As pirates have become more aggressive, the cost of insuring ships has gone up.
The Gulf of Aden, which connects the Indian Ocean to the Red Sea and the Suez Canal, is one of the busiest and most dangerous waterways in the world. As pirates have become more aggressive, the cost of insuring ships has gone up. Some companies are spending more time training their crews, others are avoiding the area altogether -- taking long trips around the Africa's southern tip that can potentially add millions to the cost of each journey.
While the coast of Somalia has been a problem for years, it was flagged in May as an area of particular concern by Lloyd's Market Association, and premiums have been rising -- at least tenfold, according to some media reports. Neil Smith, the senior manager for underwriting for Lloyd's Market Association, has said the exact figures are commercially sensitive in a highly competitive industry.
Large ships generally carry three separate types of insurance. Marine -- or hull -- insurance covers physical risks, such as grounding or damage from heavy seas. A second type of policy, protection and indemnity, covers crew issues, while war risk insurance covers acts of war, insurgency, and terrorism.
Although war risk policies typically cover hijackings and piracy, insurers often charge extra for ships that venture into high risk areas such as the Gulf of Aden. Others, including Chicago-based Aon Corp. and London's International Security Solutions Ltd., have recently launched new plans specifically tailored to cover losses incurred by piracy -- for example by including ransoms and cargo delays under the same policy.
The other option available to ship operators, taking the long way around Africa's Cape of Good Hope instead of the short cut through the Suez Canal, is also expensive.
Routing a tanker from Saudi Arabia to the United States through the Cape of Good Hope, for example, would add 2,700 miles to the voyage and boost annual fuel costs by about $3.5 million, according to the U.S. Department of Transportation's Maritime Administration. In addition, it said using that route would mean the ship could make only five round trips a year instead of six, cutting delivery capacity by 26 percent.