Pirates Exemplify Shifting Risk Environment

Three recent news stories have underscored the need for insurance underwriting to adapt to a constantly changing environment, as ISO CEO Frank Coyne recommended during his recent address at ISOTech: the California wildfires, the rise of deer collisions in the Eastern United States and the increasingly brazen and ambitious pirates of Somalia.The wildfires show that attention to circumstances ought to affect how one takes on new business. While the unusually intense Santa Ana winds driving the scope of the fire are not predictable over the long run, other factors are. For example, unusually rainy seasons over the past two years have caused the build-up of fuel making it far likely that fires would destroy property if they were to be ignited. Also, property owners in pursuit of a more natural environment are building in wilder areas that are more subject to wildfires, according to RMS.

State Farm has calculated that deer-related automobile crashes have risen about 15 percent over the last five years, according to a report by the Property Casualty Insurers Association of America. The report doesn't comment on the possible cause of that increase, perhaps because it would be difficult to discern. Population is a likely factor, but so may be construction, which provides deer with food sources in more traveled areas. Whatever the cause, insurers need to adjust their pricing according to increased probabilities of deer-related collisions, based on the reported incidence of such crashes or other sources, such as information from state wildlife organizations about population changes.

The case of the Somali pirates demonstrates that the risks of a given geography can suddenly climb substantially. Piracy off the Horn of Africa has been rising steadily over the last few years, but recently it seems to have jumped in terms of both frequency and severity. While we noted a few days ago the predictable result of an asymmetrical confrontation between pirates and a Royal Navy vessel, the asymmetry is usually in favor of the pirates. These malefactors pounce on unsuspecting vessels that are seldom armed to resist forced boarders. Once the pirates are on board, the incident takes on the color of a hostage situation. And that's the M.O.: pirates don't seek to sell their booty but rather ransom it.

Earlier this year, Somali pirates hijacked a Ukrainian ship carrying 33 tanks and other military equipment. On Saturday they captured a Saudi supertanker of tonnage equaling about three U.S. aircraft carriers which was transporting roughly 2 million barrels of oil, according to an article in the Financial Times (FT).

The article notes that the pirates have become more sophisticated in their tactics and are capturing ships further out at sea. That's an important development because it is far more costly to escort ships than simply to patrol the area close to the choke point between the African continent and the Arabian Peninsula at the western end of the Gulf of Aden, where shipping enters the Red Sea on the way to the Suez Canal. The FT report cites Lloyds' Marine Intelligence Unit saying that 7 percent of the global oil supply passed through the Gulf of Aden in 2007.

Without consulting with a marine insurance specialist, I don't know what the implications might be for how the terms insurance policies are written. However, there is no question that underwriters need to keep on top of developing situations such as this one.

It is easy to underestimate the difficulty combating Somali piracy, both because of the vast size of the area in which the piracy is taking place and because of the nature of pirates' tactics. The number of pirates required to take a large ship is very small. How does one efficiently identify who are the bad guys from among a multitude of small vessels? Still, it seems that with a determined effort the problem of piracy in the Gulf of Aden could be eliminated or at least seriously attenuated. As the prizes grow larger and pirate chiefs grow richer, it will become easier to locate and punish the crime. Also, a determined short-term use of naval power could be very effective. Perhaps this would be a good opportunity for an American president of East African descent to demonstrate the legitimate use of American power as part of a multilateral military operation...Three recent news stories have underscored the need for insurance underwriting to adapt to a constantly changing environment, as ISO CEO Frank Coyne recommended during his recent address at ISOTech: the California wildfires, the rise of deer collisions in the Eastern United States and the increasingly brazen and ambitious pirates of Somalia.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio