The Price of Protection

Despite the high value of stolen goods and huge ransoms, the true cost of piracy for shippers ultimately amounts to the price of protection.

Since early 2000, the cost of kidnapping & ransom insurance policies spiked tenfold for trips through the Gulf of Aden, rising to about $30,000 for a trip past the Somalia coast.

Meanwhile, insurance premiums for vessels venturing through the Gulf of Aden increased from about .05% the value of their cargo to 0.175% of the value of their cargo in a single month of 2008, when Somali piracy hit a record high. Unfortunately, however, as a document released by the African Development Bank (AFDB) grimly states, “the additional costs due to piracy are passed on to consumers as shipping companies recoup most of their losses through their protection and indemnity clauses.”

Yet the pricey insurance is still cheaper than rerouting around the Cape of Good Hope as a recent report by an intelligence branch of the US Army points out, “A Norwegian company that recently stopped sending its fleet of 100 vessels through the Gulf of Aden reported that doing so is costing the company $30,000 each day.”

This is because diverting a single oil tanker from Saudi Arabia around the Cape of Good Hope to the United States adds:

2,700 shipping miles

$3.5 million more in annual fuel costs

Reduces its number of annual transits from 6 to 5

Even the simple act of speeding up costs shippers money. To save fuel, cargo ships often travel at about 14 mph, which is actually slower than most 19th-century sailboats. But because pirates today prefer their targets "low and slow," many captains speed through danger zones as a precautionary measure, one that is encouraged by the International Maritime Organization, because no ship has ever been boarded by pirates while pushing 21 mph. But the safety of speed comes at a high cost. Cruising at 20 mph in a supertanker, as compared to the typical 15 mph, adds an extra $88,000 in fuel expense per ship per day.

So even in Somalia where, after several years of serious violence, piracy has now been almost completely eliminated, the total cost of piracy in 2013 was estimated at $3.2 billion. Even though the total cost of ransoms and stolen goods approached zero.

Similarly, the total cost of West African piracy in 2013 was an estimated $565-681 million.