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The Pirates' Toll: High Stakes on the High Seas

That so many dry-bulk-carrier and tanker operators have suffered attacks and hijackings should surprise no one. These ships are, in the nautical argot, slow and low. Their tonnages sink them into the sea, closing the distance from deck to waterline -- the freeboard. They move at a deliberate pace: 14 knots and slower. They present to pirates the easiest targets on the oceans, like fat antelopes to a pride of lions.

In response, marine insurance companies -- whose byzantine policies sometimes baffle even those who have spent careers deep inside their codicils -- have jacked their rates. The Gulf of Aden and an enormous swath of the Indian Ocean from the coast of East Africa to the Seychelles has been declared, for insurance purposes, a war zone.

This means that shipping companies, or the outfits that charter merchant ships to transport their cargos, must purchase a special kind of insurance at a premium -- in effect a kind of tax -- for each voyage through this "war risk" region.

Both the premiums and the area described by the zone were at the end of 2009 expanded once again, under the auspices of a junta of British maritime underwriters and syndicates and reinsurers and indemnity clubs called, ominously, the Joint War Committee. London is basically the world headquarters of marine insurance. (Though, somehow funnily, AIG (AIG) has a very large practice in this area.) This makes sense. The business of underwriting insurance was pretty much invented in the seventeenth century in a London coffee shop, a ship captains' hang out where they traded gossip, gambled, and sold each other guarantees on the value of goods sailing on English ships throughout the world. The coffee shop was known as Lloyd's.

Prices for insurance depend on the size of the ship, the type of cargo, the number of potential piracy-induced costs you want covered, and "how good you are at negotiating with your insurance company," says Per Gullestrup, CEO of Copenhagen's Clipper Group, which had a chemical tanker abducted in the Gulf of Aden in 2008 [pirates aboard the ship are pictured above]. In total, shippers end up paying anywhere from $20,000 to $100,000 per vessel per voyage through the war zone. Multiply that times the number of merchant ships going through the area each year and the amount paid to the insurance industry by shipping companies approaches $1 billion per annum.
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