Pity The Poor Insurance Companies

September 30, 2012: Strategy Page

A sharp (60 percent) decline in pirate attacks off Somalia has led to a similar decline in insurance rates. Shipping companies have found that posting armed guards on ships moving near Somalia is cheaper than paying higher and higher insurance premiums. Over the last decade, the growing Somali pirate problem led to special insurance (marine kidnap and ransom coverage) that grew to be a $250 million a year business. A lot less of this stuff is being sold now that pirate attacks are down, and it's been noted that no ships carrying armed guards has ever been taken.

Various additional costs (extra fuel for high speed travel, danger pay for crews, naval patrols, insurance and ransoms) related with Somali piracy has been costing some $7 billion a year. Only two percent of this was actually ransoms, so shipping companies have been looking for better solutions. Armed guards appeared to be it. The use of such armed detachments has increased from ten percent (of ships in Somali waters) in 2010 to over 70 percent now. For a long time the conventional wisdom (at least in most seafaring nations) was that armed guards would be counter-productive and just spur the pirates to be more violent. This was not the case, as security personnel on large ships had the advantage of height, better equipment and training (most were former military). The pirates respected lethal force and avoided ships known to be carrying armed guards. As is often the case, the conventional wisdom was wrong.