Examination of Witnesses (Questions 520
- 539)
WEDNESDAY 13 MAY 2009
Mr Sean McGovern, Ms Louise Shield and Mr Andy Wragg
Q520 Lord Faulkner of Worcester:
Have you had any examples of that?
Mr McGovern: No.
Q521 Lord Faulkner of Worcester:
None at all.
Mr McGovern: No.
Q522 Lord Hodgson of Astley Abbotts:
If there was a still more rigorous scrutiny what would the impact
be on the competitive position of the London insurance market
and Lloyd's in particular?
Mr McGovern: Do you mean more broadly?
Q523 Lord Hodgson of Astley Abbotts:
We are talking about seeking further consents. How would this
impact the competitive position impact? Are we concerned about
how scrutiny is carried out in other countries?
Mr McGovern: As I said, I am not concerned about
the impact of the current consent regime because of the nature
of the general insurance market. I do not think that if the consent
regime is left where it is or is somehow made more onerous, that
would have a particularly significant effect on the general insurance
sector.
Q524 Lord Richard:
Mr McGovern, one of the things which has been with us throughout
the whole of this inquiry—and this is, after all, a sub-committee
of the Select Committee on the European Union—is the extent
to which there is co-operation within the EU on these matters,
and particularly, since we have been looking at it, in relation
to piracy. The British have one way of dealing with it, the French
presumably have a different way, the Germans have a different
way, the Italians have a different way. Can you give us some idea
of the way in which other countries tend to deal with this situation?
Are there any attempts that you know of by Lloyd's or, indeed,
by the insurance world generally, to try to produce a more concerted
European policy to this problem?
Mr McGovern: Of course the situation is a matter
of great concern and of great interest to governments around the
world and to the industry, both the shipping industry and the
insurance industry. I have had conversations, for example, with
the US Treasury, who have been asking exactly the sorts of questions
that you have been asking this morning around piracy and the role
or otherwise of insurance in dealing with it. I would say that
quite a lot of work has gone on and is still going on amongst
governments and industry, and indeed navies, to try to come up
with ways of dealing with the threat of piracy in the Gulf Aden,
short of bringing the Somali pirates within terrorism legislation.
I will give you an example of that. There has been a great deal
of work done amongst governments, the shipping industry and the
insurance industry, about giving advice to shipowners around how
to travel through the Gulf of Aden. There is a very lengthy document,
a best practice guide, which essentially has been compiled with
advice from naval authorities, security experts, the insurance
sector, which is all about trying to make passage through the
Gulf of Aden safer. It is advice around navigational channels
and advice around techniques that could be used to evade capture,
et cetera—all of those things short of arming the vessels,
which I do not think is something that the shipowners or the insurance
industry would necessarily support.
Q525 Lord Richard:
I was rather more concerned with the position where the piracy
has taken place and where there is a ransom demand. We deal with
it in this country in a certain way. How do the French deal with
it? How do the Germans deal with it? Is there any communication
between the industry as to how it should be dealt with?
Mr McGovern: Given the role of the insurers
in responding to indemnification for payment of a ransom, I am
not aware of any steps that are taken at the point of capture,
and tactics or process that is applied in dealing with the pirates
at the point at which the vessel has been captured. We come into
the process at the point at which the ransom has been paid and
the owner is looking for indemnification. That is not to say that
there is not co-ordination and co-operation. It is just not something
that I am personally familiar with.
Q526 Lord Richard:
What do you indemnify them for? The ransom?
Mr McGovern: I was going to take the opportunity,
if it is acceptable, to walk the Committee through the process
by which the loss arises and how the indemnification process works,
if that would be useful in answering the question.
Q527 Chairman:
I think it would, if you would be good enough to do so.
Mr McGovern: In broad terms, this is how this
type of insurance works: shipowners will generally buy annual
cover which will cover them for the hull, the basic structure
of the ship, and they will also buy separately annual war-risk
cover. That is obviously only required to the extent that the
vessel is likely to be travelling into territories that might
be considered a war risk. In the majority of policies that are
in the market, coverage for the piracy peril is in the war policy.
That means that the underwriters can, during the course of an
annual policy, adjust the terms to take account of changes in
security situations around the world. For example, the most significant
means of doing that is through a system of listed areas which
are higher risk zones within which shipping travels. The Gulf
of Aden is a listed area and has been a listed area since May
of last year. If a ship is intending to travel into a listed area,
they are under an obligation to notify the insurers of that intention.
