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The
Reverse Effect in Maritime Security:
How It is Encouraged
and its Implications on the Human Element
By Karsten von
Hoesslin[1]
Origins of the Reverse Effect
Cornerstone to the reverse effect is the
unregulated realm that shippers, Flags of Convenience (FOC), classification
societies, and the maritime insurance industry have carved out for
themselves. After years of standardization,
the shipping industry has set its own rules within a relatively unregulated
environment. Maritime trade was once a
simple system of moving goods but has now morphed into a highly complex and
interlinked system supporting the global economy. When globalization became an evident trend,
the shipping industry was given the green light to do what it could to not only
support the phenomena, but to speed it up as well.
The demand for maritime freight is at its
highest in the wake of the Chinese economic boom, which is one of many reasons
why larger, faster, and more advanced ships are put to sea. Existing ships, though old and outdated, are
either recommissioned for service or forced to
continue sailing with little care and attention. This continually puts human lives at
risk. The number of vessels trafficking the world’s sea lanes has increased dramatically
in the past fifty years and the number of vessels registered under a flag other
than that of their corporate homelands is also on the rise. Shippers can chose their federal loyalty
based on slack regulations and are able to choose a classification society, the
agency that certifies the ship according to local and international
regulations, to its liking.
Connected to the reverse effect is the human
element because the shipping industry survives on overhead reduction and profit
maximization where shipping firms may not only be less inclined to take the
necessary security measures but are also reluctant to report instances of
piracy or theft out of fear for increased premiums. The low ranking (typically) uninsured
seafarer is most affected by this trend because their lives and personal
belongings are most at risk as there is little or no guarantee from their
employer that they will be properly compensated in the event of an attack.
It is a known fact that the shipping industry,
as noted by Human Rights Watch, commits numerous abuses against seafarers
typically from lesser economically developed countries such as the
Living With the Flags
of Convenience:
The FOC trend increased dramatically in the
past twenty years providing advantages for ship-owners regarding regulation,
registry, and operating costs. The
primary reason for the FOC is “to obtain cost economies and to stay competitive
in the industry [because]…. in a maritime company all decisions are taken in
order to achieve the common goal of minimizing private costs and maximizing
private revenue.”[2] According to maritime law, ship-owners are
bound by the rules of the country whose flag they sail which as an FOC
typically offers less stringent regulations and reduced operating costs. FOC offer a 30-50% reduction in registry
costs and are compensated according to the ship’s tonnage. Finally, in terms of operating costs, FOC
have considerably lower standards in terms of company salaries and benefits once
again reducing such overhead.[3] Therefore, FOC, which hold jurisdiction over
seventy percent of the world’s ships, have adopted the position of market
player, forsaking their primary role in guarding social boundary conditions.[4]
Insurance & The Human Element
The insurance industry, consisting of
underwriters, brokers, and forums is just as cut-throat as the maritime shipping industry and equally alluring. As Dr. Ger Nieuwpoort[5]
notes, “the underwriting market has obtained all the characteristics of a pure
commodity market.”[6] Proper risk assessment is neglected for fear
of losing business. Risk assessment
calculations for shipping firms and ports are available to
neither the public, the shippers, nor the ports. Though premiums increased in certain
instances such as in the wake of the September 11th terrorist
attacks, the increase was based on no statistical formula but rather on a
hypothetical what if. Taking advantage of the situation,
underwriters and brokers who work within forums that earn percentages from
annual profits, the forums have little motivation to request more
transparency.
Insurance underwriters are slowly becoming part
of the problem because of the danger that unnecessary premium increases
pose. For example, because of “war risk”
level premiums implemented by insurance underwriters in the mid 1990’s,
In 2002 when the Sri Lankan Tamil Tigers
attacked
Herein lies the
dilemma involving the maritime insurance industry. It is a known fact that shipping firms are
hesitant to report minor[10]
instances of criminal activity at sea, specifically with reference to piracy
because of the fear of increased insurance premiums. If goods are taken that are
less than the potential increase in insurance premium, shippers will avoid
reporting the incident.[11] Furthermore, if a report takes place, the
shipper must consider additional expenses such as port fees to allow
investigations to take place which can be lengthy, inefficient, and possibly
even corrupt.
Consider the notion of skeleton crews; ships
staffed with the minimum amount of crew necessary. Skeleton crews find themselves overworked
often performing multiple duties at the operational level. For example, a ship passing through a piracy
prone area staffed by a skeleton crew may find itself
unable to perform the recommended[12]
anti-piracy measures which include all-night deck patrols. The IMO solution is that as of July 1st,
2004, it is expected that one lucky individual within the skeleton crew act as
the Ship Security Officer (SSO) as mandated by the International Ship and Port
Security (ISPS) Code. Unfortunately,
when the IMO pushed through the ISPS Code, it did so too quickly without
addressing issues such as skeleton crews or discount incentives for compliant
ships.
The Trinitarian
Approach:[13]
The insurance industry can be integrated into a
security framework which in turn, would provide more transparency among the
smaller shipping lines that suffer from universally increased insurance
premiums. Insurance incentives are a
confidence building measure that will lead to the desirable increase in security, however, they are also a revenue loss for
insurance firms under the existing system.
