Somali piracy – Is the insurance industry part of the problem?

The Commons Select Committee on Foreign Affairs has recently published a report on the levels of piracy off of the coast of Somalia, which over the past four years, have blighted global trading routes in the Indian Ocean to the tune of some $300 million in ransom money.

What is more disturbing is the sharp rise in average ransoms over this timeframe: $600,000 per vessel in 2007 to $4.7 million last year. As the report notes, far from being a minnow-sized local racket, Somali piracy is a “thriving business” which, on the strength of the above figures, appears to be very much on the up.

The report is somewhat critical of the action (or lack thereof), that the UK Government proposes to take to stem the tide, and puts forward a number of further counter-measures. As has been reported however, the Committee note the effectiveness of private security forces, but stop short of recommending that their use be made mandatory on the merchant ships that pass through the affected waters. This position is in line with the stance of the maritime insurance industry, much of which is of course British and based right here in the City.

It appears that, rather than requiring endangered vessels to carry armed security forces as a pre-condition of their being insured, the industry prefers to deal with piracy by hiking up insurance premiums for the whole shipping industry, so as to fund ransom payouts as and when. But the industry’s approach presents problems, not least of which is that for one thing, it is arguably helping to keep the Somali pirates in business, and for another funding a parasitic industry in the form of a network of agents and intermediaries who facilitate communications between the insurers and the pirates.

On a short term basis, it must be right to ignore the moral implications of paying a ransom to secure the safety of seafarers. But in the medium to long term, is it really acceptable for the industry to be permitted to take such a laissez-faire approach?