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By CYRIL TUOHY, managing editor of Risk & Insurance®

More than 25 incidents of piracy have been reported in the Gulf of Aden so far this year, and ship owners have raised the issue with Chubb, a major underwriter of kidnap and ransom insurance.

Risk & Insurance® Managing Editor Cyril Tuohy spoke with Greg Bangs, vice president of Chubb & Son, and worldwide product manager for crime, kidnap and ransom, and workplace violence insurance, about repurposing policies to fit the new demands of the marketplace.

Greg Bangs: Traditionally shipping companies have bought their marine shipping insurance products on a per-trip basis or per transit basis.. So, for example, their war risk, would be based on a per-transit basis and not an annual policy. Therefore, if a ship was going from Djibouti to Asia through the Gulf of Aden and all of the waters along the way, the ship would be insured for just that trip. Talking with ship owners about a kidnap and ransom policy, they told us that coverage on a per transit basis is really what they needed, not an annual policy. There is some coverage available under the traditional marine products but its grey and it is kind of limited.

Cyril Tuohy: Give me an example of such a hole.

GB: Hull policies often exclude acts of terrorism and many courts are still very unclear as to whether piracy is in fact an act of terrorism. So there is a grey area. Hull policies, even if they do respond to the ransom, don't respond to the broad range of expenses that a dedicated K&R coverage would bring to the table: expenses involved in hiring a security consultant to handle the risk on behalf of the insured; medical expenses; lawsuit coverage; public relations expenses, etc.

There is a series of expense coverages that are not available under the traditional product. The other grey area is the war risk coverage. If the vessel is held for ransom, and the crew released because the ransom is paid, and the ship completely unharmed, then was there actually a loss under a war risk policy? A lot of war risk insurers would say there wasn't a loss.

CT: Chubb altered the K&R product, not the marine product?

GB: Correct. It is really a K&R policy that has just been adapted and focused for the marine risk. It's not offered under our marine coverage. We call it a Marine K&R product. We'd been offering K&R for about 30 years to businesses. But, we've turned our focus on the marine industry in the last 6 to 8 months in response to the fact that hijacking spiked and ship owners are saying to us: What can we do?

CT: What kind of details were changed from the K&R land product to the Marine K&R product?

GB: The primary focus is on the way we sell the K&R coverage. We sell it on a per-transit basis. Actual coverage granted is similar to our standard policy, but we also focus on the ship owners' key exposures--which include the need to pay the ransom. The main thing for the ship owner is when a hijacking occurs, they need a security consultant to immediately come "on board" and handle the incident. The incident is actually handled from land, but they do it through a dedicated radio channel and frequencies in English.

From the ship owner's perspective, the most important thing other than the ransom payment is to make sure that you get that security consultant in there so in that way the coverage is not that different from the land-based policy. But, there may be some unusual wrinkles involved in a hijacking. For example, once the ransom demand has been agreed to, the security consultant arranges to have a helicopter or light plane fly over the ship to drop the ransom money down in a big bag. It's usually used $100 bills in a big bag and the pirates literally just divide it up right there on the ship.

CT: What kind of other "unusual wrinkles" have you come across?

GB: There was one hijacking and the pirates had gotten their money. They each had an average of $150,000 in their pockets and they left the ship and were going back to land. Three of these little pirate skiffs sank in heavy seas. So here are these pirates washing up on shore with $150,000 in their pockets. Thousands of people came out of the hills looking for these dead pirates with $150,000 in their pockets.

CT: About 6 to 8 months ago, you brought these policies to market. How has the uptake been?

GB: It has been extremely good. We have actually sold policies in various markets: the United States, the United Kingdom, northern Germany, where there is a heavy ship-owning presence, and in Asia as well, particularly in Korea. In all of these markets, the response has been quite strong because the ship owners really want that positive coverage affirmation: "Yes, I am protected against this. I don't have to argue with my hull insurer. I don't have to argue with my war risk insurer. I know I'm covered against kidnap and all the expenses involved." The product is sold through brokers and agents.

CT: Pricing depends on what is being covered and what is being protected. A large cargo ship would be a different price than an oil tanker.

GB: There are a number of different factors we take into account. The risk profile is very different from class of ship to class of ship. The most difficult ones to hijack are the container ships, because in many instances they are too fast for the pirates. They also have a much higher freeboard, which is the amount of the hull sticking out above the water. The higher it is the harder it is for the pirates to climb. As the container ships are the hardest to hijack, you will rarely see pirate ships taking a ship such as the Maersk Alabama.

The second tier would be the bulk cargo ships that are the ones most being targeted and taken. The third tier would be the slow, hard-to-turn not that difficult to get onto oil tankers, which are sitting ducks. Those are the easiest to attack because they are big, slow and lumbering, and if the pirates want to get on board they will.

CT: And those kinds of ships, I assume, would be more expensive to cover.

GB: Correct. The tankers would pay the most and then the cargo ships and then the container ships.

CT: At $100 a barrel of oil, I would think the tanker is all of a sudden much more valuable.

GB: Exactly. Look at the Sirius Star. That was taken with $100 million worth of oil in it.

CT: The flare-ups in the Gulf of Aden are not unique. Is this the first time you have repurposed these policies from land to sea, or have you repurposed these policies previously?

GB: It is the first time we have repurposed for the maritime exposure. It is not like piracy is a new problem but it is a new problem now that's surfaced in the Gulf of Aden where the level, scope and scale of the problem has just exploded exponentially. There's so much money for the ransom to the pirates that has been paid, so much money washing around in Somalia amongst the pirate groups.

There are thousands of potential pirates out there and they have a lot of money now, so of course they are going onto the black market and buying their RPGs and their AK-47s, and suddenly you have this very, very large pirate base heavily armed with a nice kitty behind them. It is the scale of it that is much bigger than anything we have ever seen.

CT: This serves as an interesting lesson in repurposing your existing products. Is this a model that Chubb would use in the future, or is this limited to this particular world of K&R?

GB: It is a good model. It has shown us that if you specifically repurpose and direct your focus on a particular segment, you can address the needs of the insureds and at the same time obviously, sell more insurance, which makes everybody happy. This is a model that we will probably use going forward.

August 1, 2009

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