This will be the key obstacle facing the integrated framework because
insurance underwriters claim to already be losing revenue as their premiums are
not high enough.[14] This lack of will from the insurance industry
is unfortunate, however, if states are to consider
funding initiatives, then an insurance incentive initiative directly involving
the corporate sector is far more capable of addressing illegal activities
threatening maritime security than a purely state/regime orientated one. The private sector is developing a number of
technological products designed to add security to ships, however, shipping
firms with respect to piracy and various smuggling activities, are unwilling to
suffer the costs mainly because they receive no insurance incentives for
possessing such products. One such
product is the security fence developed by Rotterdam-based Secure Marine. The fence is
specially designed for the maritime environment and wraps around the vessel. If
someone attempts to board the vessel and touches the fence, it will activate
flood lights and an alarm as well as release a non-lethal 9,000 volt
shock. The fence is very versatile and
has special exit areas for the crew if there is an emergency. Should shipping firms receive incentives, it
will increase their desire to outfit ships with such products and statistics of
piracy would decline.[15]
The potential threat to seafarers would also decrease respectively.
Conclusions:
The bulk of this paper
questions who is accountable: FOC, classification societies, insurers,
P&I Clubs, and shippers can far too easily neglect their responsibilities
without punishment. As Dr. Nieuwpoort notes, “there is a whole chain of market players
who should bear at least some responsibility.”[16] In order to achieve dependable underwriting,
greater transparency of information is absolutely vital because improper risk
assessment is not only consciously providing incentives for substandard
shipping, but is creating a reverse effect in maritime security that decreases
the level of cooperation between regimes, concerned states’ enforcement
agencies, and the shipping community. A
cost driven market makes it very difficult to build transparency, enforce
regulations, and provide accountability.
Former American Secretary of Transport, Norma Mineta encouraged “economic incentives- such as tax and
insurance incentives encouraging quality and secure
transport” in a keynote address.[17] He is correct in that only concerned states
can push the incentives agenda forward and such states must immediately begin
considering approaches such as the Trinitarian framework to further integrate
sea commerce and regulation for the sake of protecting the human element at
sea.
Currently, the world is experiencing a shipping
boom and yet it is facing an ever-increasing threat to the human element
employed in sea commerce. What the
industry will be like should the current shipping surge decline and the market
become even further focused on overhead reduction? Quality shipping must become more
rewarding. The solution is not to cause
a teeter-totter effect with states and regimes on one side and shippers and ports
on the other trying to balance maritime security, but rather a trinity
involving states and regimes; shippers and ports; and corporate security
products and the insurance industry. As
evidenced in the Trinitarian model, special corporate security products coupled
with insurance incentives will secure the ship’s hull, cargo, and most
importantly, the crew.
[1] Karsten von Hoesslin is a Research Associate with the
Centre for Military & Strategic Studies, University of Calgary, Canada.
[1] “Statement to the
United Nations Open-Ended Informal Consultative Process on Oceans and the Law
of the Sea.” http://www.un.org/Depts/los/general_assembly/contributions2004/HRW2004.pdf. June 02, 2003.
[2] Dr. Z. Oya
Özcayir. “Flags of Convenience and the Need for International Co-operation.”
Http://www.turkishpilots.org/DOCUMENTS/Oya_Ozcayir_Flags_Of_Convenience.htm.
[3] “Tonnage by
Country of Registry, 2003.” http://www.marad.dot.gov/Marad_Statistics/.
[4]
[5] Dr. Nieuwpoort
is Director of Maritime Transport in the Dutch Ministry of Transportation.
[6]
[7] Dillon, Dana
& Selvaggi, Lucia. “Stopping an Al Qaeda
Attack in the Malacca Straits.” Channel News
[8] Based on
statistics compiled by the International Maritime Bureau (http://www.icc.ccs.org). Understandably, Indonesian waters faced a
surge in piracy in the post 1997 Asian Financial Crisis which was non-related
to the escort/patrol initiative.
[9] Raja, Simhan.
"Increase in War-Risk Insurance --- Transshipment Ahoy!" http://www.blonnet.com/businessline/logistic.
[10] The author defines minor as ranging
from petty theft to crimes involving physical assaults at sea.
[11] Maritime Security specialists tend
to increase the reported number of incidents five-fold to reveal the actual number of attacks.
[12] Anti-piracy drills and adaptive
measures are recommended by the IMO, the International Maritime Bureau, and
occasionally the Shipping Company.
[13] The “Trinitarian Approach” is a
model created by the author.
[14] This statement was made by a Lloyds
Market Association representative. He
was referring to the increased demand for hulls due to the current shipping
boom. This in turn is giving shippers
and ports considerable revenues. Based
on interview (October 2004).
[15] The author is aware that no amount
of technology can replace the danger of human error, but security systems such
as the fence would be far more effective for a ship with a skeleton crew and
the fence’s cost is minimal in comparison to additional staffing requirements
(a one time $25,000 cost).
[16]
[17] Mineta,
Norman. “Remarks as
Prepared for Delivery at Western Hemisphere Initiative Ministerial Meeting.” http://www.dot.gov/affairs/031501sp.htm.