Kidnap and ransom are on the increase Ian Harrison discusses the issues involved and the protection available in the insurance market.

Multinational companies across a wide range of industries not previously known to operate in unstable areas are now looking to win contracts in Iraq, to help rebuild the infrastructure of the country. These contracts are often highly lucrative. For example, the US conglomerate Halliburton's second-quarter results revealed that its Iraq related work contributed $1.7bn to the firm's revenue; its engineering and construction subsidiary's (Kellogg Brown and Root) results were up 68% thanks to its contracts in the Middle East. However, increasingly there is a human price to pay, and managing staff in dangerous locations can bring special challenges and consequently insurance solutions.

Climate of fear

Almost daily there are reports in the media about foreign workers being kidnapped in Iraq. The number of foreign nationals who have been kidnapped since the Iraq war started stands at around 100 people, with many high profile murders of kidnap victims. Increasingly, it would appear that hostage taking is becoming an important weapon for militant and criminal groups in Iraq. People who are being targeted appear to be foreign workers, aid workers and journalists.

A very worrying trend is the way in which rebels and criminals are using kidnapping as a lever to try and exert pressure on foreign governments, gain publicity or to extort funds - for example, the demand for the release for the French journalists currently being held, is $5m. There is evidence that these types of kidnappings have had an effect on public opinion in places such as Japan, South Korea, Italy, the US and the Philippines.

The militants see any incident that has dissuaded a company from working in Iraq or meant that it has withdrawn personnel, as a 'success'. Due to this there is likely to be a dramatic rise in this kind of kidnap incident if countries do not stand firm against the kidnappers' demands.

In many cases, the hostage takers are small time bandits trying to make some cash quickly. They then sell their captives 'up the chain' to politically motivated militant cells, creating a new dimension to the danger already faced by foreigners working in Iraq.

Within this climate of fear unsurprisingly the demand for kidnap and ransom (K&R) insurance for employees of western companies has increased dramatically. However, the new dangers posed in Iraq bring a new set of challenges for K&R insurers.

K&R insurance has been available for a number of years. The cover provides ransom reimbursement, 24-hours access to specialist consultants and reimbursement for a wide range of costs resulting from the insured event. This form of specialist insurance cover has saved a number of lives by enabling access to experts, who can help to negotiate and guide those involved through the extreme trauma of a kidnap event.

Changing dynamics

Kidnap is often referred to as the second oldest crime and tends to follow an identical development pattern within a given country or area.

- The first stage is the 'Robin Hood' or 'Che Guevara' style group, operating with tacit support of local people within an area of high political instability.

Wealthy 'non locals' are kidnapped and the ransom monies are shared locally.

- The second stage usually moves on to more brutal kidnapping for publicity or political gain. In these incidents money is often not the motive of the kidnap. This sadly was the case with Daniel Pearl, the Wall Street Journal journalist, who was murdered by his captors in Pakistan earlier this year. His abductors demanded the release of Pakistani detainees at the US naval base at Guantanamo Bay, Cuba, where captured al-Qaeda and Taliban fighters are being held.

- The third stage is the gradual transformation of the political movements into overtly criminal gangs who kidnap purely for financial gain, as seen in Colombia with FARC and ELN guerrilla groups.

In Iraq the cycle is blurred, and there appears to be a combination of these incidents occurring concurrently. This makes it extremely difficult for the K&R market to assess the situation, and so price cover.

Duty of care

Another key factor, especially in Iraq where sub-contractors are often used on big complex contracts, is how companies assess who their 'employees' are. Sub-contracting creates a chain effect and the company with the original contract for the work contractually does not owe their sub-contractors 'duty of care'. However, morally this presents a difficult problem.

There is also the issue of brand reputation. This can be a major challenge for publicly quoted multinational companies, if they fail to provide proper protection to a foreign national who is working, albeit not directly for them, in a dangerous location.

Companies either working, or chasing work, in Iraq or the Middle East need to examine their contracts carefully. They also need to decide what their stance is going to be regarding sub-contracted employees. On the surface these contracts can look very lucrative, but they can also prove to be a poisoned chalice, often catapulting the company into potentially dangerous and litigious situations, which are never fully examined when agreeing the original contract.

The market's response

K&R cover is underwritten by a number of syndicates in Lloyd's and London market insurers. The London market has always prided itself on the fact that it has never excluded any area for K&R cover. What has occurred recently is that prices for this cover have risen dramatically.

Clients often say they want 'war cover' - the problem usually comes when brokers are trying to understand what clients really mean by this. Prior to 9/11, K&R policies were often extended to cover death benefits following an 'act of terror'. However, the 9/11 attacks gave rise to significant accumulated losses. As K&R is rated on low frequency/high severity incidents, these aggregate losses led to the market immediately withdrawing this extension. Today, personal accident benefits are restricted to losses sustained post an abduction event, but there is interest in hybrid personal accident and K&R insurance.

The huge upsurge in violent abductions against foreigners in Iraq and around the world (see the US State Department travel warning chart) has required a careful review of the wordings provided. There is a common misconception that K&R policies only respond to incidents where money is demanded. So when kidnappers are not seeking a negotiated release of the victim, the coverage sometimes appears limited. However, ensuring 'wrongful detention' coverage is included can add to the value of the cover. Another major benefit of K&R cover, which is often overlooked, is the provision of locally-based experts who help to negotiate the safe release of the victim and assist the victim's family and company through the trauma of such an horrific event.

Another specific area, which can be incorporated into K&R cover, is a political evacuation/repatriation endorsement. This covers the cost of bringing foreign workers back from newly designated 'high risk' areas, as has been the case in Saudi Arabia following the recent attacks on foreign workers. The trigger for this is normally a statement issued by the US State Department or UK Foreign Office, advising their foreign nationals to leave the designated territory. This usually results in a mass evacuation of workers and can give rise to significant insurance aggregation issues.

Complex issue

Whilst the basic concept of K&R insurance is simple, it can raise some complex issues in terms of coverage extensions. K&R insurance placed via a specialist broker can help to ensure that the correct cover options are made available to the client. The most vital aspect of any K&R policy is that it can provide emergency response quickly, and the required on-the-spot expertise.

With the risks increasing almost daily and subsequent premium rises in certain areas, the general advice to companies chasing contracts in Iraq and other unstable areas of the world, is to exercise extreme caution.

Many companies have never operated in high-risk territories before, and purchasing employee protection insurance such as K&R needs careful consideration.

Before signing any such contracts, companies should see what employee welfare measures are in place. They should also ensure the price of insurance is built into the contract. K&R is often sold as part of a programme.

These programmes should be bespoke packages to ensure all aspects of risk are considered and covered.

This is an interesting time for K&R brokers and specialist insurers.

With many of the world's most unstable areas offering potentially lucrative business opportunities to foreign businesses, more and more workers are being dispatched to high-risk areas. This heightens the risks and puts increased pressure on the K&R market.

To date, Lloyd's and the London market have responded well to the requirement for cover, always quoting even the most difficult risks. It will be interesting to monitor how they respond going forward.