Shipping insurance costs may double due to rise in piracy

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The escalation of piracy activities off the coast of Somalia is threatening to greatly increase insurance costs for ships sailing along the Gulf of Aden, said insurance and maritime experts.

The more than 10-fold increase in insurance premiums witnessed on the same route this year is likely to increase by another 60 per cent in December, a move that will adversely affect the already fragile maritime industry.

Warnings over increased costs come hot on the heels of Saturday's hijacking of a Saudi supertanker, the Sirius Star, by Somali pirates. The tanker, carrying two million barrels of oil worth $100m and 23 crew is currently anchored at a Somali port.

"There is no doubt that insurance premiums will shoot up as the risks posed by piracy escalate," said Khadija Bennis, Manager of Future Insurance Brokers in Dubai.

"We will see about 60 per cent increase in insurance premiums between now and December, with a possibility for further increase."

Insurance premiums for ships sailing through the Gulf of Aden, one of the world's busiest sea transport routes have gone up tremendously since the beginning of this year following a surge in piracy activities on the volatile Somali coast.

Insurance premiums for cargo shipments through the route have reached an average of $12,000 compared to $900 a year ago, according to sources from the maritime insurance industry.

Nearly 20,000 ships pass through the Gulf of Aden every year as it is the main trade route for dry and manufactured goods between Asia, Europe and the Americas. A majority of tanker operators in the UAE and the Gulf use the route to transport oil to various destinations around the world.

Bennis said ship owners were now facing a big increase in demands for ransom along with increased costs of settling negotiations.

"Previously, pirates would settle for a lesser amount to release the vessel, but today the average kidnap settlement runs stands at not less than $1m. The amount paid in ransom is also commensurate to the size of the vessels and its cargo," said Bennis.

Although Vela International MarineVela International Marine, the owner of the hijacked Saudi tanker says that it has not entered any negotiations with the pirates, reports indicate that pirates are already demanding a ransom of $250m, more than the cost of the vessel and its cargo.

Shipbrokers believe that increased insurance premiums are likely to have an impact on the final price of the goods shipped since ship owners and charterers are not ready to absorb the increased costs.

"Ship owners and charterers are definitely not ready to accommodate any extra costs arising from increased insurance premiums, so somehow these costs will be passed on to the final consumer," said Mathieu Philippe, Regional Director for Barry Rogliano Salles, a Paris headquartered ship broking company.

He said unlike in the bulk sector, tankers will have to transport cargo at all times regardless of existing circumstances since oil is urgently needed.

A report released yesterday by IHS Global Insight said shipping costs would rise significantly as insurance premiums increase substantially and that attacks were likely to spur international efforts to secure the region's shipping lanes.

According to NMA Faisal, Executive Director for Dubai based ETA Shipping in whose oil tankers operate along the Gulf of Aden, freight rates are most likely to surge if ship operators choose to avoid the Gulf of Aden and opt for other routes such as the Cape of Good Hope in South Africa.

"We are seeing many a number of operators opting for the longer but safer Cape of Good Hope route to avoid putting their ships at risk in the Gulf of Aden. But this will add to freight costs and also cause delays in cargo delivery," said Faisal.

Frontline, the world's largest operator of supertankers, has said that it may divert vessels away from Somalia after the capture of the Saudi owned tanker and also following an attempted hijacking its Front Voyager tanker in the same area that was thwarted in September. The Joint Hull Committee, a group representing ship insurers, has also advised ship owners to avoid Somalia waters.

By Ashaba K Abdul Basti

© Emirates Business 24/7 2008