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VIDEO: EU Naval Forces Fight Piracy off Somali Coast

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With 25 vessels under the control of Somali pirates and an estimated 577 hostages held as of Monday [PDF], naval forces are trying desperately to stem the attacks:

Between June and September, the number of hijackings drops, as monsoon season makes it difficult for pirates to operate the small skiffs used in attacks. Come autumn, the attacks begin once again, which are so frequent that Frontline Ltd., the world’s largest operator of oil supertankers, which transports cargo for companies including ExxonMobil, BP, and Chevron, has in the past considered avoiding the Gulf of Aden altogether.

Pirates know that the value of the ship and its cargo are usually worth far more than however much they are demanding, and a few million dollars is a drop in the bucket in relative terms for the ship operator. Whatever risks there are -- the international task force of naval vessels patrolling the area, for one -- the risk of not collecting a ransom is lowered still, as “Kidnap & Ransom” insurance today seems to be the rule, not the exception. K&R insurance is not something generally offered by the Aetnas of the world; it’s a highly-specialized slice of the overall insurance industry and is only available through a handful of companies like Lloyd’s of London, which wrote the world’s first K&R policy in 1932 after the kidnapping of the Lindbergh baby.

Here’s how it works. In the event of a pirate attack, the vessel’s crew contacts company headquarters, which in turn, contacts its insurance company, which in turn, contacts a security firm, which then begins negotiations with the hijackers.

James Wilkes of maritime risk company Gray Page, likens this to a “tense boardroom negotiation.”

“A commercial transaction is probably a good way to describe it,” he tells the BBC. “They have hijacked the ship, the crew and its cargo and they want a certain amount of money for its release.”

In most cases, there are no laws to prevent a ransom from being paid by a private entity.

“Paying ransoms is not illegal,” Guillaume Bonnissent, a special risks underwriter for Hiscox Insurance Co. Ltd, which writes about two-thirds of the world's kidnap-and-ransom insurance policies, tells Time magazine. It is, however, illegal for insurance companies themselves to pay ransoms, which is why Control Risks and others make the payments. “K&R is really reimbursement,” Bonnissent said. “We reimburse clients for ransoms paid.”

“The money is concealed in large floating plastic containers, and flown by air and dropped,” says Mike Regester, an insurance broker for Cooper Gay. “Then the pirates go out and pick it up,” he says.

Though the 24-nation Combined Maritime Forces patrol as effectively as possible, “The number of forces is never going to be enough to guarantee protection,” a spokesman for the CMF told Bloomberg. “Pirates are opportunists who will seek the easiest target available.”

In the event a ransom is paid in person, the one couriering the cash could wind up being that target.

As risk consultant Darren Dickson, whose firm has arranged several payments to pirates, says, “Some of these people who have done these drop offs by boat actually have to fend off pirates as they are delivering the ransom themselves.”
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