Pirates and Insurance Blackmail

I have previously discussed how effective measures to combat modern day piracy on the high seas won’t come about until the insurance costs get too high. Piracy will continue until the the increase in insurance premiums for getting attacked by pirates exceeds the amount the underwriters will charge if armed guards are placed on board.

This recent post at StrategyPage.com pretty much says the same thing. NATO warships might be tasked with anti-pirate patrol, but they won’t actually shoot anyone for fear of bad press. The pirates know they have a good thing going, and there will be more attacks in the future. The shipping companies aren’t about to place armed guards on board their vessels since the higher premiums they have to pay for pirate insurance is less than what the underwriters will charge for having private troops on the vessels.

I figure one of two things will happen.

The gangs will continue to raid enough ships for them to have a big (in Somalian terms) payday through ransom money, but not enough for it to make sense to actually attack the outlaws. It will be the same-old, same-old for years to come.

More pirate gangs will form to grab a slice of the pie. Either the number of attacked ships passes an economic tipping point, or some undisciplined criminals start slaughtering innocent crew members that they have taken hostage. Eventually NATO starts to clean house, and the number of pirate attacks are reduced for decades afterwards.

It looks to me like more of the same-old, same-old is more likely in the foreseeable future.

4 thoughts on “Pirates and Insurance Blackmail”

  1. I’m not sure that making such decisions based on economics is such a bad thing, at least short term.

    One might think about the opposite state wherein we respond to all forms of extortion with violence which leads to a state of near constant conflict.

    Paying danegild offends us morally and we know from history that it is not a sustainable policy but I don’t think the private actors have any choice. The law prevents private actors from attacking the pirates (both directly and by liability) so they really only stand to lose by taking action themselves.

    I think the terminal move in this game will come when terrorist camp out in the pirate lands. Somali already has an active Al-Queada presence.

  2. The post-revolutionary US Navy was created to suppress Muslim pirates very similar to the current Somali kind. Owners of US-flag ships should have a reasonable expectation that Navy and Marines will be deployed to protect them against piracy. This would include placing Marine parties on ships transiting the pirate-infested areas.

    Of course US-owned ships are mostly not US-flagged ships. This is because the Jones Act mandates uncompetitive terms for US-flag shipowners; thus, US-flag ships operate almost entirely in economically-protected markets: Mainland-Hawaii, mianland-Puerto Rico, etc. The Jones Act should be reformed to make US-flag ships reasonably competitive in world markets. Providng US military protection to US-flag ships means that the US maritime wage would not have to fall to world maritime wage levels; they would be competitive somewhere in between current and world levels. As for foreign-flagged vessels: when they report an attack, give them the phone number for the Liberian Navy, if there is one.

  3. Right now there are hundreds of ship owners who are ordering their ships to voyage to Somalia asap. Since the commodities/credit crash began in September, the Baltic Dry Index of ship chartering costs has collapsed to the point where ships cannot pay their own way. Ship breakers in India cannot get credit to buy ships with and their markets for scrap have disappeared as metal prices have plunged.

    My friend George, who went to law school in Brooklyn at night, tells the story of his bankruptcy law class. The prof asked if anyone could name an alternative process to bankruptcy, hoping to hear about state court reciverships and assignments for the benefit of creditors. A student in the back of the class stuck up his hand, and, when called on, said: “A fire.”

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