Saturday, November 29, 2008

Private War Risk Insurance Providers: Bankrupted by Piracy?

Since the incidence of maritime piracy off the Horn of Africa is on the rise, will this endanger the economic viability of private companies underwriting war risk insurance contracts?

By: Ringo Bones

Ever since that brazen act of piracy by Somali pirates that allowed them to successfully hijack a full-sized Saudi-owned oil tanker then held her for a “King’s Ransom” became headline news, many of those in the insurance industry have switched into panic mode. After all, the International Community have not even yet reached a consensus whether to classify piracy as an act of war under the Geneva Convention, or just a civil criminal act. Given the current legal debacle of Guantánamo, are war risk insurance contracts still an economically viable part of the insurance industry?

War risk insurance is defined as a type of insurance that covers damages due to acts of war. This usually includes invasion, insurrection, rebellion, and hijacking. Some war risk insurance policies cover damage incurred when weapons of mass destruction – like nuclear devices – were used. This type of insurance is mostly issued in the shipping and the aviation industry.

War risk insurance generally has two parts: War Risk Liability, which covers personnel and items within the craft and is calculated based on the indemnity amount; and War Risk Hull, which covers the craft itself and is calculated based on the value of the craft. War risk insurance premiums are usually based on the expected stability of the countries and territories to which the vessel will travel.

Back in September 11, 2001, policies for private war risk insurance were temporarily canceled but later reinstated with substantially reduced indemnities. In response to this cancellation, the US federal government set up a terror insurance to cover commercial airlines. Because of this, the International Air Transport Association has argued that airline companies operating in the United States which do not provide war risk insurance find themselves at a competitive disadvantage. Because war risk insurance is very dependent on the prevailing geopolitical climate, some insurance companies – like Lloyds for example – have even made adverts highlighting that their companies are very mindful about the prevailing global trends concerning geopolitical security and stability.

For all intents and purposes, and their actions caught on the international news media’s cameras. Somali pirates in most people’s eyes falls under the purview of the Geneva Convention Section I on Belligerents, Article 1. Stating that countries where militia or volunteer corps constitute the army, or form a part of it, they are included under the denomination “army”. So like the al-Qaeda operatives, Somali pirates are by definition enemy combatants waging a war with the Western civilization through piracy.

Given that the maritime industry is the lifeblood of our current global economy, will the threat of piracy make the shipping of goods by sea become prohibitively expensive due to security and insurance mark-ups? Piracy, like the one existing in the Gulf of Aden and the Straits of Malacca only received scant Foreign Policy prosecution by various members of the International Community. With this conundrum, insurance companies and their clients – especially the clients – who are at the sharp end of uncertain losses that’s ever increasing can finally call themselves as the “social group” claiming to be unable to pay for protection. Thus causing widespread social jeopardy to the maritime industry workers and their families, the roots of which can be traced to various governments around the world and their inaction in ending the scourge of piracy.


Marie Lynne said...

Since that Gitmo and Abu Ghraib scandal by the Bush Administration, using the Geneva Convention definition of Belligerants as enemy combatants has become a political hot potato. Since November 20, 2008, insurance providers had been steadily hiking their war risk insurance premiums by reasons you have stated - piracy created by the failed state of Somalia.
Policies that cover protection and indemnity for the crew are usually an afterthought since crew safety is never guaranteed when they are held for ransom by pirates who can ill-afford to feed themselves.

Ringo said...

My sentiments exactly. But given the Bush administration's ill-conceived invasion of Iraq in search of WMDs back in March 2003, the US Government is even now extremely reluctant to tackle the problem of piracy in the Gulf of Aden militarily even if they have the right to do this time around. Insurance providers around the world will be very furious about this.

A said...

Insurance premiums concerning war risks should be debated in the same level as the ongoing health care debate in Congress concerning insurance providers such as Blue Shield California and pharmaceuticals.