Piracy Premiums


Economic News

22 Jul 2010
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Malaysia's establishment last week of a new maritime law enforcement body comes at a frustrating time for shipping companies. Since Lloyds of London put the waterway on their list of war risk areas, cargo vessels navigating the Strait of Malacca are now subject to increased premiums. The reason for this move was an old scourge of the sea - piracy.

The economic importance of the 900km-long strait cannot be understated, as it bears 30% of world trade each year and 50% of world crude oil cargoes as they make their way from west to east.

In July, Lloyd's Market Association Joint War Committee declared the area in jeopardy of war, strikes, terrorism and related perils over concerns about criminal actions perpetrated by "sea-robbers", or pirates.

The committee only has an advisory role, but the result was inevitably higher insurance costs and the potential that some underwriters will no longer cover ships in the strait.

The issue prompted an August 1 trilateral meeting of foreign ministers and defence chiefs of the littoral states involved in the matter - Indonesia, Malaysia and Singapore.

"We need to act now," announced Najib Tun Razak, Malaysia's Deputy Prime Minister. "Firstly, if we don't do anything, the economic cost will go up, and that is to our disadvantage. Secondly, we have to prevent something more serious or sinister from happening."

A joint statement issued after the two-day meeting claimed the move from Lloyds did not take existing efforts regarding maritime security on the part of the three states into account. They asked the Joint War Committee to review the assessment.

As a result of the talks, two technical committees were set up to study details of co-ordinating air patrols and sea patrols. Indonesia, Singapore and Malaysia agreed in principle to "eye in the sky" patrols, which began in September over the straits. An assortment of aircraft now patrols the skies over each other's territorial waters.

But many also accuse Lloyds and the firm that reported to the Joint War Committee, Aegis Defence Services, of misunderstanding the problem.

Looking at the numbers, it would seem the critics' case has some justification. The Kuala Lumpur-based International Maritime Bureau (IMB), a specialised bureau of the International Chamber of Commerce that monitors piracy and maritime crime worldwide, recently reported a decrease in the number of piracy incidents in early 2005 over previous year's numbers.

The total number of incidents of piracy in the straits during 2004 was 37; 20 in the first six months and the remainder in the latter half of the year. That number is a significant drop from the 2000 figure of 75 incidents, while figures for the first half of 2005 show a continued downward trend - a total of only eight reported incidents in that six month period.

While many claim this trend should actually be seen as a reason to lower the risk assessment rating, other observers claim the reason for the extremely low number of incidents was the December 2004 Asian tsunami disaster.

Indeed, the IMB's 2004 annual piracy report noted that the wave which hit Sumatra might have destroyed ports and related piracy infrastructure, as well as killing pirates. The subsequent naval presence as part of the relief efforts may also have acted as a deterrent to perpetrators.

However, whilst that may be the case, the nature of the attacks has also changed over the last few years. Raids have become more daring and more commercially aware.

"Previously, we were seeing hit and run attacks," explained Steve Wilford, South-east Asia Analyst at Control Risks Group, when talking to OBG recently. "Since 2003 they have moved to a kidnap and ransom model of operations. They're pretty sophisticated as well. They contact shipping company directors directly and come up with realistic amounts that they know the companies are willing to pay."

With the cost of an Indonesian crewmembers' ransom between $20,000 and $30,000, the payment is not too uncomfortable for shippers. As a result, although deals happen behind closed doors, there are unconfirmed reports that ransoms have been paid in 2005.

One concern that Wilford identifies is the higher ransoms commanded by foreign crew, making foreign ships more attractive. One of the events in early 2005 was significant for exactly this reason when on March 14, armed pirates boarded a Japanese ocean-going tug.

Two Japanese crewmembers and one Filipino were taken hostage, though eventually the ship was escorted by Malaysian police boats to Penang, where the three were released. The Japanese foreign ministry did not say whether any ransom had been paid.

"This was first time non-Indonesian or non-Malaysian crew were taken," said Wilford. "It has never fully come out what happened, but the belief is that ransom was paid."

Whilst this trend is of course a concern for shipping companies and security agencies alike, some analysts are still not satisfied with the Joint War Committee's decision. Piracy may be escalating and becoming more commercially aware, but it still does not constitute terrorism, many argue.

Although some incidents have been linked to the Indonesian-based Free Aceh movement, these too have been commercial in their goals. The pirates are in fact believed to be loath to spoil their market by branding themselves as political or religious extremists.

However, the report on which the Joint War Committee's report was based also cites increased terrorist activity in the region, in particular the rise in numbers of ships targeted by Islamic extremist groups operating out of Indonesia and the Philippines.

However, critics of the report say that whilst the threat of terrorism spreading to the Strait of Malacca is a theoretical risk which could have big implications on world trade, it is no more of a risk than potential spectacular attacks anywhere else in the world, including places which are not classified with the same level of risk.

It is hoped that increased security from all sides will eventually lower the risk posed by piracy - and possibly the potential risk posed by terrorism. However, although some agreement has been reached over airspace, the trust needed to concede enough sovereignty to allow co-ordinated maritime activity is not readily forthcoming. Malaysia and Indonesia have longstanding territorial disputes which fetter the process.

One example of the practicalities involved is hot pursuit - when patrol vessels pursue suspects across territorial water boundaries. Situations have arisen where Indonesian forces have challenged Malaysian vessels that have strayed across frontiers during such operations.

Yet while more patrol vessels and more co-ordinated efforts could make some difference, piracy will be a problem in the straits as long as economic conditions make it an attractive option for Indonesians, not to mention as long as land-based policing is unable to clamp down on the problem. In the meantime, shipping companies will have to pay the premiums or find another route.

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