Today's piracy problem

Good afternoon everyone, and thank you for inviting me to speak today.

I make no apology for beginning with a short history lesson. By 1688, Edward Lloyd’s coffee house was already doing brisk business. It had of course become a trusted venue for merchants, shipowners, and those in related public service, who would to pool information and better understand the opportunities and risks their expanding businesses faced.

The risks were certainly growing around that time. In particular, the so-called “Golden Age of Piracy” was just beginning. Amongst the tales passed down from this era is one of a fearless pirate, Edward Teach, who used slow-burning matches woven into his enormous beard to intimidate his enemies. Festooned with weapons, he fought in a big feathered tricorn hat, and this somewhat romantic image of Blackbeard remains today.

It may therefore seem both strange and ironic that, some three hundred and twenty one years after Lloyd’s came into being, the subject of piracy is once again on the world’s agenda. We are currently experiencing the biggest upsurge in piracy for four centuries. But, far from the story book images of old, today’s pirates are furnished with machine guns and rocket launchers.

I fear that in speaking to you today I may cover some points that have already been made by others more expert than I am. However, as Chairman of the world’s leading specialist insurance market, I can confirm that our underwriters’ expertise is once again being called upon to help protect shipowners from a very challenging risk. I will therefore address three questions today from the perspective of an insurance market:

• what is the scale of today’s piracy problem?
• what is its economic impact? and
• what are the solutions and how can those of us in business and the insurance industry play our part?

Ladies and gentlemen, the first question is what is the scale of today’s piracy problem?

Let us be in no doubt. Incidences of piracy in the Gulf of Aden and off the coast of Eastern-Africa have been increasing since 2005, and the number and scale of recent attacks is a real and particular cause for concern.

The figures, I’m sure, are familiar to you, but I repeat them here just to set out the facts, which are quite staggering. So far this year, we have seen¹:

• 79 hijacks attempted or completed by Somali pirates.
• 18 vessels successfully hijacked, with 16 still being held and 285 seafarers taken hostage.
• This follows nearly 300 incidents of piracy against ships last year.

Looking forward, our prognosis needs to be realistic. I said earlier that we are currently experiencing the biggest upsurge in piracy for three hundred years. The likelihood is that it is going to get worse before it gets better.

The recent increase in activity has been encouraged by the arrival of calmer spring seas making it easier for the pirate skiffs to operate. All the signs therefore point to an active piracy season for several months because of this natural weather cycle alone.

There are other causes for concern. The trend is for pirates to demand – and receive – larger ransom payments. At the same time, some are becoming more hostile and aggressive. And, following the action taken by French and US forces recently, pirates are threatening revenge. The stakes and the tensions are rising. Moreover, there is a risk that the threat could spread further out to sea as mother ships seek targets away from the Transit Corridor.

There has also been some speculation recently about whether Somali pirates could become the agents of international terrorist networks. To date, there have only been a few qualified expressions of support for pirates by Islamist terrorist groups, and there is certainly no evidence of co-operation. The pirates clearly label themselves as criminals, not terrorists. Nevertheless, this is a question issue for the international community to watch.

We must also bear in mind that piracy is not a problem confined to East Africa. True, the number of places where lawless activity can flourish to this extent is limited. But they do exist, and the recent success of pirates in East Africa will not go unnoticed by criminals elsewhere. The International Maritime Bureau² reported 40 incidents off the coast of Nigeria last year, and believes that there were a further hundred incidents that went unreported. The issues here may not be quite the same – there is a political dimension and most of the attacks are on smaller vessels closer to land – but it highlights that other areas can present real problems too.

Having acknowledged the scale of the problem, how significant is its economic impact?

It is difficult to understate the importance that the Gulf of Aden holds for global trade.

• 30 percent of Europe’s oil currently moves through the Gulf.
• Some 22,000 vessels, including 6,500 tankers, used the route in 2008.

If anything, this importance will increase in the short to medium term thanks to the imbalances of the world economy. For example, the world’s main oil reserves are increasingly concentrated in Russia, Central Asia, the Middle East, and Africa. The mismatch in supply and consumption is stark: the US consumes one-quarter of the world's oil, but produces only seven to eight per cent of the total³.

There are significant cost implications of the current upsurge in piracy for all of us. First, Somali pirates were paid a considerable 35 million pounds in ransom payments last year⁴, all of which ultimately comes from corporate coffers of those affected.

