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As they set sail on the high seas, today's merchant vessels can rely on modern technology to make their voyages safer than ever before. Despite the advances, however, ship owners and cargo owners still face many of the same age-old risks that bedeviled the ancient mariners--bad weather, shipwrecks, theft and pilferage, and piracy.

On top of that, cargo owners and ship owners have to contend with modern perils such as terrorism, as well as liability from increasingly strict regulations on everything from pollution to health standards for U.S. crew members.

The topic of piracy may call to mind colorful 18th century images of men like Blackbeard or Calico Jack hoisting the Jolly Roger and plundering ships along the trade routes in the Atlantic or the Caribbean.

Although the golden age of piracy was nearly 300 years ago, pirates remain a very real and serious problem for modern mariners.

"The risk of piracy, old-fashioned and quaint as it sounds, has not gone away, and it is still covered," Komorowski says.

Only today, the pirates patrolling the narrow straits of the South China Sea are armed with cutting-edge weaponry and radar, and their plunder is not gold or rum but pricey electronics like laptop computers and Blackberries. And they don't have to hoist the Jolly Roger anymore.

"Piracy in the South China Sea is still an enormous threat to international shipping," Komorowski says. It is a problem that has been constant for merchant vessels, he says.

Indeed, pirate attacks on ships rose 8.9 percent in the first quarter of 2006 compared with the year-ago period, the result of incidents off Indonesia, the world's most dangerous area for piracy, as well as in Somalia and Nigeria, according to the International Maritime Bureau.

In Southeast Asia, pirates target vessels with containers chock full of expensive electronic gadgets manufactured in the region's emerging economies.

In the blink of an eye, they can make off with millions of dollars worth of high-tech equipment that they can then easily sell on the black market for a tidy profit.

Off the North Africa coast--where in the early 19th century the U.S. Marines won fame against the Barbary pirates operating from Tripoli--pirate attacks have been a problem as well. But the cargo shipped from that region tends to be bulk commodities such as palm kernel oil or iron ore--items that are not easy to pirate away.

Instead, the bigger problem is pilferage from the docks as the large, oceangoing vessels are unloaded and the cargo is moved to smaller coastal vessels, Komorowski says. Even so, it is still safer to transport cargo by ship rather than by truck or rail, he says. However, there's not much a risk manager can do about the piracy in Southeast Asia or the pilferage in Africa.

According to the International Maritime Bureau, authorities in Indonesia have increased their efforts to defeat piracy with a show of force in known hotspots via several intelligence-led actions. These efforts have resulted in several pirate arrests.

Insurance markets, meanwhile, have put surcharges on insurance premiums for cargoes that transit that area, says Bob DeMotta, managing director of Aon Risk Services' marine insurance operation.

That, he says, is causing ship owners and cargo shippers to reconsider their transit routes. But that option is limited because it can be difficult to find an alternative in certain parts of Southeast Asia.

Merchant marines have no defense against pirates, Komorowski says. And there's not much anyone can do to defend against even a small modern high-speed attack vessel.

The risk, therefore, is "tremendously current," he says. "This is why people buy marine cargo insurance--as well as against the traditional perils of the sea, which mariners call heavy weather, windstorm, hurricane," he says.

Other risks--such as pollution and even terrorism--are being managed through international regulations, which are helping to raise risk management standards.

Tough international regulations in the area of pollution, for instance, have helped to reduce the number of pollution incidents.

"Years ago everybody was talking about pollution," DeMotta says.

Oil spills were a big risk, not just for the oil companies, which saw their asset wash away, but for the environment and the local communities that were harmed by the pollution.

Although the Exxon Valdez spill in 1989 has become infamous as an ecological disaster, with more than 10 million gallons of crude pouring into the Prince William Sound in Alaska, there have been other, even larger spills in more densely populated areas.

In 2002, for instance, the Prestige, a 26-year-old tanker, split apart and sank off the coast of Galicia in Spain. The Liberian-owned, Bahamian-flagged Prestige was carrying more than 60,000 tons of fuel oil, making the spill one of the worst in history.

New regulations have forced ship owners to phase out their single-hull oil tankers in favor of new ones with double hulls. The new regulations also have increased fines and penalties imposed for any kind of illegal discharge.

