LONDON (Bloomberg) — Kidnap and ransom premiums paid to insure against Somali piracy have slumped since the BBC Trinidad was hijacked in the Gulf of Aden in August 2008 as escalating attacks spurred more companies to offer coverage.

Buying $5 million of coverage now costs as little as $15,000 per voyage, half the peak rate in 2008, said William Miller, divisional director of Willis Group Holding Plc's Kidnap and Ransom, or K&R, unit in London.

"Piracy is a peak risk with a relatively low probability of happening, but with an immensely high damage potential," said Niels Stolberg, head of Bremen, Germany-based Beluga Shipping GmbH, the Trinidad's owner. The company now buys kidnap and ransom coverage for every ship crossing "this dangerous passage", after paying a $1.1 million ransom to release the vessel and its 13 crew from the pirate haven of Eyl, he said.

Kidnap and ransom premiums climbed to $100 million last year as pirate attacks on the 25,000 ships passing through the Gulf of Aden rose 70 percent. That prompted more insurers, including Bermuda-based Aspen Insurance Holdings Ltd., Ascot Underwriting Ltd. and Chubb Corp., to offer marine K&R coverage, a policy first developed to address kidnapping in South America.

The insurance covers the ransom of the ship and its crew, including negotiations with pirates and hiring ex-special forces teams to deliver the money. With Somali pirates usually returning hijacked vessels undamaged, kidnap and ransom plugs a gap in war-risk insurance that only covers damage to a ship and its cargo, said Stolberg.

The average ransom has almost doubled to between $3.5 million and $4 million since Chubb entered the market 22 months ago, said K&R Manager Greg Bangs, adding that the company expects to expand its piracy business further.

"At first the rates were a little higher than they should have been and then over time insurers realised they could reduce their rates and still make money," said Bangs.

The decline in rates has deterred Ascot from writing any policies since being authorised to offer kidnap and ransom coverage last November, said Andrew Moulton, a marine underwriter at the Lloyd's of London arm of American International Group Inc.

"Traditional carriers have been cutting each other so much to get the premium in that the price has fallen off the end of a cliff," said Moulton, adding that in the current economic climate, most ship owners won't buy kidnap and ransom insurance as they view it as "icing on the cake" rather than core coverage.

Pirates are currently holding 18 ships and 379 hostages, up from 11 ships and 261 hostages at the beginning of the year, according to the International Maritime Bureau. When the summer monsoon in the Indian Ocean ends this month, attacks may rise as pirates venture from lairs such as Garacad, Hobyo and Harardhere on the Somali coast, said bureau Director Pottengal Mukundan.

"It's a big problem," said Per Gullestrup, chief executive officer of Clipper Ferries. He arranged for a $1.7 million cash ransom to be parachuted to pirates that used AK-47s and rocket-propelled grenades to hijack the CEC Future in November 2008. "The Somali pirates have shown they are quite good at adapting to the situation."

Pirates are being encouraged by the ransoms and the ease with which they capture ships, said Sven Gerhard, global product leader of marine hull & liabilities at Allianz SE's corporate and specialty unit. Ship owners must also pay as much as $2.5 million to negotiators and security firms that fly the ransom to a drop-off point, he said.

While the presence of the Combined Maritime Forces in the Gulf of Aden cut attacks by 18 percent to 196 in the first half of this year, incidents in the surrounding Somali basin and Indian Ocean rose 14 percent to 51 as the pirates used larger mother ships to widen their range toward the Maldives and as far south as the Mozambique Channel, according to the maritime bureau.

Attacks have been reported as far as 1,000 miles from shore.

"They're going further and they're taking more risks than before," said Guillaume Bonnissent, who works in London for Bermuda-based Hiscox Ltd., the world's largest underwriter for piracy coverage.

Premiums depend on the ship's speed, height of its deck above sea level and measures taken to protect the vessel, said Sean Woollerson, a partner at Jardine Lloyd Thompson Group Plc, the UK's biggest publicly traded insurance broker.

While most insurers advise ship owners to deploy razor wire and train sailors how to legally fend off attacks, Woollerson also aims to raise funds for a fleet of escort ships to shepherd vessels through the Gulf of Aden. That may push rates down further, he said.

"We are working on a unique concept to create a legitimate private navy for the shipping industry to complement the existing naval forces to stop this kind of piracy escalating," said Woollerson, who estimates start-up costs of $15 million. "This is the only way we're ever going to stem these attacks."

For the moment, Beluga Shipping deploys high-pressure hoses and cardboard dummies called "soldiers" to deter boarders, after the Trinidad was captured by nine pirates using two speedboats, said Stolberg.

"Sending armed teams aboard is a last resort," said Mark Hankey, a spokesman for Maritime & Underwater Security Consultants, which gives shipping lines transit advice from its basement control center opposite London's Royal Courts of Justice. Using arms involves the risk of "massive escalation," he said.

When the company does employ guards on cargo vessels it stations three to four former British Royal Marines or Royal Navy personnel to escort ships through pirate waters, said Hankey.

The naval task force is no longer effective after the pirates expanded the scope of their operations, said Jan-Thiess Heitmann, head of the legal department at the German Ship Owners' Association. While the association is against arming crew members or hiring armed security guards, it's in talks with the German government on installing soldiers on merchant ships.

"The number of forces is never going to be enough to guarantee protection," a spokesman for the 24-nation Combined Maritime Forces said in an e-mailed statement. "Pirates are opportunists who will seek the easiest target available."

The naval force deploys as many as 25 vessels in counter- piracy operations along a recommended transit corridor that runs from close to the Bab-el-Mandeb at the southern end of the Red Sea through the Gulf of Aden to a point north of the Yemeni island of Socotra. The corridor carries about a fifth of the world's trade.

Gullestrup says a set of best practices, introduced by the naval task force, have helped keep the rest of Clipper's fleet safe. Still, he says the only long-term solution to piracy is to help Somalia, a country that has lacked a central government since the overthrow of former dictator Mohamed Siad Barre in 1991, develop its own security and coastguard infrastructure.

"All the money would be much better spent in assisting the Somalis in capacity building," he said.