked to economic stability can provide the necessary conditions to prevent criminal acts.”

The UK government and piracy
In the past two months, the coalition government, led by David Cameron, pictured, has taken a strong stance in a bid to help tackle piracy. In October, Cameron announced that the government was seeking to legalise armed guards on ships sailing under the British fl ag. The guards would only be permitted when passing through dangerous waters, such as the Red Sea and the Gulf of Aden.

Last week, the Prime Minister, made a speech at the Lord Mayor's Banquet condemning Somalia as a "failed state" and pledged to host a conference on how to tackle piracy in London next year.

Cameron said: "Somalia is a failed state that directly threatens British interests. Tourists and aid workers kidnapped. Young British minds poisoned by radicalism. Mass migration. Vital trade routes disrupted. Meanwhile, Somalis themselves suffer extreme famine, made worse by violence and some of the worst poverty on earth. We shouldn't tolerate this. Somali pirates aren't invincible: they are violent and lawless men in small boats and it is time we properly stood up to them. That's why British vessels can now carry arms. But there is a real and pressing need to pull together the international effort."