Piracy Costs Soon To Increase By Billions

A very interesting article on the financial impacts of piracy on the shipping industry.

India is lobbying Lloyd’s of London to reverse its expansion of the area judged prone to pirate attacks to cover almost all of the nation’s west coast after insurance costs surged as much as 300-fold this year.

“There is no longer any threat along the Indian coast,” Shipping Secretary K. Mohandas said in a May 23 interview, adding there had been no attacks within 800 kilometers (500 miles) of the coast due to stepped-up naval patrols. The Joint War Committee, which assesses insurance risks, extended the zone in December about 900 miles east as the hijacking range grew.

A reversal by Lloyd’s would reduce insurance costs after some premiums skyrocketed to as much as $150,000 per voyage from $500, the Indian National Shipowners’ Association said, hurting shippers’ earnings. Essar Shipping Ltd. and Varun Shipping Co. are among companies that say the move is eroding margins as they struggle with overcapacity and rising costs.

“Typically ships bought insurance for the three days they were moving through the Gulf of Aden -- now they have to pay for the additional 10 days” through the Indian Ocean, said Sean Woollerson, an insurance broker at London-based Jardine Lloyd Thompson Group Plc (JLT), which specializes in shipping. The larger zone means about 28,000 more journeys a year are liable to higher premiums than the 22,000 made in the old zone, he said.

The article is worth reading, and goes on to note that 52% of all maritime trade to India takes place in western ports that could be impacted by the new zone.

The piracy insurance costs for the old zone that impacted the 22,000 ships was around $3.3 billion in earnings for insurance companies. The new zone will add an additional $4.2 billion annually in insurance costs to shippers in the region. The 300% increase in insurance costs due to piracy has to date, hurt the region more than it has hurt the global market. That might change though as the piracy zone continues to expand, and in all cases those costs eventually get passed down to the consumer.

What I find interesting is the insurance costs would soon be around $7.5 billion annually in Somali piracy alone. Following the money from Somali piracy, insurance companies are easily the largest source of costs, and I do wonder how much tax revenue Great Britain is earning from those insurance company earnings.

India has made significant strides in fighting piracy along their west coast over the last 5 months, but they are inaccurately taking credit for the recent decline in piracy near Indian waters. It would be more accurate to highlight that the weather has been the primary factor keeping pirates off the west coast of India the last several weeks, and for the foreseeable future those weather conditions are unlikely to change, meaning piracy is simply moving elsewhere - currently towards the Red Sea, among other places.