Congressional Research Service: “Ocean Piracy and Its Impact on Insurance”
December 3, 2008


Many Members of Congress are concerned about the sharp rise in pirate attacks in the strategic waterways in the Gulf of Aden off the East coast of Africa. The hijacking of a Saudi Arabiaowned oil tanker, Sirius Star, off the coast of Kenya on November 17, 2008, by pirates was another in a series of seizures that have focused worldwide attention on economic and  umanitarian threats posed by pirates to the global seafaring community and the smooth flow of international trade. Given the sharp increase in the number of pirate attacks, the cost of transporting cargo in international waters could rise dramatically because of the sharp increase in ocean marine insurance rates for ships transiting the Gulf of Aden. Commercial insurers, for example, could require a special “war risk” insurance premium costing an additional ten of thousands of dollars a day. These additional costs could adversely impact international trade during the current global economic slowdown.

In addition to proposals for military deterrence and diplomatic engagements, policymakers may elect to consider adjustments to the federal statute (Title XII of the Merchant Marine Act of 1936, as amended) that authorizes the federal government to underwrite marine war risk insurance in circumstances such as piracy. Title XII, administered by the U.S. Department of Transportation’s Maritime Administration, authorizes the federal government to act as an insurer or reinsurer of last resort to facilitate waterborne commerce should private ocean marine insurance markets not be able to ensure that financial losses due to war risks (and piracy) will be largely covered.

Policymakers may also elect to maintain the status quo on this statutory authority. The property and casualty insurance industry policyholder surplus is calculated to be approximately $505 billion (as of June 2008). Vessel hull and war risk premiums in the U.S. market paid to insurers totaled approximately $350 million in 2007, and the total value of cargo insurance premiums paid in that year was approximately $833 million, according to industry data. Some may contend, as a result, that the insurance industry appears to be financially capable of handling U.S. exposure to the current piracy threat and that the existing policy “backstop” will be adequate.

Read full report: Congressional Research Service: “Ocean Piracy and Its Impact on Insurance”