The insurer is then able to assess the risk in a more real-time
basis, take advice from security consultants and, if necessary,
impose additional terms. That may be the addition of some further
premium to cover the vessel whilst it travels through the listed
area, but it could also be other conditions, such as notifying
relevant navies, sticking to fixed navigational channels, et cetera,
and they are all designed to help manage the risk of the vessel
travelling through the area.
Q528 Lord Richard:
Who produces the list?
Mr McGovern: That is produced by the insurance
industry. We have, in London, a Joint War Committee which is made
up of marine insurers of both the London market and the Lloyd's
market. They, together with specialist adviser from security consultants,
define what listed areas there are. The process of attaching any
conditions to a particular policy as a consequence of it being
a listed area, is a matter of negotiation between the insurers
and the shipowner. As I have mentioned previously, as well as
adjusting terms and requiring notification to navies, et cetera,
the industry has produced advice working with shipowners about
how to deter pirates and evade capture. However, notwithstanding
all of that, if the vessel travelling through the Gulf is attacked
and taken by pirates, the process then is entirely driven by the
shipowner. It will be the shipowner who will decide whether or
not to negotiate with the pirates, to pay a ransom, and ultimately
to deliver the payment. That is all handled by the shipowner.
Assuming that the shipowner pays a ransom and the pirates release
the vessel and it carries on with its journey, ultimately the
shipowner has the right to claim the ransom payment through a
process that is known as "general average" which is
a concept of maritime law that predates the formal advent of insurance.
You could substitute the word "average" for "loss,"
so "general loss". It means that all parties to an adventure
at sea, to the voyage of a ship, effectively agree that if one
party suffers a loss which is suffered in order to save the whole,
then they will indemnify the one party who has suffered a loss
to save the whole in proportion to the amount they would have
lost if the venture had been lost entirely. The claim then goes
into what is known as general average, and all insurers involved
with the venture would share proportionately the cost of paying
the ransom. That would be the cargo underwriters, the hull underwriters,
and the hull war underwriters. Therefore the insurers are only
ever indemnifying the policyholder. In addition to annual hull
cover, war cover, and cargo cover, there is another cover which
could be in play in this process, although it is relatively rare,
and that is stand-alone kidnap and ransom insurance. It is very
difficult to get data on kidnap and ransom insurance because one
of the key terms of having kidnap and ransom insurance is that
you keep the existence of that insurance confidential. Breach
of the confidentiality is a breach that could lead to the avoidance
of the policy, but it is our understanding that less than ten
per cent of the ships travelling through the Gulf are likely to
have stand-alone kidnap and ransom cover. Kidnap and ransom cover
primarily occupies two additional areas. The first is that the
shipowner, on the kidnapping of a ship, would notify the kidnap
and ransom insurers, and as part of the policy the kidnap and
ransom insurers would procure for the shipowner a third party
expert, security consultant, who would help the shipowner and
advise the shipowner in handling the situation. Again, it is not
something the insurer is involved in but is something the insurer
covers the cost of. Kidnap and ransom insurance may also cover
the shipowner for cash in transit, so, having decided to pay the
ransom, he will then transfer those funds through one or more
parties and obviously there is a risk that that cash will go missing
during the process of making its way to the Gulf and kidnap and
ransom insurance will often cover the shipowner for the potential
loss of cash in transit. Again, all of this activity takes place
without the involvement of the insurer and a claim would or would
not arise after the ransom has already been paid. In terms of
tying up all the loose ends, the application of the Proceeds of
Crime Act and any terrorist financing legislation would not therefore
apply to the transaction between the insurer and the shipowner
because that is a transaction between legitimate parties for a
legitimate purpose.
Q529 Chairman:
Surely, with the 90 per cent of traffic which does not have kidnap
and ransom insurance, any one of those people who was subjected
to an attack would also use the services of the experts you referred
to, the same people as would be assisting those who were covered.
Would that be right?
Mr McGovern: That is probably right but they
would just be covering the cost themselves. Instead of the shipowner
being able to cover the costs of getting that advice through having
bought a kidnap and ransom policy, they would just have to pay
those security consultants directly.
Q530 Lord Marlesford:
It seems to me that you have made a rather a good case for the
insurers not being liable—at any early stage, at any rate
to make a suspicious activity report and therefore to ask for
consent. On the other hand, you make it very clear that the shipowner
is in the driving seat. Shipowners, I think I am right in saying,
are not part of the regulated sector, so they would not be subject
to the same obligation to make SARs as insurers are. Would that
be correct?
Mr McGovern: I believe that is correct. Our
assumption is that they are not part of the regulated sector and
would not be covered by the same obligations.
Q531 Lord Marlesford:
If one wanted to ensure that there was full notification in the
case of kidnap and piracy,that would suggest that the regulated
sector should be extended to include shipowners.
