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By Doug McLeod

Somali piracy continues to pose a multibillion-dollar threat to the shipping industry despite the successful use of armed guards on vessels, naval intervention and other steps that have brought some improvement.

"There are still a high number of attacks occurring," even though the rate of successful attacks has dropped recently, said William Miller, divisional director with the Special Contingency Risks Ltd. unit of Willis Group Holdings in London.

"The trouble," said Robert Scott-Mackie, senior underwriter-marine with Torus Insurance Holdings Ltd. in London, "is there's too much money involved for the pirates for it to go away."

Shipping interests and insurers are increasingly relying on armed guards, onboard security measures like razor-wire perimeters and naval anti-piracy action to slow hijackers.

"All of these have acted in conjunction with each other to lower the rate of piracy off the Somali coast," said Gary Li, head of marine and aviation for Exclusive Analysis Ltd., a London-based intelligence firm.

Market observers are also awaiting the start-up of the Convoy Escort Programme Ltd., which will provide armed escort service from the mouth of the Red Sea to Salalah, Oman.

These efforts are all aimed at a problem that has defied quick solutions.

An expensive business

Somali piracy created between $6.6 billion and $6.9 billion in economic costs in 2011, according to a report sponsored by the One Earth Future Foundation, a nonprofit research organization based in Broomfield, Colo. The costs include $2.7 billion in fuel expense stemming from the higher speeds ships must maintain through pirate-infested waters; $1.3 billion for military operations; $1.1 billion for security equipment and armed guards; and $635 million for insurance, according to the report.

Exclusive Analysis counted 570 attempted hijackings by Somali pirates between January 2010 and May 2012, with 111 successful seizures of tankers, cargo ships, bulk carriers and other vessels.

So far this year, there have been 67 attacks off Somalia, with 13 successful hijackings and 185 crewmembers currently held hostage, according to the London-based ICC International Maritime Bureau.

Pirates typically attack using small arms fire and rocket-propelled grenades, but relatively few ships are damaged during hijackings, Exclusive Analysis figures show.

In fact, pirates often take care not to damage ships or cargo or injure crewmembers because their livelihoods depend on returning property and people intact, said James W. Carbin, a partner with Duane Morris LLP in Newark, N.J.

Ransoms have been on an upward trend for years, with the total amounts paid jumping to $145 million last year, from $31 million in 2008, according to security consultant Control Risks Group Holdings Ltd. The average ransom per vessel rose to $5 million in 2011, from $1.3 million in 2008, the One Earth Future report noted.

Pirates have become more sophisticated in negotiating ransom -- one reason for the steady increase -- and underwriters are concerned this could get worse. To date, pirates have negotiated a single price to release a ship, cargo and hostages; if they decide to ransom each separately, the cost of hijackings could rise further, Scott-Mackie said.

"If you continue to pay," said Don Harrell, senior vice president-marine with Liberty International Underwriters in New York, "they are going to continue to get worse, because it's a business."

Shipping interests and governments have taken several steps to combat the problem, with varying degrees of success.

The European Union Naval Force Somalia, consisting of up to seven combat ships and up to four surveillance aircraft at any given time, has become "very effective," Li said. The force last year shifted its tactics from trying to patrol the entire Gulf of Aden to using aerial reconnaissance to spot and intercept pirate mother ships -- from which attack skiffs are launched -- as they leave the Somali coast. Once intercepted, the mother ships are sunk and the pirates typically put back ashore in Somalia, he explained.

"It essentially just scuppers the operation," Li said.

In March, the naval force launched its first air strike on a pirate base within Somalia, but pirates have since threatened to kill hostages if additional strikes follow.

National navies have also contributed warships to escort convoys through the Gulf, though not all ship owners or operators choose to join, Li noted. The convoys can only move as fast as the slowest ship -- possibly 10 to 15 knots -- and many operators would rather not wait, he explained. Ships traveling at 18 knots -- 20 miles per hour -- or faster can generally evade pirate skiffs.

The most effective deterrent so far has been armed security, marine sources agree.

"What really has made the difference is having armed guards on vessels. That's the major factor," Scott-Mackie said.

