Transportation

Pirates and Insurance Blackmail

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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.

Opting for a Really Big Deductible

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Our fellow Chicago Boy, Steven den Beste, has posted some thoughts about piracy on his own personal blog. He thinks that the recent plan to allow NATO warships to form an anti-pirate patrol off of Somalia is not the optimal solution to the problem. Instead he thinks that a few heavily armed squads of soldiers, placed on a civilian ship as it traverses pirate infested waters, would do the trick.

I have been writing regularly about maritime piracy for years now. Most of my previous posts were lost when my former ISP abruptly terminated service, but the idea of hiring mercenaries for short term security in dangerous waters is hardly new. The concept of having regular military troops perform the same job merely transfers the cost from the private shipping company to the taxpayer.

But the same problem which prevented the shipping companies from hiring private soldiers keeps them from allowing government troops on board. And that problem is higher insurance premiums.

Back when I first became interested in the problem in 2001, ship captains who had to navigate through areas with heavy pirate activity were given $20,000 in cash. The idea was that the money was to be kept in the ship’s safe, and paid to any group of pirates who managed to make their way on board. Danegeld on the high seas.

But we all know what happens if you pony up the Danegeld. The idea that a mere $20K would satisfy a self respecting pirate band today is ludicrous. And it will probably get worse before it gets better.

Anyone interested in maritime piracy is encouraged to read the ICC Piracy Report, a free weekly update listing attacks on shipping. One thing that becomes painfully obvious very quickly is that pirate attacks are becoming more frequent, the pirates are demanding ever increasing amounts to return control of the ships they take, and the pirates are becoming ever more violent in an effort to coerce the shipping companies to pay up.

One would assume that the huge amounts demanded by pirate bands recently is a prime motivator for shipping companies to hire some mercs, but that is only if you discount the enormous number of vessels that daily move through the major shipping lanes. Four, eight, ten, a dozen ships might be held for big money, but hundreds more manage to move through those waters every day without having any problems. The increase in money paid to the insurance companies if troops were allowed on board is still greater than the cash paid out to the pirates.

Right now we are seeing a fluid situation that is trying to reach equilibrium. The pirates won’t stop because they get some really good money for attacking maritime vessels, and there is very little risk. The shipping companies will continue to pay ransom money as long as it is cheaper than increased insurance premiums. The pirates will continue to demand ever larger payouts as long as they are ultimately handed the cash.

If things are allowed to develop as they have been, eventually the shipping companies would begin to balk at the huge amounts that the pirates would demand. Then I expect the pirates would turn into terrorists, executing the captured crews in public and highly visible ways in an attempt to get the money spigot turned back on. It would only be at this point, with insurance premiums climbing because of the increased chance of murder, that the shipping firms would begin to look to resisting piracy in an aggressive and effective way.

The decision by NATO to begin anti-piracy patrols is probably seen by the shipping companies as a possible solution, and one that they won’t have to pay for out of their own pocket. It would work if the warships tasked to hunting down the pirates would actually shoot a few of them, but I really don’t expect that to happen.

Ships and the Global Economy

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The ocean shipping industry is, and always has been, a major enabler of global trade. Air freight is very important, as are communications technologies such as the Internet…however, there exists a vast array of products and commodities for which the only economically-viable means of transportation is the ship. Hence, anything that affects the ocean shipping industry has the potential to influence the shape of the global economy.

The International Martime Organization has approved new rules which will ban ships from using their traditional fuel (very heavy oil, known as bunker fuel) in most parts of the world. The rules are stated in terms of sulphur oxide targets, which will phase in over time. Specially-treated bunker fuel may meet the initial targets in some areas, but only distillates are likely to meet the long-term targets. This implies an eventual potential fuel cost increase for shipping operators of fifty per cent. More at the WSJ.

Increased shipping costs will, at the margin, encourage domestic and regional production of goods at the expense of imports. The strength of this effect will of course depend on the nature of the particular products–shipping costs as a percent of overall value are much higher for washing machines, for example, than for flat-screen TVs.

The new regulations are probably good news for this company. But even if their technology is very successful, overall costs per ocean freight ton-mile will still likely be going up as a result of the new regulations.

A commenter at the WSJ link asks some interesting questions:

What is difficult to discover is just how many people will be adversely affected by increased shipping costs. How will it affect sub-Saharan economies? Will it cause more problems for the shortest lived poorest people on the planet? will it reduce their life expectancy still further? There are reports that indicate the importance of low shipping costs to these economies but unfortunately no one seems to have measured the cost in lives of the current high fuel costs nor what it will be when the new measures kick in.

Asinine

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The story about the airline pilot whose pistol went off accidentally — a foreseeable outcome of idiotic storage requirements imposed by bureaucrats — will be analyzed to death by other bloggers, but the posts by Paul Huebl (via Arms & the Law) and Steve H. are particularly good.

Huebl points out that the government bureaucrats who came up with the storage/holster scheme didn’t merely ignore but went out of their way to ignore reasonable advice from law enforcement officials who are experienced with weapons. And I think that almost everyone who has commented has pointed out the absurdity of treating pilots, whom everyone trusts with the lives of hundreds of passengers, as being somehow too irresponsible to use independent judgment in handling simple weapons they have been trained to use.

I don’t think bureaucratic stupidity is the central problem. It’s more likely that the bureaucrats are responding to strong incentives that aren’t visible to outsiders — otherwise, why not take the apparent easy way out by following the cops’ suggestions? Probably, given the way bureaucracies function, and the hostility of TSA and DOT management to armed pilots, and the aversion of airline companies to lawsuits that might be brought if pilots misused their weapons, and perhaps also (as a commenter on Steve’s post suggested) lobbying by vendors of “safe storage” equipment for pilots’ firearms, the easy way out really is to make it as cumbersome and hazardous as possible for pilots to arm themselves. What better way for the bureaucratic decisionmakers and airline executives to minimize their liability while nominally accommodating political demands for armed pilots? Never mind that pilots and passengers, the people who have the most at stake, are mainly either strongly in favor of letting pilots be armed or are neutral.

Dangerous storage of guns on commercial aircraft is a consequence of involving government in an area that should have been left under the control of the people who are most accountable. If airlines could set their own policies they could allow armed pilots to follow sensible procedures, or forbid pilots from being armed. In either case an airline could follow its best judgment about the risks and benefits of armed defense against hijackers. An even better solution would be to leave the arming of pilots to airline discretion and to provide airlines with legislative immunity against lawsuits brought in cases where pilots use their weapons in good faith.

Too much of the public debate about responses to terrorism is driven by fear of lawsuits and by bureaucratic agendas that have nothing to do with national security.

UPDATE: David Foster’s 2002 post on this topic is well worth reading.