Mr McGovern: Possibly, if that was something
that the Committee wished to recommend.
Q532 Lord Marlesford:
The Treasury have indicated to us that their main reason for not
wanting consent applications to be made, is that they are worried
that they would in some way be compromised in the event of a later
legal case, and the quid pro quo they have offered is that
if a consent were not to be applied for when it would normally
be required, they will give an ex ante undertaking not
to prosecute. How happy are you with that, particularly in the
light of the Lord Denning's ruling of January 1977 when he ruled
against the Attorney General, in a not wholly dissimilar case,
with the famous dictum: "Be ye never so high the law is above
you." It was not seen as a discretion that the Attorney General
had whether or not to enforce the law. Would it not, from your
point of view, be safer if the obligation were made clear in statute,
or lack of obligation, rather than a nod and a wink from the Treasury
or indeed an exemption which has been given to us?
Mr McGovern: I think ultimately this is an issue
for the shipowners and the risk that they are willing to take
around the likelihood or otherwise of prosecution. My understanding
is that any decision to prosecute for failure to make a report
would be taken on a case-by-case basis—although I have seen
the evidence that has been submitted by the Government on that
point. I think it is a case of judging the objective of getting
the kind of clarity that you have outlined versus ensuring, as
I have said earlier, that shipowners are not somehow constrained
and the flexibility is not constrained in how they extract their
ship and, more importantly, their crew from this kind of situation,
but I quite understand the point you are making.
Q533 Lord Marlesford:
What you are really saying is that, although there would be no
problem in making a suspicious activity report, the bit of it
which can cause the problem is getting the consent to collect
or pay the ransom.
Mr McGovern: I would have though the issue would
be about the timing.
Q534 Lord Marlesford:
Yes, but there are two parts to this regime, are there not? There
is the SAR.
Mr McGovern: Yes.
Q535 Lord Marlesford:
And then, where it is necessary, to get consent. You have indicated
that there would be information passed to the authorities as soon
as such an incident happened, which often would be publicly known
anyway, so there is no need really to change the rules about making
a SAR, but maybe it would be necessary to have an exemption from
asking consent, which would have to be statutory, from which the
Government could be excused from giving consent.
Mr McGovern: That would satisfactorily deal
with the issues that I would see with putting the consent regime
into this kind of situation, yes.
Q536 Lord Hodgson of Astley Abbotts:
Presumably if the vessel is flagged in Panama and the shipowner
is operating out of Panama, technically it never touches these
shores at all, so there is no SAR to be reported here because
the Proceeds of Crime Act will not apply unless it is a British
flagged vessel.
Mr McGovern: Yes, I think that is right. One
of the problems is that unilateral action taken by individual
governments can lead to results which either have intended consequences,
create competitive challenges for our jurisdiction, and do not
often always deliver the solution that you might like them to.
Q537 Baroness Henig:
Neither Government guidance nor the guidance issued by the Financial
Action Task Force seems to make specific mention of the financial
transfer aspects of piracy. Would the insurance industry welcome
such guidance?
Mr McGovern: Clarity would always be welcome.
I know that you have heard from Sir James Sassoon who would be
certainly in a better position than I to judge whether or not
FATF would be an appropriate body to do that. I am aware of the
limitations of the effectiveness of their action, given that there
is not a stable government within Somalia. I think, given the
position of the UK industry in these situations as I have described
them, it is difficult to see how we would benefit from that kind
of clarity, but that is not to say that clarity should not be
sought, but there is then the question about which is the appropriate
body to do it.
Q538 Baroness Henig:
Are you suggesting that you might welcome it but it would not
necessarily make that much difference?
Mr McGovern: I think that is right. I do not
think it would make a tremendous difference to us, but I think
it probably would be helpful to others who face these situations.
Q539 Lord Mawson:
I think you have answered some of this question, but I will ask
it. At what stage might the insurers of shipowners who have paid
a ransom become involved in negotiations for compensation? What
obligations would be imposed on insurers by the Proceeds of Crime
Act 2002 and other AML/CTF legislation?
Mr McGovern: I have set out, as you say, the
way in which a shipowner would be identified. In terms of our
obligations, we are involved after the event and we would view
the payment of any money to the shipowner as part of that indemnification
as being a legitimate transaction with a legitimate party. The
Proceeds of Crime Act would not apply unless, as has been said,
there was suspicion that there might be collusion between the
shipowner and the pirates. As regards other anti money laundering
legislation, the regulations would not apply to the general insurance
sector and the counter-terrorism financing legislation again would
not be applicable where we are paying money to a shipowner.
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