Under a law enacted in 2003, for instance, France reserves the right to intercept ships caught in the act of polluting up to 90 miles from its southern coast. Captains of tankers and other large vessels could be sentenced to up to four years in prison, as well as fines of up to $600,000. Until now, only fines, and no prison terms, could be imposed outside the territorial zone. As a result of these various laws and regulations, the number and the severity of oil spills and other pollution incidents have dropped dramatically in recent years.

"It is still a big risk," DeMotta says. "The potential severity of what happens in a pollution situation is still there," he says. "But we're seeing fewer pollution events, and I think that's the reason for it."

Although most businesses generally dislike government intrusion and increased regulation, this is an example of a situation where regulation has helped improve risk management strategies and has reduced liability, he says.

"While people generally don't appreciate more regulation and interference from government, in certain circumstances it has had a positive impact because it has motivated changes in risk management strategy by the companies and, in fact, some of the positive results are evident--look at the impact of reduced pollution," DeMotta says.

"The standard of risk management and the level of competence for the maritime industry has increased significantly," he says.

Terrorism, meanwhile, is an entirely new peril that has only become a concern since the Sept. 11, 2001, attacks.

There is some concern that a terrorist could try to smuggle a bomb or some other device in cargo that is being shipped or stored in a warehouse or at a port, DeMotta says.

Measures are being taken by ports, ship owners and regulators to try to manage this risk, he says. Ship owners who are importing cargo to the United States are now required to electronically send the manifest of cargo in advance before the cargo arrives.

"There has been a response both from the industry and government to try to suggest risk management measures to minimize the risk of terrorism," DeMotta says. "I think it is also widely recognized that a lot more work needs to be done in that area over the next few years."

But, Komorowski says, the risk of a device smuggled in containers is a concern, yet the risk is fairly low given that underwriters are still willing to provide cargo coverage.

"Traditionally, the commercial markets are a very good gauge for how seriously do we take this as a society and how big of a risk is this--because I guarantee you that if underwriters thought there was a real possibility that this would happen, you would see it reflected in the pricing of these commercial products we are selling," he says.

"Underwriters would say, you know what, maybe we'll reconsider the concept of terrorism coverage for cargo in the ordinary course of transit, and we haven't seen that," he says.

Instead, the bigger concern is about cargo that is being stored at ports or in warehouses in foreign countries.

This is a concern, Komorowski says, because marine-cargo coverage has been broadened over the last 25 years to include coverage for unlimited storage of cargo held, not just at ports, but in warehouses as well.

"The coverage had been broadened and the cargo doesn't have to be in transit," he says. "It could be cargo in a warehouse." At one time, the warehouse coverage was restricted to cargo that would at some point be in transit, but that has changed.

"We don't care if it ever goes around the block," he says.

"But along with covering extended warehousing, the ugly specter of terrorism raises its head," he says. There is concern, for instance, that cargo in warehouses in foreign countries could be damaged in a terrorist attack.

Marine underwriters, he says, will cover international terrorism under the Terrorism Risk Insurance Extension Act, but domestic terrorism is covered through a separate property market. And coverage has been amended to differentiate between cargo that is in transit and cargo that is in storage.

"That's a relatively new threat that shippers of cargo would not even have dreamed of prior to the September 11 terrorist attacks," Komorowski says.

Finally, a new risk may be emerging for U.S. ship owners and operators in the form of a proposal from the U.S. Coast Guard, DeMotta says. The Coast Guard has drafted new physical guidelines for U.S. mariners.

The guidelines have stricter requirements for mariners with certain existing conditions seeking license renewals. For example, mariners with diabetic, epileptic or cardiac history may have more difficulty obtaining license renewals, DeMotta says.

While these guidelines may raise the health standard of mariners that can obtain their licenses, it may also reduce the level of shipboard experience as the pool of U.S. mariners is already marginal, he says.

So from a risk management viewpoint, these new guidelines could improve the chance that all U.S. mariners are healthy enough to deal with a shipboard emergency, yet could put on board mariners with less navigational experience. The challenge of finding qualified U.S. mariners is already an operational and risk management issue for ship owners and operators, he says.

If this proposed ruling is accepted, it can have both a positive and negative impact from a risk management point of view.

PATRICIA VOWINKEL lives in New Jersey.

July 1, 2006

Copyright 2006© LRP Publications