Piracy boosts shipowners’ demand for K&R cover

There has been a significant increase in shipowners opting for kidnap and ransom (K&R) insurance across Southeast Asia and the Gulf of Aden region, reports S&P Global Platts. The spike has occurred because of recent attacks on merchant vessels, industry executives said during the recent Sea Asia conference in Singapore, with there now being more queries for K&R insurance that are being converted into cover purchase. “The unrest near the Philippines can’t be classified as war but it is serious enough to be covered through other forms of insurance,” an unidentified Norway-based executive of a major western P&I club told S&P.

Platts noted that the way in which ransoms linked with ‘ordinary’ P&I cover was complex. Abduction risks may come under P&I cover, but P&I insurers were not willing to pay ransoms to abductors, at least not explicitly. However, if the shipowners paid a ransom, the costs involved could often be offset through protective compensation. P&I policies were liable to pay compensation for deaths of

crew. To prevent this, a mitigation clause could be used to compensate the shipowner who paid the ransom.

However, there were ambiguities, and insurers were offering shipowners explicit K&R cover, where the insurer could take over the negotiation from the shipowner.

Premiums for K&R cover in the Sulu-Celebes Sea region, which Abu Sayyaf has been haunting for the past two years, were now higher than those near Somalia.

The risk level for a ship is based on its size, average speed and gross register tonnage. Higher speed and freeboard can make for smaller premiums.

An official at one of the insurers told S&P Global Platts that it had a piracy payout capacity of $15m for each K&R cover, mainly for payment of ransom.

The UK and many other maritime nations have said that terrorists must not pay to get hostages released, so underwriters, lawyers and crisis response consultants working with them undertake appropriate procedures. There is a standard clause at Lloyd’s of London that is applied to all such policies under which coverage to a ship is automatically excluded if it exposes the insurer to the risk of sanctions. Abu Sayyaf, which runs a fine line between terrorism and plain economic banditry, is currently considered a terrorist organization, so payment to it would not be countenanced by most K&R insurers, Platts said.