The piracy racket begins here in the City
January 7 2012 12:01AM
Maritime insurance companies have it nicely sewn up – and they are encouraging the lawlessness to continue
Is the insurance industry a hidden cause of the growth of Somali piracy? This week’s report from the Commons Select Committee on Foreign Affairs prompts, but does not ask, the question. It skirts around it.
The committee’s recommendations are workmanlike but cautious in the extreme: a legal regime for the carriage and use of weapons for the purpose of deterring piracy (fair enough: uncertainty over the status in law of armed guards does need to be resolved). And better international co-operation to create a co-ordinated anti-piracy strategy. We all want that.
Yet no properly armed merchant ship has ever been successfully hijacked off Somalia. Think about it: how easy is it to board, from below, a great high-sided vessel at sea? So you would expect at least a recommendation that British insurers require the presence on board of an adequate force of armed guards rather than simply offer a discounted premium — motorists, for instance, cannot insure against car theft without a car alarm.
There is no such recommendation. The industry was not too keen on this idea. Think about that too. The greater part of maritime insurance is British, but very few British merchant seamen will ever be affected. You may speculate that the risk of the occasional loss of a few Filipino crewmen is preferred to a substantial hike in the cost of every voyage and the danger that maritime insurance would be driven away from the City of London.
In its conclusions the committee comments: “We are surprised by the continuing lack of information about those funding and profiting from piracy.”
They should not be surprised. Piracy is funded by pirates and insurance companies. A whole network of agents and middlemen has sprung up and is used by insurers and shippers as a semi-formalised line of communication with the Somali pirates. Many careers and many fortunes — all perfectly legal — are now founded upon this racket.
Efforts to combat the evil are failing. Despite this week’s US Navy rescue of 13 Iranian sailors, naval engagements against pirates have not succeeded and there is no evidence that our own military gives this serious priority. After nine international resolutions and three multilateral naval drives against piracy in the Indian Ocean, the average ransom has risen since 2007 from $600,000 per vessel to $4.7 million now; $135 million was paid in ransoms in 2011, as compared with $5 million in 2007. One might expect a growing sense of alarm within the shipping industry and among those who insure it. Instead, one encounters a preference for letting well alone.
In evidence to the committee, Stephen Askins, a maritime insurance lawyer, agreed that negotiation (by which he must also mean the payment of ransom) is preferred over military intervention, and “in a commercial sense, we would rather there was minimum government involvement in the negotiation process. [We] ... have a process and, on a commercial level, it works.”
In short, the insurance industry is collecting the money from world shipping, facilitating negotiations with the thieves and helping organise the payments to them. It’s all nicely sewn up. The select committee discovered that “insurance premiums have more than doubled as Lloyd’s widened the risk area to most of the Indian Ocean. However, Somali piracy has also constituted a business opportunity for some new and existing British companies, a number of which are involved in insurance.”
What interest does the industry have in messy dogfights at sea? Much to be preferred is a set of orderly arrangements for the payment of ransoms, which insurers then collect from their shipping clients in the form of increased premiums. They act as middlemen, effectively (however unwillingly) working for the pirates as well as their policyholders; and creaming off their cut from the transaction. Look at it, if you like, as a boon to the City combined with a freelance form of foreign aid. Thus has the situation evolved, to nobody’s great detriment but the ultimate customer: you and me, and the occasional poor Filipino who gets caught in the crossfire.
The logical conclusion of this evolution would be for the insurance and shipping industries to strike a deal with a consortium of the pirates for protection for certified vessels. This would save the pirates the trouble of putting to sea, save loss of life and save shipowners the distress of interruptions to their shipping.
In evidence to the select committee, representatives of the maritime insurance industry insisted that they were not profiting from piracy premiums because the cost of payouts was racing ahead of their ability to raise their premiums. If (while raising an eyebrow) we are to take them at their word, then we must accept that insurers are offering piracy cover as a hook or loss-leader to bring in more business and (as they put it to the committee) cement long-term client relationships. So losses on piracy are being recouped by raising premiums for the whole shipping industry, even clients not affected by piracy. Somali crooks have effectively instituted a levy on the totality of world shipping.
Insurers put it like this to the committee: “We would much rather [ransoms] were not being paid, but the reality of the situation is that there is no other way to secure the release of crews ... We therefore have to go past the moral consequences, engage with the pirates and pay them a ransom.”
And I think that’s true for insurers. But should we accept this insurance arrangement?
In Britain we do not criminalise individuals who cave in to blackmail (unless the demands come from a terrorist organisation). We do, though, outlaw the paying of bribes as well as the demanding of them. A British company doing business in Nigeria could not insure against having to make corrupt payments. A pirate, an insurer and shipowner, however (or their agents), can coolly negotiate a ransom payment confident that only the pirate is breaking the law, while those within reach of the law are not breaking it.
Here, then, is my own report, concluded by a very select committee of two: my researcher and I. English law could easily be tweaked to criminalise the payment of ransoms. There’s a range of ways you could do this: (1) amend the laws on proceeds of crime to make clear that a ransom can be “proceeds of crime” before it is handed over; (2) declare in statute that paying a ransom is tantamount to helping to fund the next kidnapping, and therefore already unlawful; (3) deem Somali pirates a terrorist-linked network; or (4) simply criminalise the payment of ransoms.
But there’s one huge problem about any legal change that might put a ransom-payer in the dock: public opinion in sensational and heartbreaking cases. So I propose that this be the long stop, held out as a threat to the industries should their co-operation in a more limited proposal not be forthcoming. This proposal is to require all British insurance against piracy in the Indian Ocean to be contingent upon the carriage on board of an adequate private security squad. The industry will squeal. But the policies they now offer and pay out on are an inducement to piracy. The committee should have said so.