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Piracy Menace

Threat of piracy could push up cruise insurance

AP  Dec 08, 2008

ATHENS — It's an insurer's nightmare: Heavily armed pirates, emboldened by their success in capturing cargo vessels, hijack a cruise ship with hundreds of well-heeled passengers and ask for massive ransoms.

It hasn't happened yet, but the failed attack this week on the luxury American cruise liner MS Nautica has shown the threat is real — raising questions about what impact piracy may have on cruise ship insurance costs.

"I don't know where the rates are going to go, but they're not going to go down," Rich DeSimone, president of Travelers Ocean Marine insurance, said by telephone from New York.

"One of the greatest impacts on insurance rates is increased exposure. And if you have increased exposure to something like piracy, it's going to result in higher costs."

But he and other brokers said it was unlikely that passengers' costs for buying cruises would be greatly affected as companies would be reluctant to pass on the increases.

And travel insurance companies indicated they would not boost rates for tourists taking cruises.

"We are still offering travel insurance to customers who are on cruises and there will be no effect on premiums as a result of the attempted act of piracy recently reported," said Sally Leeman, a spokeswoman for the British insurance company Norwich Union.

Ian Crowder, spokesman for AA travel insurance, said he expected cruise companies would avoid pirate-infested waters.

"Given that the shipping company is not playing Russian roulette with its passengers ... then we don't expect the premiums to increase," Crowder said.

He said that while travel insurance would not cover ransom payments, his company's policies would cover costs such as medical expenses and repatriation were someone to be injured or suffer a heart attack when taken hostage.

Both AA and Sainsbury's Travel Insurance noted that their policies would not cover people traveling to areas where Britain's Foreign and Commonwealth Office had advised travelers not to go. The FCO advises against all travel to Somalia itself, and advises "mariners to maintain a high level of vigilance and to exercise extreme caution when anywhere near Somali waters."

On the ship industry front, brokers, underwriters and shipowners indicated that while the costs for insuring vessels against piracy were likely to increase, it was impossible to tell at this stage by how much.

"It is a developing subject," said David Glass of the Greek shipping publication Naftiliaki. "It is something the insurance industry is now grappling with."

Although cruise ships have been the target of terrorism in the past, such as the 1985 hijacking of the Achille Lauro, there haven't been incidents of hundreds of passengers being held purely for ransom.

"Because there's no case law, everyone is feeling their way," said one marine insurance broker with a firm of Lloyds brokers.

"It's up in the air. Nobody knows who will respond to what. It is a dangerous situation," said the broker, who asked not to be named because the situation was still unclear.

Neil Smith, senior manager for underwriting for Lloyd's Market Association, said that while insurance costs would likely change, "it's impossible for us to put a figure on it because each individual underwriter will make a decision as they're approached."

Overall, cruise ships are probably in a better position than merchant vessels in facing pirates: they are faster than cargo ships, and their tall hulls make it harder for bandits to throw hooks over the side and board.

In the Nautica attack, a small band of pirates in two small speedboats fired shots at the roughly 180-meter (600-foot) long ship as it crossed the Gulf of Aden. The ocean liner increased speed and outran the bandits.

And with destinations such as the Mediterranean and Caribbean available to pleasure-seeking tourists, cruise ships don't necessarily have to sail through dangerous waters.

But passengers tend to book months in advance, and some companies have already set itineraries through the region.

Silversea Cruises spokesman Brad Ball said his company was "taking a wait and see attitude" about future cruises in the region, but that no changes were being made yet. Andre Poulton, spokesman for Regent Seven Seas Cruises, which also has ships scheduled to go through the area next year, said he was not aware of any increased insurance costs from the Nautica incident.

Cost increases are unlikely to be immediate, especially on contracts that are renewed annually, brokers and underwriters explained. And as no hijacked merchant ships have been damaged yet, insurance companies have had limited involvement.

In addition to annual policies, extra hijacking and ransom coverage can be bought for the days a ship will transit through dangerous waters.

Christos Stoforopoulos, owner of Epirotiki Shipping, said piracy insurance costs for passage through the Gulf of Aden vary between $15,000 to $50,000. Costs for cruise ships could be higher.

He added that any increase in cruise ship insurance costs could be softened by the fact the ships are able to outrun pirates.

"Cruise ships can evade pirates faster, so that might temper insurance costs," he said. "There might be a small markup, but I don't think it'll be significant."

Threat of piracy could push up cruise insurance
Yemeni coast guard mans a weapon, as his boat patrols Gulf of Aden / Image via AP/Mohammed al-Qadhi

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