Insurance companies lose business as pirate attacks off the coast of Somalia drop

A fall in the number of pirate attacks off the Somali coast is forcing down the cost of piracy insurance for commercial ships.

International navies have cracked down on pirates, including strikes on their coastal bases, and ship firms are increasingly using armed guards and defensive measures on vessels including barbed wire, scaring off Somali seaborne gangs.

That reduced the number of incidents involving Somali pirates to just 69 in the first half of 2012, compared with 163 in the same period last year, according to watchdog the International Maritime Bureau.

“The chance of pirates being able to carry out successful hijackings are now very slim, which is probably deterring many would-be pirates from going to sea,” said Rory Lamrock, an intelligence analyst with security firm AKE.

War torn Somalia is next to the Gulf of Aden’s busy shipping lanes, and poverty has in recent years tempted many young men to take up piracy, storming commercial vessels and holding their crews and cargo to ransom.

Last year, they netted $160 million, and cost the world economy some $7 billion, according to the American One Earth Future foundation.

The drop in Somali pirate activity is weighing on the market for so-called marine kidnap and ransom insurance, which has grown for scratch to be worth about $250 million in little more than five years, according to informal industry estimates.

Spending on marine K&R cover, which indemnifies shipowners against the cost of paying ransoms and recovering vessels and crew, has halved compared with two years ago, estimates Will Miller of Special Contingency Risks, a unit of insurance broker Willis.

“We are seeing a softening in the rates that underwriters are charging for piracy cover,” Miller said.

“The key driver is the implementation of more robust security measures on board by the shipping community.”

Brokers and insurers say a key factor in the downturn is the spread of on-board armed security, which has allowed shipowners to negotiate discounts of up to 50 percent on their premiums in recognition of the reduced risk of being hijacked.

Guards equipped with guns are seen as the best deterrent as no ship carrying them has ever been seized, although critics say they risk escalating conflict with heavily-armed pirates.

Governments including Britain last year dropped their opposition to armed maritime guards, triggering a big increase in their use. SCR’s Miller says about two thirds of his clients now deploy armed security, compared with just 10 percent in 2010.

While the cost of piracy insurance is falling, the drop in the number of hijackings will reduce claims, helping to preserve insurers’ profits.