Second, the current situation means that some ships are now avoiding, or considering avoiding, the Gulf of Aden and the Suez Canal and instead diverting around the Cape of Good Hope. This is not a decision to take lightly. It can take a large vessel three weeks to make the journey, and the extra operational costs are very considerable. So far, we have not seen a strong trend in this direction. But if the situation deteriorates further and this thinking accelerates, European businesses and consumers can expect to see prices of manufactured goods and oil from Asia and the Middle East rise due to higher transportation costs.

Third, conditions in the insurance market are pretty dynamic right now, as you might expect.

Insurance costs are rising in reaction to the changing risk profile, but premiums are set on a case by case basis taking into account the specific risks. A shipowner using riskier waters should expect to pay a higher rate, in the knowledge that underwriters are monitoring the situation very closely.

Yet, above all, one thing is clear – insurers still have the appetite and the capacity to take on risk. Nearly all of the ships pirated this year are insured within Lloyd’s either by hull underwriters, hull war underwriters, kidnap and ransom underwriters or through reinsurance. And the peril of piracy, traditionally covered by the hull policy, is currently being moved into the war policy to avoid disputes as to which policy should respond in the event of a loss.

Finally, I will share our thoughts on some possible solutions.

First and foremost, we can promote better standards of risk management. The insurance industry is actively involved in the debate about how to manage piracy risk and Lloyd’s has been working hard with brokers, clients and the marine sector to promote the practical steps which companies can take to mitigate risk.

As with any type of risk, proper risk assessment and crisis planning is preparation rime well spent. Registration is another obvious step, yet EU Navfor believes that around 30 percent of vessels passing through the Gulf of Aden fail to register their voyage information with forces in the region⁵. And it may sound obvious, but security is one area where more can often be done. Many companies have enhanced their security measures, but standards still vary hugely between vessels. Pirates are more likely to strike at dawn and dusk, and much less likely to take on well-manned ships with stern watches. Quality of crew and training is of course also key.

Ultimately, we must recognise that piracy is not a short term problem and there is no quick fix. Population growth and inconsistent economic development will continue to generate perfect breeding grounds for violent criminality. The current economic outlook only means that things are likely to deteriorate over the short to medium term.

Insurers can play a part here too. Towards the end of last year Lloyd’s co-hosted an event with NATO, with a range of UK business leaders in attendance. Its objective was to discuss the issue of energy security and in particular the threat of piracy. Our discussion left us in no doubt that this is a key issue on which the business community must engage.

The key point I want to make here is that international co-operation works. It worked in the Malacca Straits. Attacks fell from 126 in 2003 to 26 in 2008, thanks to closer co-operation by coastal states. In the same way, incidents in Bangladesh have fallen from 47 in 2006 to 10 last year⁶.

It takes time for initiatives like this to make a difference. Further investment and closer co-operation will be vital to defeat this threat in the long-term. That’s why Lloyd’s welcomes the adoption of the Dijbouti Code of Conduct at a meeting of 17 states in January. It promises a viable solution for the East African problem based on co-operation. The code recognises the extent of the problem of piracy and armed robbery against ships in the region. Moreover, the signatories have declared their intention to co-operate to the fullest possible extent, and in a manner consistent with international law, in the repression of piracy and armed robbery against ships.

Of course, we simply cannot view what is happening offshore in isolation from what is taking place on land. Until there is a stable Somali government and a decent level of prosperity in the country the piracy problem cannot be eradicated. It is good and necessary that debate on this subject is now happening , with the US, NATO, the EU and African states involved. This must continue and as they operate and do business around the world, companies must work harder to show local communities that they can be responsible contributors. This does not mean them trying to solve political problems so much as driving economic development in ways which can help deliver a more stable operating environment – both on land and at sea.

Ladies and gentlemen, in conclusion, our view at Lloyd’s is that:

• we are experiencing the highest levels of piracy risk for four centuries.
• it is no longer simply a security issue, but an economic issue which has an impact on all of us; and
• piracy is not a short term problem and there is no quick fix.

However, we are ion no doubt that international co-operation works, and that the business community has a valuable role to play in building solutions, both in the short and long term. And for our part, the Lloyd’s market remains committed to helping business manage risk on the high seas, just as we did over 300 year ago

Thank you for listening.