The recasting Of purpose: with hull policies excluding terrorism, carriers have extended their kidnap-and-ransom policies to cov

More than 25 incidents of piracy have been reported in the Gulf of Aden so far this year, and ship owners have raised the issue with Chubb, a major underwriter of kidnap and ransom insurance.

In response, Chubb used its successful K&R template to create a Marine K&R policy designed to protect shipping companies from kidnap and ransom on a per-transit basis.

Risk & Insurance[R] Managing Editor Cyril Tuohy spoke with Greg Bangs, vice president of Chubb & Son, and worldwide product manager for crime, kidnap and ransom, and workplace violence insurance, about repurposing policies to fit the new demands of the marketplace.

Greg Bangs: Traditionally shipping companies have bought their marine shipping insurance products on a per-trip basis, a per-transit basis. So their huh insurance, their war risk, has always based on the per-transit basis. If a ship is going from Djibouti to Asia, for that one transit that they would make through the Gulf of Aden and all of the waters on the way would be under one insurance program.

Talking with ship owners about it, they said this is really what we need, not an annual policy. Give us something we can say that for this particular transit, this particular vessel, we know we're covered for K&R, There is some coverage available under the traditional marine products but its grey and it is kind of limited.

Cyril Tuohy: Give me an example of such a hole. GB: Hull policies often exclude acts of terrorism and many courts are still very unclear as to whether piracy is in fact an act of terrorism. So there is a grey area. Will the courts come down, yes or no? Is there coverage or not? Hull policies, even if they do respond to the ransom, don't respond to the broad range of expenses that a dedicated K&R coverage would bring to the table: expenses involved in hiring a security consultant to handle the risk on behalf of the insured; medical expenses; lawsuit coverage; public relations. There is a series of expense coverages that are not available under the traditional product. The other things are the war risk, which a number of insurers are trying to turn to. The grey area is if in fact, the vessel is held for ransom, and the crew released because the ransom is paid, and the ship completely unharmed, then was there actually a loss under a war risk policy? A lot of war risk insurers would say there wasn't a loss.

CT: Chubb altered the K&R product, not the marine product?

GB: Correct, it is really a K&R policy has just been adapted and focused for the marine risk. It's not offered under our marine coverage. We call it a Marine K&R product. We'd been offering the standard K&R policy for about 30 years but the focus on the marine industry has been in the last 6 to 8 months really, in response to the fact that hijacking spiked and ship owners are saying to us what can we do?

CT: What kind of details were changed from the K&R land product to the Marine K&R product?

GB: The primary focus is on the way we sell it, on a per-transit basis. Actual coverage granted is similar but what we do is we focus for the ship owners on their key exposures, which is No. 1 obviously you need to pay the ransom. The main thing for the ship owner is when this happens, they need a security consultant to immediately come "on board" and handle the incident. The incident is actually handled from land, but they do it through dedicated radio channel and frequencies in English. From the ship owner's perspective, the most important thing other than the ransom is to make sure that you get that security consultant in there so it's not different from the land-based policy but it's just that there are unusual wrinkles. Once the ransom demand has been agreed to, for example, they fly over the ship in a helicopter or a light plane and drop the money over the ship in a big bag. Used $100 bills in a big bag and here it is on ship and the way the pirates do it is they literally just divide it up right there on the ship.

CT: What kind of "unusual wrinkles" have you come across?

GB: There was one hijacking and the pirates had gotten their money. They each had an average of $150,000 in their pockets and they left the ship and were going back to land and three of these little pirate skiffs sank in heavy seas. So here are these pirates washing up on shore with $150,000 in their pockets. Thousands of people came out of the hills looking for these dead pirates with $150,000 in their pockets.

CT: About 6 to 8 months ago, you brought these policies to market. How has the uptake been?

