Kidnap & ransom cover is an increasingly important aspect of risk management for global organisations. By Ronald Gift Mullins.

Not to put too strong an emphasis on the role kidnap and ransom (K&R), and extortion insurance has played in the growth of international business, the absence of this somewhat shadowy coverage could well have meant that globalisation may not have occurred as quickly or with as much assurance.

K&R insurance began when Lloyd's of London started underwriting the coverage shortly after the kidnapping of the baby of Charles and Anne Lindbergh in 1932. Back then, the policies were purchased by only a few companies that had operations in precarious areas of the world or individuals with great wealth or fame. Slowly, as American corporations set up new ventures in foreign countries, the market for this insurance grew to relieve companies from the need to assess for themselves the scope and cost of the liability of employees being kidnapped or property damaged.

Today, a number of insurance companies offer such coverage. Because both companies and insurers keep such policies secret, total premiums for the market are at best a rough estimate, ranging from $75m to $250m. And since underwriters of this kind of coverage don't willingly admit they have paid losses because it could encourage copycat activity, little is known about how profitable the coverage is. The National Association of Insurance Commissioners does not track this insurance line.

Despite the increase in trade and manufacturing overseas, coupled with growing violence and anti-American sentiment, a new study released by The Conference Board found that the median increase in security spending by US businesses is a mere 4% since September 2001. Furthermore, just 7% of the companies in the survey, which was sponsored by ASIS International, have increased their security spending by 50% or more. Companies most likely to have permanently increased their security spending are in sectors such as transportation, energy and utilities, financial services, media and telecommunications, information technology and healthcare.

While the companies surveyed have spent only marginally more on security, they have expended considerably more on insurance and risk management. The median spending for these functions was up 33%, with about a fifth of those surveyed saying their insurance costs have at least doubled since 2001. The rise in spending on insurance was not further defined as to specific coverages, so the boost may somewhat reflect the general upsurge in the cost of insurance in the last 18 months.

Writings rising
Each insurer packages its K&R and extortion coverage a bit differently, but essentially the benefits are similar. Kidnapping-related expenses can include payment of a number of fees: hostage negotiating, lost employee wages and ransom, consulting, death and dismemberment, plus payment for personal financial losses, medical and dental costs, rest and rehabilitation, travel and accommodation, loan interest, forensic analysis, family counselling, cash payments to victimised families and legal costs, including judgments and settlements. Britain's Foreign Policy Centre estimates that families, companies and insurance companies pay an estimated $500m each year in ransom. About 60% of Fortune 500 companies, but far fewer smaller companies, carry some kind of K&R insurance.

Gregory Bangs, vice president, product manager, crime, kidnap/ransom and extortion, Chubb & Son in Warren, NJ, said the demand for this specialised insurance "has increased 20% since 9/11, for two reasons. One, US businesses realise they are targets. And two, the US is more aggressive now as a political force in the world. This has brought a rise in anti-US sentiment. Every time there is a high profile kidnapping or extortion, we see a spike in submissions." Chubb writes its K&R insurance on a net basis and buys very little reinsurance.

The US market for K&R, "has jumped 200% in the last 12 months," said Steve Quinton, specialist underwriter, ransom and kidnapping, Cassidy Davis, a Lloyd's agency in London. Why the considerable strengthening? "US companies are far more aware now of security than they were prior to 9/11 and the war in Iraq. Many US companies have extensive foreign exposures and their executives travel considerably. If they are involved in high-risk activities in high-risk countries, they are more likely to take precautions."

Nigel Shepherd, vice president of Converium Re (North America) in New York, in an article stated that expenses incurred in a kidnapping can be relatively high. "For example, a kidnapping in which a $100,000 ransom is demanded can actually cost over $500,000 in other expenses," he said. When pricing this line, he advised insurers to anticipate a ransom payout in 40-50% of all kidnappings, an average ransom payment of $1m ($10m outside the US) and a payout pattern (ransom) of a few days (weeks to months outside of the US).

In addition, companies that specialise in crisis management are usually retained by K&R insurers to handle the actual kidnapping negotiations and ransom, and to train clients and risk managers in ways to prevent kidnappings from occurring. These firms also provide risk assessment for companies that are planning expansion into a specific country. Among these security companies are The Ackerman Group Inc, Pinkerton, Amsec International and Control Risks Group. Usually these firms are headed by former FBI, CIA, SAS or other special forces personnel, or professionals who have worked at Scotland Yard or in British Military Intelligence.

Cassidy Davis' policies are designed to encourage companies to take the necessary steps to prevent a crisis arising in the first place. "Each year, we make available up to 10% of the annual premium from a client as a contribution towards the cost of a security consultation," said Mr Quinton. "The consultation includes advice for both individuals and organisations on their security requirements and crisis management plans, including, where necessary, the appropriate training, defensive driving courses and executive security awareness."

"A little training can make a great difference in reducing losses," said Sangita Ladwa, marketing manager at Cassidy Davis. "A bit of guidance can reduce vulnerability."

