Why Insurance companies and Western Navies Love Somali Pirates

On the 11th October  the BBC’s defence corespondent Caroline Wyatt reported that British and US forces freed a ship that had been seized by Somali pirates and said that “piracy is now big business”.(1)  Piracy may well now be “big business” but for who exactly?  The average ransom demand has increased from $150,000 in 2005 to $5.4million in 2010(2) and pirates income from ransoms in 2010 was around $238 million (up from $80 million in 2008)(3) so it may seem that pirates are raking in the cash especially as that kind of money goes further in Somalia then it would in any western nation. (Except Greece. Maybe). In his bookThe Pirates of Somalia (Deadly Waters in the UK & Australia) Jay Bahadur says that while the media focus on the multimillion-dollar ransoms most pirates “have a virtual army of destitute friends and relatives they are expected to share with, they do not typically experience a sustained rise in their standard of living……….once the ransom is divided up, the middling amount received by the average …[pirate]…is quickly either spent or bled away by family and friends”.

The ransom is divided up between 20-30 or more pirates and then there are “creditors” (or a committee of creditors) who fund piracy missions up front and will want their slice of the cash as well interpreters who take part in negotiations; then there are weapons & ammunition, food, fuel, Land Cruisers and skiffs to ferry supplies all of which eats into the ransom payment. And then there’s khat, a narcotic shrub chewed incessantly by Somali’s. Bahadur estimates that when the German owned MV Victoria was held for 72 days in 2009 the pirates spent a whopping $109,440 on khat alone ($1,520 per day). However like all good corporations the man at the top gets well rewarded; in the case of the Victoria hijacking the pirate gang leader may well have taken home over $620,000 which goes a long way in any country.

There is another group who make money from Piracy and they also seem to be quite happy that ships remain defenceless against attack – insurance companies. According to the German Institute for Economic Research (DIW) “the insurance industry has an interest in the continuation of piracy, which is an important revenue source. Insurers are therefore unlikely to make demands on shipping to comply with guide lines which would eventually serve to cut off this important income stream.”(4) “It is therefore not in their interest for piracy to stop altogether”(5) The DIW also say that many of the relevant players such as the pirates, the insurance industry, and international navies (see below) do not have any incentive to stop piracy. “In fact, there is a relatively stable relationship between these groups, many of whom share a clear business interest in maintaining piracy at its current level”. Piracy “creates opportunities for businesses around the world; thereby further reducing incentives to bring piracy to an end.”(5) The DIW add that “The total cost of piracy off the Horn of Africa including public and private counter-piracy efforts is estimated to be in the region of US$7-12bn”(5). However ”from the costs caused by piracy, only 20% go to Somalia”(6) the rest of the money is spent on increased insurance premiums, re-routing of ships to avoid pirate areas, prosecution of pirates (which came to $31million alone), naval forces off the Somali coast and private security firms who insurance companies involve in negotiations – daily rates for security firms can run into thousands of dollars; these same security firms are also tasked with air-dropping the ransom to the pirates. The point here is from the costs caused by  Somali piracy most of the money is spent in the western economy, one Captain Farrington of the Royal Navy commented “this is a business where everyone makes money”.(5)

The chances of being attacked by Somali pirates are actually very small. The German Institute for international and Security affairs (SWP) say that 16,000 to 20,000 ships pass the Horn of Africa every year but only between 40 and 100 (less then 1%) are victims of successful pirate attacks.(7) The SWP ask why are western nations willing to commit warships and personnel at great cost (Oceans Beyond Piracy put the cost of naval deployment off Somalia at $2 billion(8)) instead of trying other methods to counter piracy, such as a naval coastguard based in Puntland a self-governing (and relatively peaceful) region of Somalia. They could also encourage shipping companies to make their  vessels more ‘pirate proof’ but the DIW say that “many ship owners are choosing not to spend the money to institute even the cheapest of practices recommended by the navy, like putting barbed wire on ships.”(5)

There are three naval operations working to tackle piracy emanating from Somalia; the EU & NATO launched operations to protect shipping in late 2008 and the Combined Task Force was set up in January 2009 with the United States as the main contributor. There are also vessels from countries as diverse as China, Iran, Malaysia & Russia independent of the above three multinational missions. But are they there solely to tackle Somali piracy?

The SWP suggest that one reason for the presence of western navies off the Horn of Africa is control of the Indian Ocean “in an era where competition over dwindling resources will increasingly shape international relations this motive cannot be dismissed out of hand”.(7) The Horn of Africa and Gulf of Aden connect the markets of Europe and Asia (in particular India and China) and China is looking to expand its influence in Africa. According one retired Vice Admiral, the Indian Ocean holds “the key to the world’s seas, particularly the sea routes to the Pacific,” and is particularly “decisive for the future power constellations in Asia, above all between India and China.”(6)

Sending warships to the Indian Ocean also gives international Navies “a welcome opportunity to demonstrate their importance”(7). The DIW argue that because of the wars in Afghanistan and Iraq the profile of land forces has been far greater then that of the worlds navies and success in tackling piracy is an opportunity to raise the profile of a states navy. ”Success for the world’s navies in Somalia demonstrates their continued importance and hence the importance of continued naval funding”.(5) However even if the impact of western navies in countering piracy is small or barely noticeable their deployment may well be regarded as a success because “navies have defined counter-piracy missions in such a way that ‘success’ is inevitable and significant change unlikely to result”, hindering but not ending piracy maybe seen as ‘success’.(5) If piracy continues, navies will be able to say that they do not have the resources to end the Somalia problem, and that the failure is then not the failure of naval missions, but the failure of broader policy.”(5) Added to this “China is seeking to add a serious naval component to its armed forces and gain experience by participating in international operations far from home waters”. and the European Union “has the chance to test its collective military capabilities in its first naval operations”.(7).

Has the large naval presence made a difference to the amount of ships being attacked? Unfortunately no. The DIW quote figures from the International Maritime Bureau, there were 108 pirate attacks in 2008, 216 in 2009, 218 in 2010(5) and there have been 208 attacks so for in 2011 (up to 22nd October) (9) the trend is definitely up. “Overall” the DIW say  “pirate activity appears to not to have been significantly influenced by the presence of the naval forces.”  The presence of foreign warships has however improved the delivery of food aid to Somalia but “it does not appear that extensive naval counter-piracy efforts have had a deterrent impact on piracy. The main effect seems to have been to move piracy further away from Somalia’s shores”.(5)

(1) http://www.bbc.co.uk/news/uk-15265864

(2) http://www.eyefortransport.com/content/maritime-piracy-costs-global-community-12-billion-year

(3) http://www.usatoday.com/news/washington/2009-04-23-somalia-donors_N.htm

(4) http://www.diw.de/sixcms/media.php/73/diw_wr_2010-23.pdf

(5) http://www.diw.de/documents/publikationen/73/diw_01.c.358500.de/dp1033.pdf

(6) http://www.german-foreign-policy.com/en/fulltext/57866

(7) http://www.swp-berlin.org/fileadmin/contents/products/research_papers/2011_RP03_mrs_ks.pdf

(8) http://oceansbeyondpiracy.org/sites/default/files/documents_old/The_Economic_Cost_of_Piracy_Summary.pdf

(9) http://www.icc-ccs.org/piracy-reporting-centre/piracynewsafigures

(10) http://www.time.com/time/world/article/0,8599,1892366,00.html

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