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  Existing ships, though old and outdated, are either recommissioned for service or forced to continue sailing with little care and attention.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 Philippines and Pakistan.[1]  The fact that this is tacitly encouraged by ship-owners who insure their vessels via an FOC for lower registration fees and insurance premiums does not help.  If maritime security is truly to improve from a threat assessment and human element perspective, the structure of sea commerce must fundamentally change.  Most importantly, it must be further integrated into current regulation.  Though all maritime orientated states and FOC are members of the United Nations International Maritime Organization (IMO), their (consider Mongolia, Liberia, Togo, or Cambodia) individual capacity to regulate the ships that sail under their flag through both legal and enforcement regimes is non-existent.             



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, Indonesia and Malaysia were forced to terminate the original Malaysia-Indonesia (MALSINDO) escort and coordinated patrols initiative.  Intended to increase patrols in the Malacca Straits and provide special escorts for certain ships due to increases in piracy, the initiative hoped to reduce alarmingly high statistics.  However, once the premium increase occurred in 1994, the two coastal states were forced to cease patrols and escorts because of lost revenues as ships calling on Indonesian ports faced the “war-risk” premium increase.[7]  Piracy in the region thereafter, increased dramatically.[8] 


In 2002 when the Sri Lankan Tamil Tigers attacked Colombo Airport destroying Sri Lankan Air Force and Commercial Airline assets.  Insurance on both the airport and seaport increased.  In 2003, insurance premiums for the airport decreased, however, the rate for the seaport did not change yet there was no statistical evidence indicating that the commercial aspect of the seaport was at risk of being attacked.[9] 


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. 





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.”  June 02, 2003.

[2] Dr. Z. Oya Özcayir.  “Flags of Convenience and the Need for International Co-operation.” Http://

[3] “Tonnage by Country of Registry, 2003.” 

[4] Nieuwpoort, Ger.  “Quality Management Versus Risk Finance in Shipping.”  Paper Delivered at Mare Forum 2000, September 26th, 2000.  Athens, Greece. 

[5] Dr. Nieuwpoort is Director of Maritime Transport in the Dutch Ministry of Transportation. 

[6] Nieuwpoort, Ger.  “Quality Management Versus Risk Finance in Shipping.”  Paper Delivered at Mare Forum 2000, September 26th, 2000.  Athens, Greece. 

[7] Dillon, Dana & Selvaggi, Lucia.  “Stopping an Al Qaeda Attack in the Malacca Straits.” Channel News Asia.  June 20, 2004.

[8] Based on statistics compiled by the International Maritime Bureau (  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!"  Monday, August 21, 2001.

[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] Nieuwpoort, Ger.  “Quality Management Versus Risk Finance in Shipping.”  Paper Delivered at Mare Forum 2000, September 26th, 2000.  Athens, Greece. 

[17] Mineta, Norman.  “Remarks as Prepared for Delivery at Western Hemisphere Initiative Ministerial Meeting.”  Punta Del Estes, Uruguay, March, 15th, 2001.