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Rampant piracy off Somalia is forcing shipping companies to avoid the Suez Canal and send cargoes of oil and other goods on a longer journey around southern Africa, industry officials said on Thursday.

Some shipping managers are apparantly convinced that the risk of losing a ship to pirates is enough to outweigh the savings in time and fuel using the Suez Canal.

Reminds me of some risk factor models we did in grad school–a long time ago. Lets see if I can remember a bit…

Condition of going round Africa:

CRA < R(ransom) + r(death)

Where CRA is Cost ‘Round Africa. R is risk of being boarded, and r the risk of losing sailors, both a discounting factor based on the chance of being boarded/killed. Shipping companies can probably use insurance costs as an estimate of the right side of the equation, and the left side is a product of fuel and maintenance costs.

Interesting that the article names only two companies making this decision so far, both Scandanavian. Is insurance more expensive for Scandanavian ships? Perhaps they value a life more, or their cargo is less affected by the longer shipping times.

A similar approach could be used to model the pirates’ decision to board a ship.

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