GB: It has been extremely good. We have actually done it in various markets. Obviously here in the United States, we have done it in the United Kingdom, we have done it in northern Germany, where there is a heavy ship-owning presence, and in

Asia as well, particularly in Korea. In all of these markets, the response has been quite strong because the ship owners really want that positive coverage affirmation--yes, I a.m. protected against this. I don't have to argue with my hull insurer. I don't have to argue with my war risk insurer. I know I'm covered against kidnap and all the expenses involved. The product is sold through brokers and agents.

CT: Pricing depends on what is being covered and what is being protected. A large cargo ship would be a different price than an oil tanker.

GB: There are a number of different faetors we take into account. The risk profile is very different from class of ship to class of ship. The most difficult ones to cover are the container ships, because in many instanees they are too fast for the pirates. They also have a much higher freeboard, which is the amount of the hull sticking out above the water. The higher it is the harder it is for the pirates to climb. The container ships are the hardest so they have been taking them like the Maersk Alabama. The second tier would be the bulk cargo ships that are the ones most being targeted and taken. The third tier would be the slow, hard-to-turn not that difficult to get onto oil tankers, which are sitting ducks. Those are the easiest to attack because they are big, slow and lumbering, and if the pirates want to get on board they will.

CT: And those kinds of ships, I assume, would be more expensive to cover.

GB: Correct. The tankers would pay the most and then the cargo ships and then the container ships.

CT: At $100 a barrel of oil, I would think the tanker is all of a sudden much more valuable.

GB: Exactly. Look at the Sirius Star. That was taken with $100 million worth of oil in it.

CT: The flare-ups in the Gulf of Aden are not unique. Is this the first time you have repurposed these policies from land to sea, or have you repurposed these policies previously?

GB: It is the first time we have repurposed for the maritime exposure. It is not like piracy is a new problem but it is a new problem now that's surfaced in the Gulf of Aden where the level, scope and scale of the problem has just exploded exponentially. There's so much money for the ransom to the pirates that has been paid, so much money washing around in Somalia amongst the pirate groups. There are thousands of potential pirates out there and they have a lot of money now, so of course they are going onto the black market and buying their RPGs and their AK47s, and suddenly you have this very, very large pirate base heavily armed with a nice kitty behind them. It is the scale of it that is much bigger than anything we have ever seen.

CT: This serves as an interesting lesson in repurposing your existing products. Is this a model that Chubb would use in the future, or is this limited to this particular world of K&R?

GB: It is a good model. It has shown us that if you specifically repurpose and direct your focus on a particular segment, you can address the needs of the insureds and at the same time obviously, sell more insurance, which makes everybody happy. This is a model that we might use going forward.

CT: What other advice to you have for ship owners or shipping industry risk managers?

GB: There was a lull at the beginning of the year when people said, "Oh the piracy situation in the Gulf of Aden has gone away," As it turned out it was because it was monsoon season and all the pirates were on land. The problem is not going away. I think the landscape has changed to the point where pirates know this is a great way to make money. It is relatively easy, you just need a bunch of guys on a fishing boat with AK-47s and RPGs. They realize this and that there has been a lot of publicity about it. The problem is just not going to go away anymore.

CT: It seems a rudimentary mode of attack, with kids in their teens and 20s. These are not military-grade fighters. Have you noticed the pirates upping the ante in terms of their weapons and in terms of their boats and what has that done in terms of the policy.

GB: They have upped the ante, not so much in terms of their boats although they are upgrading their engine power. Some of the ships were able to outrun them in the past, but with more powerful engines they are able to catch these ships now. More importantly, the type of weaponry they are buying on the black market now that they have millions of dollars to be able to do this is becoming scary. They are buying heavy weaponry and unless you have people armed with heavy weaponry on the ships, it is virtually impossible to knock these people away. They are organizing themselves almost like a military operation. You have the actual ex-fishermen themselves who man the boats and get them out there and surround the ship. Then you have the soldiers who actually fire the weapons and attack the ship, who tend to be ex-employees who used to work for the warlords in Somalia. Then you have the logistical supply chain on land, the ones who go to the black market and buy the weaponry, the food, the supplies and other logistical material that they use.

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