The hijacking of the Sirius Star – part of a surge in piracy – has focused attention on marine insurance. Saxon East finds how a move from traditional cover to kidnap and ransom policies could help calm the nerves of ship owners.

Pirates have an almost mythical status, the result of hundreds of years of romantic story-telling from Treasure Island to Johnny Depp in Pirates of the Caribbean.

But fact is often grimmer than fiction, and the hijacking of the Sirius Star in the Indian Ocean earlier this month exposes modern-day pirates as nothing more than brutal gangsters who hijack merchant vessels with machine guns.

As Insurance Times went to press, the Sirius Star was still anchored off the shores of Somalia with a $100m (£67m) cargo of oil and 25 crew, including two Britons, aboard.

The kidnapping and demand of a $17m ransom sent shockwaves across the world. But for Lloyd’s of London underwriters, it comes as no surprise.

In recent years they have been monitoring attacks in the Gulf of Aden and steadily pricing it into their risk analysis; rates for marine kidnap and ransom (K&R) have been escalating throughout 2008 as piracy becomes more prevalent.

According to the International Maritime Bureau, there have been 92 attacks on vessels in the Gulf of Aden and off the east coast of Somalia this year – 36 of them successful hijackings.

Neil Smith, senior managing underwriter at Lloyd’s Market Association, says: “From a media point of view, the Sirius Star has stirred up a lot of interest. From an insurer point of view, this is just an instance when they have been successful.”

For the old hands at Lloyd’s, it could spell new business, as they capitalise on the frayed nerves of the merchant shipping industry – much of which does not have kidnap and ransom cover – and offer their services.

Guillaume Bonnisent, kidnap and ransom underwriter at Lloyd’s insurer Hiscox, says the firm – which covers 65% of the world’s K&R insurance market – has had more than 50 approaches over the past three months from broking firms on behalf of owners and managers seeking protection.

“Without a doubt, the surge in piracy activity in the Gulf of Aden has been the catalyst for this increase.”

He says traditional marine cover will meet the ransom only, which can account for just 25% to 30% of the total costs. “Where K&R cover goes above the traditional marine policies is that it will become involved from the moment a vessel is seized.

“We’ll provide a crisis management team and meet the costs of the security team that will be needed to take the ransom to the Somali pirates.” K&R covers medical and psychological help for the families involved, and crew salaries, too.

The hijacking of the Sirius Star has also raised the question of whether merchant vessels should carry armed crews, something Bonnisent says Hiscox would not recommend.

“Carrying weapons onboard can only increase the risks facing the crew. We see pirates not hesitating to fire on national navies.”

Brokers are also sensing an opportunity to show their credentials.

Paul Wood, director of the marine division at Lloyd’s broker Tysers, said: “We believe this incident and the resulting publicity will make more owners consider buying K&R. It has demonstrated that the pirates are operating over a wider area and in a much more brazen fashion.

“They are able to target much larger vessels than before. If anything, it will be these issues that drive up premiums and force owners to consider buying cover.”

He says it was Tysers’ role as a broker to make sure clients were treated fairly, based on the real risk levels rather than sensationalist reporting.

“The Gulf of Aden has been a war listed area since mid-August and war underwriters generally have been charging additional premiums to extend cover for transits through this area – even though in many cases, the piracy coverage has been predominately in owners’ hull and machinery contracts,” he says.

The attack may have made governments realise they need to be more forceful against piracy – as India was last week when one of its naval warships sank a pirate craft in the Gulf of Aden.

Fourteen vessels are currently being held hostage, with 268 crew. Between November 10 and 16 alone, there were 11 attacks in the region with three vessels hijacked and another four fired on.

Somalia, Nigeria and Indonesia are ranked first, second and third in terms of acts of piracy this year. Until the end of September, 581 crew members had been taken hostage, nine kidnapped, nine killed and seven listed as missing, presumed dead.

However, Smith believes the Sirius Star could be a turning point. “It requires some sort of particular will collectively.

“I guess the good thing here is that the event has raised the profile and got people aware of it outside the shipping industry. That increases the chances of realistic action being taken.”