Piracy insurance is a relatively new idea, spawned by the Somali pirate takeovers of several ships in recent years. Marine kidnap and ransom insurance covers ransom costs and vessel recovery costs if a ship is hijacked by pirates. Florida has its own history of piracy, but modern piracy is a multi-billion dollar industry. And when insurance companies see losses, they see opportunities for their own profits.
Although the piracy insurance industry is just about five years old and is a $250 million industry, it is already seeing signs of a downturn in the lucrative market, for several reasons. International navies have aggressively sought to protect ships from pirates.
Ship owners are now defending their vessels with barbed wire. Ship owners are also hiring armed maritime guards for their vessels, which allow the owners to negotiate discounts up to one half of their piracy insurance premiums.
Last year alone, pirate attacks cost the world economy approximately $7 billion. However, pirate attacks for the first half of this year were about half of what they were last year. All of these factors combined have made it more difficult for pirates to carry out successful attacks, and that means that ship owners are not investing in piracy insurance nearly as much as in proceeding years. This has also resulted in lower piracy insurance premiums for ship owners. Rest assured, though: Insurance companies are still making a considerable profit on the coverage, because claims have fallen considerably.
Although there is less piracy, the hijackers are demanding ever-increasing amounts of ransom. Indeed, the average ransom payment this year has risen from $1 million to $1.5 million from last year. In the words of one industry specialist, the pirates are "being paid more for less work."
Source: Insurance Tech, "Insurers Face Tougher Times as Somali Piracy Drops," Reuters, Sept. 21, 2012