Economic growth boosts the demand for kidnap insurance

29 July 2003
Financial Times
ELLEN KELLEHER and AMY YEE

Economic growth boosts the demand for kidnap insurance - Services are for more than Colombians and oil companies, say Ellen Kelleher and Amy Yee.
 

The release this month of three oil workers who were snatched by bandits from a boat off the coast of Nigeria was high drama - gripping proof of the risk of kidnapping for global companies.

As the world economy improves, more are preparing for the possibility and insurers are benefiting from their interest, reporting a surge in demand for kidnap and ransom policies of as much as 20 per cent.

It used to be that the people most interested in K&R insurance were wealthy families in Colombia - the kidnap capital of the world - and oil company executives placing their employees in countries where taking businessmen captive was part of the rhythm of daily life.

But David Lattin, director of industry practices at The St Paul Companies, says middle-market groups are growing fond of it. If a company is not particularly intrepid, a K&R policy can be obtained for a nominal amount. The protection the policy provides against extortion, a widespread problem, is also quite appealing.

Chubb, the US insurer, has started to market "an executive protection portfolio" which lumps coverage for extortion and kidnapping with directors' and officers' insurance and other corporate products.

"In the past, it was just looked at as stand-alone coverage; now because there are so many more people interested in it, we've decided to market it more broadly in this package product," says Gregory Bangs, vice-president for kidnapping and extortion lines at Chubb.

In addition to paying ransoms, salaries during captivity and the costs of recovering victims, most policies also cover extortion. "K&R is sort of a misnomer," Mr Lattin says.

The types of extortion included in policies vary widely from covering expenses if, say, an employee is thrown in prison for drinking in Saudi Arabia or another Islamic state to protecting a company from computer hackers or arsonists.

The more unadventurous the company, the cheaper the policy, insurers say.

An American construction company with as many as 200 employees and a couple of offices in Mexico and Brazil, might pay as little as $8,000 per year for a $5m limit. However, 10 members of a powerful Colombian family in Bogota or Cali would probably have to hand over $20,000 for a $2m policy.

For the most part, insurers only cover kidnappings where the motive is enrichment. Political kidnappings such as that of Terry Waite, the special envoy of the Archbishop of Canterbury who was held hostage in Lebanon in the 1980s, have slumped in recent years, since most proved to be rather ineffectual, according to Donald Palmer, who heads the crisis management practice in the UK at Kroll Associates.

Of the 15,000 or so kidnappings reported each year, about 70 per cent are resolved by ransom payments, while 10 per cent of victims are actually rescued without paying, he says. It is estimated that between $120m and $130m is paid out annually in premiums for kidnap insurance around the world.

Insurance policies always include a contract with a major player in kidnap security work such as Kroll or its rival Control Risks, which bear responsibility for negotiating the release of a hostage.

While interest in it is growing, people still debate whether K&R insurance actually encourages the crime.

Most companies at risk are very guarded about discussing their K&R insurance and refuse to disclose the limits on their policies.

In Colombia, Chechnya, Tajikistan, the Philippines, Yemen and other areas where kidnapping is common, local thugs often act as middle men for powerful guerrilla groups, kidnapping the victim and handing them over at a rendezvous point.

The guerrillas bear responsibility for determining the victim's worth.

Whether this type of business model encourages thieves to conduct bounty hunts to track down those with large policies remains uncertain.

Jeffrey Greene, chairman of Asset Security Managers, a leading K&R broker, which usually handles between 20 and 30 kidnappings a year, says no.

"In reality, criminals are not going to choose their victims on the basis of whether they have insurance."