Insurers Struggle to Calculate Costs of Piracy

Despite the widespread attention paid to attacks by Somali pirates on international shipping in the Gulf of Aden, the true costs of these attacks to the maritime insurance industry are still uncertain, according to a new report published by the General Insurance Board of the Faculty and Institute of Actuaries of the U.K., which is known as the Actuarial Profession.

The report, which was due to be unveiled at the group’s General Insurance Research Organization conference Oct. 13-15 in Newport, Wales, argues that the scarcity of statistics on maritime piracy make estimating the risk of piracy difficult.

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"Piracy attacks have been on the increase in the last 15 years. But, since 2006, the level of attacks has increased by an average of 125 percent, and this is almost entirely due to the attacks by Somali pirates,” said Neil Hilary, a staff actuary with the profession and one of the authors of the report.

He said the challenge to the actuaries involved in pricing maritime insurance products is considerable. First, actuaries are used to working with statistics which number in the thousands and tens of thousands. Despite the increase in piracy attacks, the actual numbers are still relatively small. Second, the information about the attacks issued by shipping owners is often vague. “Understandably, shipping owners don't wish to encourage further acts of piracy, but without knowing the full details we cannot come up with the true cost," Hillary said.

The authors of the report have been able to come up with an estimated cost of around $9 million for each attack using publicly available data at the time.

“With a success rate of 6 per year, this produces a kidnap and ransom rate of around $57,000 per vessel per voyage using the Suez Canal,” Hillary said. “But this is based on judgment, not on strict modeling. So, without accurate figures, uncertainty will remain and future costs may be significantly different."

-- Contact Peter T. Leach at pleach@joc.com.