DUBAI // Captain Maqsood Khan’s shipping firm was already in trouble when Somali pirates hijacked its only vessel, the MV QSM Dubai.
Hit by global recession and shrinking profits, Qawareb Ship Management, a small firm based in Deira, had been forced to sell off its other vessels and was taking delivery jobs to Somalia, which paid better to offset their added risk.
“The danger is there,” said Captain Khan. “If you look at it that way, then it’s not worthwhile. But nowadays, in this market, if you get a good freight it’s worth it.”
The threat of Somali piracy, the heavy cost of protecting against it, and the ethical concerns of not doing so, are weighing heavily on countless shipping companies such as Qawareb that operate out of the UAE or use its prime location ports.
Almost any vessel visiting UAE waters must cross the piracy danger zone, which spans the Gulf of Aden, Arabian Sea and Indian Ocean. Of the 30 vessels that Somali pirates hold captive, 10 had been travelling to or from the UAE or are owned by Emirati firms. Two of them were seized last week.
Yet the safety measures that work best – armed guards to protect the ship and piracy insurance to pay any ransom – often cost more than firms are willing to pay.
To safeguard a vessel with armed guards and piracy insurance for a three-week return trip to East Africa would cost about US$200,000 (Dh734,000), said a shipping executive who declined to be named. “That’s a big chunk” of the profit, even for a valuable vessel such as an oil tanker.
Going around the danger zone and routing along the western coast of India, due south, then west towards Madagascar, would cost the same amount in added fuel, he said.
More companies, especially multinationals, are shelling out cash to secure their ships. Many are shedding the industry’s longtime reluctance to carrying armed guards on board because they now believe it best deters pirates.
Several private security firms and insurance brokers said their clientele and revenues were growing, though they declined to give specifics.
“There’s a greater demand for armed security week by week,” said Orlando Rogers, the director of operations for the UK-based security firm Solace Global Maritime. “Pirates are increasing their ability and shipping companies are having to react and up their game.”
For ships that are captured, ransoms have reached such large amounts – estimates range from $3m to $10m – that more firms are resorting to insurance.
Today, all the clients at Colemont Insurance Broker in Dubai buy piracy-specific policies – up from a quarter of clients five years ago, said the managing director, David Miles.
“Of course it has resulted in increased revenue for the insurance industry, but relative to where the vessels are trading,” he said. “In hot-seat areas, the revenue generated to the insurance industry is substantial.”
These costs ultimately fall to the consumer in the form of higher prices for fuel, food and other innumerable goods that reach them by sea.
Many low-end shipowners are sticking to safety measures that cost less but protect less, especially for small boats such as the MV QSM Dubai.
They follow “best management practices” laid out by the industry in a 70-page booklet. Crews should keep a lookout and “harden” their vessel with razor wire, water hoses, electric fences and even dummy guards.
They should also prepare safe rooms, in which crewmen can lock themselves and keep control of the vessel and its communications. This newer tactic has gained popularity as it has thwarted more and more attacks. In a recent case, on January 3, the attackers who boarded the CPO China abandoned it within a day while the crew hid, unharmed.
When entering the high-risk Gulf of Aden, vessels are recommended to register with naval forces that patrol the area and cross in convoys escorted by warships.
Yet the navies have not been able to stop piracy in the Gulf of Aden. Once a ship is hijacked, they back off to avoid the crew being harmed.
Nor are they able to oversee the vast Indian Ocean, where more and more pirates lie in wait on large ships loaded with skiffs. The mother ships, presumed to be hijacked vessels, carry them much further beyond Somali waters than the solo skiffs they used to rely on.
When a target appears, a few pirates jump into the skiffs and zip towards it. Unarmed vessels are advised then to speed away and swerve to create waves.
Some of them manage to shake off their attackers. But, while the skiffs top 20 knots, ships such as the MV QSM Dubai max out at 15. Their decks hover just a few metres above water – an easy climb for pirates.
“The ships going 10, 12 knots are vulnerable. What precautions can they take? Water, barbed wire – still they will come,” said Captain Khan. “If they are not armed, they cannot stop the pirates from boarding.”
When the MV QSM Dubai was captured last June, a naval ship answered its distress signal but did not intervene. Instead, a Somali force with ties to the intended recipients of the cargo rescued the vessel. In the exchange of fire with the pirates, the captain of the vessel was killed.
Nowadays, on trips to Somalia the MV QSM Dubai does not use armed guards or piracy insurance.
As with many small operators it risks being unable to thwart a future attack or afford a ransom.
“Shipowners care about their crews. But if you’ve not got the money, what do you do?” said Simon Cartwright, a partner at the Holman Fenwick Willan, a leading law firm that handles piracy issues.
“In an ideal world, they would all have kidnap and ransom insurance. In reality, most of them won’t. Certainly the small owners may have the minimum cover because of cost,” he said. “Ultimately, what a lot of shipowners do is a cost-benefit analysis.”
* The facts
As the threat of piracy has grown, so too have the insurance policies designed to cover it, underwriting anything from payment of ransom to loss of business. The insurance is often seen as both a necessity and a hazard.
It enables firms to afford a ransom, which is practically the only way to release a vessel. But it also entices pirates to hijack more vessels, if they believe that owners can afford to pay.
Shipping companies are not required by law to carry piracy-specific insurance, although those that have mortgages on their vessels may be required by their banks to do so.
Many firms, already struggling, opt out. “Today’s market conditions are very bad, so for some owners it is very difficult to afford these additional payments,” said a shipping insurance broker based in Dubai who declined to be named. “Not everyone is insuring.” Piracy insurance comes in three forms.
1. Special war-risk insurance
Basic war-risk insurance covers “war-like” damage not related to piracy. One example might be if an old landmine exploded and struck a vessel, explained David Miles, the managing director of Colemont Insurance Broker.
An extra premium is now charged for passing through a piracy danger zone determined by an insurance industry body called the Joint War Committee. In recent months that zone has expanded drastically. It now spans west to east from eastern Africa to western India, and south to north from northern Madagascar to the northern coast of Oman, almost touching UAE waters.
2. Kidnap and ransom
This type of policy costs more but also covers more, said Sam Wakerley, a lawyer at Holman Fenwick Willan.
It helps pay not only the ransom but also related expenses such as hiring a negotiator, delivering the money (for example, by airdrop), and even providing reimbursement if the money transfer fails.
The policy emerged decades ago to cover the rise in kidnappings in Central and South America.
3. Loss of hire
For every day a vessel is held captive – and cannot be chartered out for other jobs – the owner of the vessel misses out on tens of thousands of US dollars. This policy helps them recoup that cost, but sometimes for a limited period, say, 90 days, though many negotiations now take much longer.