No ship with a detachment of private security guards has yet been taken. While it's difficult to know how many ships use them -- because their presence isn't generally known unless there's a hijacking attempt -- Exclusive Analysis estimated that 40 percent to 45 percent of ships transiting the Gulf of Aden have armed guards.

"It's almost normal now," Li said.

The number of private marine security companies has exploded in recent years, and the use of guards has brought its own complications. Ship operators, for example, have to keep track of the rules regarding shipboard firearms of the ship's flag state and of its various ports of call. Yemen, for example, does not allow armed guards in its ports; in such cases, the guards or their weapons would have to be put off a ship before it enters a Yemeni port.

Consensus Lacking

Another potential problem, marine sources said, is there is no single set of regulations governing security guards' use of force during a voyage. Many marine security companies have their own rules of engagement. The Baltic and International Maritime Council has developed a model security contract for ship owners, called GUARDCON, which sets out guidelines on the use of force; the BIMCO contract requires a "graduated and proportional" response, starting with nonviolent measures like flares or sirens and ending with lethal force as a last resort. The United Nations' International Maritime Organization in May proposed similar guidelines in an interim memo to security companies.

But "there's no consensus on a regulatory body for armed guard providers," Miller observed.

The presence of armed guards also creates liability exposures for ship operators. If a guard, for example, accidentally shoots a civilian, the ship operator and guard company may be sued together for excessive use of force.

Both the GUARDCON contract and the IMO guidelines say that any incident involving weapons should be documented and reported to the ship owner or operator, steps that could be important in case of future liability litigation.

Along with onboard security, another key protection for ship owners has been following the industry's best management practices for countering Somali piracy, known as BMP4.

BMP4 outlines a number of defensive measures, such as installing double coils of razor wire outside a ship's railings; metal shutters for bridge windows; and fire hoses or water cannons that can be aimed at approaching skiffs.

It also recommends that ships have a "citadel" -- a secure location, often the engine room -- where the crew can retreat safely in case pirates take over a ship. A citadel should have two-way communications so crew can radio for help, and should have controls allowing the crew to cut the ship's power.

The Suezmax oil tanker MT Smyrni, hijacked in May, had neither armed guards nor a citadel and was traveling at nine knots, making it easy prey for pirates, Exclusive Analysis reported.

All of these measures to fend off pirates have created huge costs for the shipping industry.

Armed security can cost anywhere from $400 to $1,000 per guard per day, brokers said. A 12-day transit of the Indian Ocean with four guards could thus cost a ship owner as much as $35,000 to $48,000, depending on where the guards join and leave the voyage, said Sean Woollerson, a partner in the energy and marine division of Jardine Lloyd Thompson Group PLC.

Many ship owners also buy marine kidnap and ransom cover. Fortunately for them, competition has driven K&R rates down: Where there were only a few insurers writing the coverage several years ago, there are now at least 15, according to Woollerson.

Limits vary, depending on the ship, with $7.5 million to $10 million in limits common for very large crude carriers and $5 million for bulk carriers, said Miller. While a $5 million limit might have cost $15,000 to $20,000 four years ago, the premium today -- with a discount for having armed guards -- might amount to only $5,000, he said.

Ship owners also pay a hull war risk additional premium for transits through the high risk Gulf of Aden/Arabian Sea area. For a vessel valued at $25 million, this would cost an additional $18,750, Woollerson said. War risk underwriters offer discounts of up to 30 percent for having guards and K&R cover, which would reduce the added war risk premium on the $25 million ship to $13,125.

Given all these additional costs, then, a voyage through Somali waters might cost a ship owner in excess of $50,000 more than a voyage through safer waters.

Marine industry observers are hoping the combination of guards, naval action, escorts and BMP4 measures will continue paring the success rate of pirate attacks. If enough hijacking attempts prove fruitless, pirates may begin to lose the financial backing they have in Somalia for boats and weapons, marine industry sources said.

Some, however, said they expect the problem to continue as long as poverty and lack of effective government in Somalia create the conditions for piracy to thrive.

DOUG MCLEOD writes about risk management and insurance. He can be reached at riskletters@lrp.com.

August 22, 2012

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