Statistics released by the US State Department in April 2003, showed 218 facilities were struck in 2002, 111 of them belonging to US businesses. Of the events, most were bombings (137), followed by armed attacks (50). Of 2,738 casualties reported in 2002 from attacks, 22 were from businesses.

Underwriting factors
The premiums and terms for these products generally are assessed on a client-by-client basis. The more attractive a company is to kidnappers, the higher the premium. Among the factors considered by underwriters when evaluating a risk are the level of company assets and revenues, locations and number of employees, previous incidents, visibility and security of the company, and limits of liability selected.

"One prime factor we consider is the nature of the business going into a country," said Chubb's Mr Bangs, "and we look at where the business is to be set up - urban or rural, which is more dangerous with less law and order."

High-risk businesses include mining, and oil and gas companies working in remote areas of developing countries. He also cited the case of media organisations which can upset some powerful factions within a government. Companies involved with genetic engineering, environmental activities, food and drugs manufacturing can also be subject to kidnapping and extortion attempts. "It is kind of scary. The business can be quite mundane, such as a law firm, yet be vulnerable," he said. "In certain circumstances, lawyers can create lots of animosity, resulting in extortion and threats against them."

The high-tech industry has increasingly been subject to extortion. As these companies increase their worldwide exposures, they have been warned by unknown individuals that they will release a virus into the company's computer system unless the company pays a ransom. In addition, there are cases where sensitive/proprietary information and/or technology is held for extortion. Since most companies don't report cybercrime to avoid public embarrassment and possible revenue loss, few reliable statistics are available about this crime.

Once a K&R policy is issued, its existence generally is kept confidential. In fact, any disclosure, public or private, may be grounds for rescission of the coverage. The rationale behind this is that the existence of a K&R policy could invite an incident, or trigger fraudulent claims.

Despite a rise in kidnappings around the world, the market for K&R coverage remains soft. "Premiums vary a great deal," said Mr Bangs, "but overall, it is very inexpensive compared to the amount of protection offered." He said he rarely turns down a risk, "but if a company has little interest in security measures we may take a pass, but generally we do insure it." Chubb has a policy limit of $25m, though few claims ever reach that amount. "Ransoms mostly range up to $10m," he suggested.

Mr Quinton of Cassidy Davis, while admitting K&R is a profitable line, said not all risks are accepted. "Sometimes an inexperienced person or company may be going into an area that is high risk, so we stay away from that one. Also, we are wary of insuring a family that has repeatedly ignored demands from a radical group to pay a 'tax.' It is very likely a family member may be kidnapped."

Insurers providing K&R and extortion insurance rely on firms that assess the degree of risk in countries, firms such as World Market Research, the Economist Intelligence Unit, PRS Group, Global Insight and Aon's Trade Credit Global unit. These firms gather data from most countries in the world and provide assessments of political, trade and criminal risk. Aon publishes a global map with countries colour coded to indicate the degree of risk exposure.

Terrorism tango
South America ranks as the highest risk area in the world, and companies with employees living or travelling there regularly pay significantly higher rates for kidnap/extortion insurance. Kidnapping is viewed as an easy method of raising funds by South American terrorist or rebel groups. American companies, seen as having great wealth, are prime targets for kidnapping.

Mr Bangs identified Colombia as the world's kidnapping capital, with Mexico taking the number two position. Brazil has become a perilous country, as have Nigeria and Argentina. Don't go to Chechnya, part of the Former Soviet Union, Mr Bangs warned, "unless you want to be kidnapped."

In Colombia, it is guerrilla groups which are mostly responsible for kidnapping US citizens. According to the US State Department, about 3,000 kidnapping incidents were reported throughout Colombia in 2002, and in the past three years, 26 Americans were kidnapped in various parts of the country. American kidnap or murder victims have included journalists, missionaries, scientists, human rights workers, US Government employees and business people, as well as tourists and people visiting their families. Even small children have been abducted by kidnappers. "No one can be considered immune on the basis of occupation, nationality or any other factor," the department counsels. Victims can be kept prisoner for months - sometimes years - before being freed, or in some rare cases, killed.

In Mexico, kidnapping is a purely criminal activity, rather than the work of terrorist groups. Called 'express kidnapping', assailants snatch victims from the street or other public place, and later demand a ransom. Once the ransom is paid, the victim is usually quickly released.

US Government involvement
Until recently, it was US Government policy not to make concessions to nor to strike deals with terrorists. But the policy was changed in early 2003 to permit federal officials to assist kidnapped US citizens. Whether the victims are government employees or not, the government might sometimes pay a ransom to kidnappers. However, the government stressed that aggressive means would be taken to recover the money once a hostage was safely released. A senior US official said the message should be very clear to kidnappers: "We're going to get you. We're not going to walk away."

By Ronald Gift Mullins

Ronald Gift Mullins is an insurance journalist based in New York City.