The benefits of kidnap and ransom (K&R) cover in countering the piracy threat is made by top insurance broker, Aon, in a new report.
There has been huge growth in the take-up with Aon noting that within three years of marine K&R becoming available the annual premium underwriters are getting from the shipping industry is as big as that from the land based K&R market, which has been developing for more than 40 years.
But at the same time there are also indications that shipowners may be reluctant to buy K&R on cost grounds.
“Many more losses have been covered by war policies than K&R policies. This suggests that there are still many shipowners either refusing to pay additional insurance costs or not appreciating the advantages associated with K&R policies,” notes Aon.
Aon enumerates the benefits of K&R rather than relying on traditional war risks cover. These include:
- Speed of resolution with ransoms reimbursed with 10 days,
- Guaranteed and unlimited access to specialist risk consultants,
- Avoidance of lengthy and costly general average,
- Protecting hull and war risks claims records,
- Reimbursements of miscellaneous costs including that for delivering the ransom or loss of the ransom in transit.
Aon says it has been able to obtain up to $50m of cover for K&R and loss of hire arising from a pirate attack.
The broker says it does not necessarily advocate such high limits but says that giving the increase in demands and payouts a minimum level of cover should be $5m.
Aon says it is seeing different rates quoted for K&R cover but suggests that the cost of $5m of cover for a well protected vessel with armed guards and a speed in excess of 14 or 15 knots might be in the range of $5,000 to $7,500 per transit.
The broker however advocates the purchase of K&R cover on an annual basis rather than per transit, noting that the cost is lower and policies can be tailored so that individual transits are invoiced separately, so the cost can be passed on to charterers.
The Aon report highlights that underwriters of different classes of insurance differ in their requirements with the K&R market notably requiring various precautions as a prerequisite for cover.
“It is of particular note that the war market does not pay attention to a vessel’s state of preparedness for transits through high risk areas and this may be one of the major reasons as to why the K&R market is picking up a proportionarely lower number of losses than the war market.
Aon advocates that providers of armed guards have their own K&R policy to protect against a situation where separate and additional demands are made of the security company.
The K&R market was traditionally dominated by the Hiscox syndicate at Lloyd’s but has become much wider with Aon listing Aspen, Catlin, Chartis, CV Starr, Griffin and Travelers now among the main insurance carriers.
Aon endorses the use of armed guards as a physical form of “insurance” against pirate attacks noting that so far no vessel with such defences has been taken but registers concern that increasing use of armed guards poses a “very real risk” that sufficient quality resources will be available to satisfy demand.
“Vessels identified as being low and slow without sufficient ability to demonstrate risk mitigation or general awareness will be greater targets than those bristling with guards and a sense of preparation for attack,” adds Aon.
Aon notes that the “costs and inconvenience of the Somali piracy problem is at an all time high” with an increase in the number of attacks over the last year although fewer have been successful.
The broker says that in the Arabian Sea zone there have been 267% more attacks in the last year than the previous year but the success rate dropped to 19% from 30%.
