Return of the Pirate Part II: Addressing Business Risk

A while back I wrote a post on the recent upsurge in piracy. At the time, a Saudi supertanker carrying $100 million in crude oil had just been commandeered, and the global shipping industry was unwillingly thrust into news headlines worldwide. In the end, the tanker was released for an undisclosed ransom, but the incident served as a catalyst for discussions on how to deal with the threat of piracy.

Navies from around the world have responded by sending ships to the coast of Africa to stave off attacks and hunt down the buccaneers. Even Japan sent forces to the region in a rare, post-WWII military action. The pirates are operating in an area larger than 1 million square miles however, making it nearly impossible for these forces to ensure the safety of shipping vessels. Shipping companies, consequently, must address the question of how they will manage the risk of piracy.

There is no clear answer at the moment, but the industry is divided into two main camps. The first camp has begun arming their crews, or in some cases hiring defense contractors like Blackwater. In their eyes, a helpless shipping vessel is more likely to be targeted than one that can fire back. There is also the fear that passivity could draw more pirates into the game.

The other camp believes that armed conflict unnecessarily increases business risk. Violent standoffs could result in the loss of life as well as the loss of fully loaded vessels. They view piracy as a simple risk of doing business – not entirely different from a credit default. Paying a ransom worth a fraction of the potential loss is just a reality facing the industry.

Both sides have logical arguments, but it’s not clear which approach will be the most effective and cost-efficient. It will be interesting to see how these two very different risk management strategies play out in the months and years ahead.