Piracy – An Ancient Risk with Modern Faces Sven Gerhard LLD, Global Product Leader HML BMUSF 5/6/2010

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© Copyright Allianz Global Corporate & Specialty3 The modern face of Piracy doesn’t look like this …

© Copyright Allianz Global Corporate & Specialty4 … It looks like this!

© Copyright Allianz Global Corporate & Specialty5 What is Piracy?  Art. 101 UN Convention on the Law of the Sea 1982 defines “Piracy” as - Illegal acts of violence, detention or depredation - Committed for private ends by a private ship against another private ship - On the High Sea outside the jurisdiction of any State  For insurance purposes, Piracy is not limited to acts outside the jurisdiction of a State  As far as Marine insurers are concerned, Piracy can result in: - Injury, illness or death of crew or passengers or loss of their effects - Damage to or loss of cargo - Damage to or loss of ship - Pollution - Wreck removal - Delay or waste of time, plus expenses

© Copyright Allianz Global Corporate & Specialty6 Somalia – Successful and attempted hijacks by vessel type (06/2007 – 12/2009) There are no safe vessel types as such! Source: Exclusive Analysis 2010

© Copyright Allianz Global Corporate & Specialty7 Why are piracy risks part of Hull and Machinery cover?  What was the face of “Piracy” in the 1970s/80s? - Few attacks - Remote areas (except Malacca Street) - Use of rather “simple” weapons (rifles, knifes, machetes) - Directed towards valuables, money and crew effects, or cargo on board - Less organized grade of pirates  Few hijackings of vessels (some attempts in the 1980/90s in remote South East Asian waters) with little or no effect on the international H&M insurance market For Hull and Machinery insurers back then Piracy was a visible, but rather low-cost risk

© Copyright Allianz Global Corporate & Specialty8 What has changed in the Piracy picture in the 2000s?  What is the face of Piracy today? - Frequent attacks - More strategic areas - Somalia Basin and Gulf of Aden are worldwide trading routes - Nigeria is a target area for oil exploration in West Africa - Use of heavy weapons (rocket propelled grenades etc.) with huge potential of damage to vessel, plus high aggressiveness of pirates (esp. Nigeria) - Extracting ransom is the target - 7 digit amounts plus costs - Ransom “prices” are going up - Well organized “Business model” For Hull and Machinery insurers, a frequent, costly risk with more potential of collateral damage up to and including Total Loss

© Copyright Allianz Global Corporate & Specialty9 Conclusion: Piracy is war  Piracy is now seen as a War rather than a H&M risk  Underwriters can steer their own risk - By exclusion of defined navigational areas from standard cover - By charging risk-adequate AP  Those who sail in piracy infested waters should pay - They are a limited risk group  Higher premiums? 11/19/ /24/ /10/ /18/2010

© Copyright Allianz Global Corporate & Specialty10 AP on Hull and Machinery War Insurance: Do insurers over- charge?  Vessels under German management transit Gulf of Aden in 2009 = Number of those hijacked =4 1 - Average amount of ransom paid =US$3.5 million 2 - Average amount of costs for managing pirates, negotiations, money-transport etc. =US$2.5 million 2  Claims burning cost per transit - US$3.5 million + US$2.5 million x 4 ÷1600 = US$15 thousand - Plus brokerage, risk margin, return on capital, etc. 1 Source: EinsFüKdoBw Speaker’s best estimate

© Copyright Allianz Global Corporate & Specialty11 Ransom-payment

© Copyright Allianz Global Corporate & Specialty12 Ransom Payments and General Average  Ransom is not an insured peril under an Hull and Machinery policy  The Marine insurer was never intended to become a ransom insurer  Ransom is paid by Hull and Machinery insurer in order to reimburse the owner for his GA contribution  But: - Is there always GA situation?  “ A common danger: a danger in which vessel, cargo and crew all participate; a danger imminent and apparently 'inevitable’” - What if “Maersk Alabama Reloaded” – crew on land? - Has the owner declared GA? - Is the owner interested in declaring GA? - Reimbursement of owner’s GA contribution, not the full ransom - Insurer reimburses - who provides the cash upfront?  “Will only continue to work if all parties accept it”  Uncertainties due to President Obama’s recent Executive Order

© Copyright Allianz Global Corporate & Specialty13 Ransom Payments and Kidnap & Ransom (K&R) Insurance  The “Ransom-GA-model” - In a way it is a “quick-fix” - Shows cooperation between Hull and Machinery insurers and owners to mitigate loss - Has structural weaknesses - Gives no guarantee to work forever or in every situation  Again: The Marine insurer was never intended to become a Ransom insurer  K&R insurance should be an option for the Owner  Charter-Parties may allow for additional costs for K&R insurance  Mandatory for K&R coverage: A pre-arranged pre-agreed What’s needed is a prevention plan

© Copyright Allianz Global Corporate & Specialty14 Prevention  IMO MSC Circular 932 – IMB, IMO, IUMO and others: - “Best Management Practise To Deter Piracy in the Gulf of Aden and off the Coast off Somalia”  OCIMF: - “Piracy – The East Africa/Somalia Situation - Practical Measures to Avoid, Deter or Delay Piracy Attacks”  IMO June 2009: - “Guidance to Ship-owners and Ship-Operators, Shipmasters and Crews on Prevention and Suppressing Acts of Piracy and Armed Robbery”  All “Must-see, Must-have, Must-do” guidelines - Mandatory, not a “nice-to-have”  Again: Mandatory for K&R coverage: A pre-arranged, pre-agreed-upon - PREVENTION PLAN  Mandatory for War coverage: A pre-arranged, pre-agreed-upon - PREVENTION PLAN

© Copyright Allianz Global Corporate & Specialty15 Somalia – “State” of Puntland Source: “Die Zeit” Oct 26, 2010

© Copyright Allianz Global Corporate & Specialty16 Conclusions  The cause is onshore - Poverty and political instability  Ransom payments ease the pain of ship-owners - But don’t cure the symptoms  A ban of ransom payments will lead to a long-term battle of rich against poor on the back of seafarers - Pirates have nothing (!) to lose - Ship-owners, charterers and freight-forwarders have much to lose  Wilful “abandoning” of kidnapped crews will result in legal consequences for ship-owners - A modern “Greek tragedy”  Naval support is crucial - But limited (and costly)  The solution can only be a political one - Political/social stability in the Horn of Africa and Nigeria (plus work, food and education)

Thank you for your attention.

: Piracy in international H&M insurance conditions  Named peril, but excluded per War, Strikes and Related Exclusion clause in the AIHC Hull form dated 9/27/2009  Included in Hull, War Risk and Strikes Clause as per Form 87C-108 AIHC Feb. 6, 2007 ITC Hull Jan. 10, 1983  Named peril (only since 1983)  Excluded as per JHC Circular JH 2005/46 Violent theft, Piracy and Barratry Exclusion Clause excluded Norwegian Plan  Excluded German ADS 1919 DTV-KK 78/92 New ADS 2009  All risk  Excluded as per market wordings - (Similar for Par of the new German ADS 2009)