The expansion of so-called high risk area covering almost all of the west coast had triggered a 300-fold jump in ship insurance costs
Piracy at sea dropped to its lowest levels in six years, according to a global agency that tracks piracy, giving India the strongest backing yet in its efforts to reverse a December 2010 decision by the International Maritime Organization (IMO) and marine insurers to expand the areas judged prone to pirate attacks.
The expansion of the so-called high risk area covered almost all of India‚Äôs western coast, triggering a 300-fold jump in ship insurance costs and, in turn, raising the transaction cost of commodities shipped to Indian ports.
Globally, 264 attacks were recorded in 2013, a 40% drop since Somali piracy peaked in 2011, according to the London-based International Maritime Bureau (IMB). Only 15 incidents were reported off Somalia in 2013, down from 75 in 2012 and 237 in 2011, according to IMB‚Äôs annual report released on 15 January.
The single biggest reason for the drop in worldwide piracy is the decrease in Somali piracy off the coast of East Africa, said¬†Pottengal Mukundan, director of IMB, whose Piracy Reporting Centre (PRC) has monitored world piracy since 1991. IMB says Somali pirates have been deterred by a combination of factors, including the key role of international navies, the hardening of vessels, the use of private armed security teams, and the stabilizing influence of Somalia‚Äôs central government.
The high risk area was extended beyond the earlier boundary of 65 degrees East longitude to up to 78 degrees East, stretching right up to the territorial waters on India‚Äôs western shores. Consequently, London‚Äôs Joint War Committee (JWC), which assesses insurance risks, extended the war zone in December 2010 about 900 miles east as the hijacking range grew.
JWC comprises underwrites from the Lloyd‚Äôs Market Association (LMA) and the International Underwriting Association (IUA).
The decision was taken after pirate attacks started taking place 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 expansion of the area effectively brought the whole of the Indian Ocean, almost up to the coast of India, into a so-called exclusion zone, raising shipping costs into and out of the country.
The extension meant that this area is excluded from the annual war risk cover, with underwriters demanding additional premiums from shipowners to provide insurance cover.
A ship with appropriate war risks insurance is covered for such risks encountered throughout the course of its normal operations.
Insurance for war risks is provided by commercial war risks insurers in the marine insurance market. War risks are generally excluded from the normal insurance cover provided for the ship‚Äôs hull and machinery as well as for third-party liabilities arising from operating ships.
However, in a time of war or conflict, the areas where particular war risks apply are defined and published by JWC. Consequently, war risk insurers may declare the area an additional premium area, and basic war risk cover may be cancelled and reinstated at a higher rate.
Last week, the director general of India‚Äôs Coast Guard, vice-admiral¬†Anurag Thapliyal, reiterated India‚Äôs demand for restoring the IMO-notified high risk area to its original limits.
A similar demand was made by India‚Äôs chief of naval staff in December 2013 and earlier by the shipping ministry and the director general of shipping.
Considering that there have been no attacks reported for the last two years within 500 nautical miles of the Indian coast, after the Indian Navy took remedial measures, India has been advocating that the eastern boundary of the war zone be reduced to an appropriate longitude if not brought back to the earlier limit of 65 degrees East longitude.
There are other reasons for India‚Äôs naval establishment to seek a reversal of the expanded war zone limits.
The IMO notification forced international cargo ships to navigate closer to India‚Äôs western coast to clear the current limits of the high risk area, fearing pirate attacks. This interfered with India‚Äôs coastal traffic, creating trouble. Further, as a relatively cheaper counter piracy measure, many vessels began to carry privately-contracted armed guards in Indian waters, causing serious security concerns, Thapliyal said.
This, apart from raising insurance and freight costs, had also resulted in interference with the shipping and fishing fleets, leading to unpleasant incidents.
The Indian navy currently has four ships patrolling the area at all times and India has formed an inter-ministerial committee to negotiate with hijackers and advise vessel owners. There are about three dozen military ships altogether now engaged in anti-piracy operations.
A reversal of the high-risk area limits would reduce insurance costs, which had skyrocketed to as much as $150,000 in premium per voyage from $500.
Typically, ships bought insurance for the three days they were moving through the Gulf of Aden‚Äînow they have to pay for the additional 10 days through the Indian Ocean.
The larger zone meant about 28,000 more journeys a year are liable to higher premiums than the 22,000 made in the old zone.
Shipowners found it difficult to cope with the higher premiums, particularly in a depressed freight market brought about by the financial crisis and the global economic downturn since 2008. It is imperative to continue combined international efforts to tackle Somali piracy; any complacency at this stage could re-kindle pirate activity, IMB‚Äôs Mukundan, however, warned.
P. Manoj looks at trends in the shipping industry.