Photo: Bloomberg
Photo: Bloomberg

Global ship underwriters non-committal on lowering premium

The new industry advice will take effect from 1 December

Bengaluru: The announcement last week by organizations representing the global shipping and oil industry to reverse expansion of vast swathe of sea in the Indian Ocean judged prone to pirate attacks may not translate into reduced insurance costs for fleet owners as widely expected because the area drawn up by ship underwriters to assess insurance risks to deal with such situations are always different.

A roundtable of international shipping associations and oil companies international marine forum, agreed to India’s efforts to alter the boundaries of a high risk area (HRA) for piracy from 78 degrees east longitude to the 65 degrees east longitude.

The new industry advice will take effect from 1 December.

The HRA limit has been included in the best management practices (BMP) 4, a document written by the shipping and oil industry group incorporating advisories and guidances for self-protection of merchant ships and their crew from pirate attacks and hijack situations while transiting in piracy prone waters.

However, London-based Joint War Committee (JWC) comprising underwriters from the Lloyd’s Market Association (LMA) and International Underwriting Association (IUA), which assesses insurance risks, was noncommittal on a reduction in insurance premium.

“The Joint War Committee’s insurance notification area has always been different from the BMP/HRA and remains separate and unchanged for now. The JWC is scheduled to meet in December and will be mindful of the roundtable actions," said Neil Roberts, manager, marine at Lloyd’s Market Association.

“It is impossible to say what action they will take, if any," Roberts, who is also the secretary of the Joint War Committee, added.

The JWC takes advice from independent security advisers and issues updates to its published listed areas that are perceived as enhanced risk for those writing a range of perils insured in the war market where coverage may be arranged against the risks of confiscation, derelict weapons, piracy, strikes, terrorism and war, the Lloyd’s Market Association, said on its website.

The joint war committee had kept its list of areas considered prone to piracy, terrorism and related perils unchanged during a review in September 2015, according to the website.

While reducing the limit of HRA, the roundtable of shipping and oil industry “stressed that a serious threat remains and that correct reporting and vigilance remains crucial".

“In view of the continuing high risk of pirate attack, shipping companies must continue to maintain full compliance with the BMP and be vigilant in their voluntary reporting on piracy incidents, sighting of potential pirates, and any suspicious activity—as this provides crucial intelligence on risk levels in the area," the International Chamber of Shipping (ICS), a ship-owners lobby representing more than 80% of the world merchant fleet, said in a 8 October statement.

The ICS is a part of the roundtable that decided to reduce the HRA limit.

The roll-back of the high risk area will result in huge savings for India’s export-import (EXIM) trade and consumers on account of reduced insurance premium and consequent lower freight costs, India’s shipping ministry said in a statement on 8 August.

In December 2010, the Joint War Committee expanded the area considered at risk for piracy to about 900 miles east, and therefore eligible for higher premium, as the hijacking range grew.

The expansion of area effectively brought the whole of the Indian Ocean, almost all of India’s western coast into a so-called exclusion zone, raising shipping costs into and out of the country.

The decision was taken after pirate attacks started happening further from the Somali coast and closer to India than in the past as pirates deployed long-range ships to attack and hold ships for ransom.

The extension meant that this area is excluded from the annual war risk cover with underwriters demanding additional premiums from ship-owners to provide insurance cover.

The additional premium levied on ships passing through the high risk area carrying Indian EXIM cargo (around 22,000 vessels call on Indian ports every year), escalated by about 3,600 crore a year at the peak of the piracy between 2008 and 2012, to around 1,500 crore a year post a fall in pirate attacks since mid-2012 onwards, the ministry said. The shipping industry loads this extra premium on the freight and transmits it to consumers, as a pass-through charge. This is a huge financial burden for Indian EXIM trade and Indian consumer, it added.

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