SHIPPING: Our Exposure To The Risk Of Piracy
Recent Western Cape Business News
While the Horn of Africa seems a long way away and most South African goods reach Asia and Europe by other routes, a growth in piracy has doubled the cost of hull insurance, upped the chances of General Average being applied to cargoes, multiplied the risks that freight forwarders assume on behalf of their clients, and increased the overall risk exposure of South African businesses with goods or materials that travel the high seas.
Given the very real costs that piracy has added to shipping cargoes “South African businesses that merely rely on freight forwarders to get it all right may end up paying much more – or even forfeiting their cargoes” warns Kennedy Ntenjwa of Alexander Forbes Risk Services Marine.
The recent increase in piracy off Somalia is driven by Mogadishu’s inability to ensure the safety of it national and international waters. Until a concerted international effort is put in place to either stabilise Somalia internally or provide blanket protection to all vessels travelling around the Horn of Africa, the phenomenon is only likely to increase.
In the meantime piracy has very real cost and insurance implications for all South African businesses with goods or materials that move by sea.
Traditionally, Marine Hull Insurance, purchased by ship owners from internationally registered Protection and Indemnity (P & I) Clubs or International Underwriters, covers loss at sea, including sinking, piracy or any other physical damage to the vessel. Marine Cargo Insurance, on the other hand, covers the goods carried by ships. This is usually taken out by the owners of the cargo or the freight forwarders that book the cargo on behalf of the owners. Marine Cargo Insurance is obtained from normal commercial insurers, through brokers like Alexander Forbes.
In recent months the increase in piracy has seen some ships quoted Marine Hull Insurance rates in the region of 0.5 to 1 percent of the value of the vessel – with this increasing significantly depending on the routes that the ship will be taking.
Piracy has, on the other hand, had “surprisingly little impact on the Marine Cargo Insurance market where we have not seen the same increase in rates as observed in the Hull Insurance market” says Ntenjwa. This is all the more remarkable since goods that have been delayed are likely to experience an increase in contract cancellations and fines or penalties for breach of contract arising from such delays.
To avoid the risk of incurring delay costs it is important, where possible, to build more time in to import and export transactions to provide for unscheduled delays. Alternately “businesses with goods on the high seas should consider purchasing Marine Project Delay cover, particularly on project related cargoes” advises Ntenjwa.
Also of increasing concern is that if a shipping line declares General Average, then all parties with goods aboard the vessel are required to contribute towards the loss – in a proportion equal to their share of the overall value of the cargo. With the increase in piracy General Average is being declared more often on cargoes travelling around the Horn of Africa “further illustrating the importance of having marine cargo insurance in place - on all sea freight cargoes” explains Ntenjwa.
In short, thanks to piracy the whole process of insuring vessels and their cargo has become both more risky and costly, even for those businesses in South Africa which consider themselves far removed from the risk of piracy.
Given these very real increased risks and costs, Ntenjwa warns South African businesses to avoid a situation where they do not make a detailed review of the risks that they face. “Companies that do not take the time to understand and fully cover the risk that their vessels or cargoes may face on the high seas could end up with some nasty and costly surprises” concludes Ntenjwa.
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