MarAd activates insurance alternative for ships calling Georgia

In the aftermath of the Russian invasion of Georgia, President Bush earlier this month announced a $1 billion aid program to the country. Included was a directive to the U.S. Maritime Administration to begin underwriting war risk insurance for ships calling at Georgian ports, if necessary.

Edmond J. Fitzgerald, director of MarAd's office of financial approvals and marine insurance, said his agency has begun to activate a program that will provide war risk insurance if it is not available in the commercial market.

MarAd has a two-part program to assist ship owners with the high cost of war risk insurance. The first part is for use by the military when they charter commercial ships; the second part is for commercial voyages by commercial ship owners.

The first part of the program is used when the Defense Department -- usually through the Military Sealift Command -- charters vessels. It requests MarAd to provide war risk insurance to the ship owner at no premium. In return, the military gives MarAd full indemnity against any losses it might experience. Fitzgerald explains this saves the military the additional premium they would otherwise have to pay the ship owner in additional charter hire.

The program can result in big savings. It was done for 388 ships during Operations Desert Shield/Storm. One study showed this saved the Military Sealfift Command $435 million in premiums during the first Gulf War. Since Sept. 11, 2001, the military has used it for about 125 ships. There are about nine ships operating under the program today with active policies.

In the second part of the program MarAd charges commercial ship owners moving cargo into a war zone a premium and assumes the risk, since there is no Defense Department indemnity for this part of the program.

MarAd has a $44 million revolving fund that it uses for underwriting this war risk insurance. The program has only been used sparingly, about four times around 1990-1991 at the beginning of the Gulf War, including by some ships that called Haifa, Israel, during the Scud missile attacks.

Most ships obtain war risk protection in the commercial market.

Fitzgerald said that such policies generally tend to be fairly broad, covering not only hostilities between countries, but incidents like piracy and riots at ports. They offer reimbursement to ship owners for loss or damage of their vessel and cargo, as well as payments to crew if they are injured or die. (They generally don't provide protection for kidnapping or ransom, though some specialty insurers are beginning find increased interest in such coverage by the shipping industry because of the upsurge in piracy.)

Fitzgerald said war risk cover is relatively inexpensive, unless a ship owner is venturing into a known hot spot, at which point ship owners may be hit with sharply higher premiums when their vessels are in these war zones.

For example since the Russian invasion of Georgia in August, the price for war risk coverage for a ship operating in those waters has climbed to about 0.1 percent of the value of a hull. So it may cost an extra $25,000 to bring a $25 million ship into a Georgian port.

During Desert Storm, premiums got even higher -- 0.5 percent to 1 percent; in one case an owner was quoted a price of 3 percent of the ship's hull for a single voyage.

Fitzgerald said just the existence of alternative insurance through MarAd can be helpful to the shipping industry, even if they never use it. When some ship owners sought quotes from MarAd during the first Gulf War for war cover, the government's quote was matched by commercial underwriters and they did not have to rely on MarAd as an underwriter. 

Source: American Shipper