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Is K&R Coverage a Risky Business?

By Rachel Briggs. Source: lloyds.com

The following article by Rachel Briggs, manager of the Centre's Security Programme, was published on lloyds.com, the site of Lloyds of London.

'The Kidnapping Business' by Rachel Briggs was published by The Foreign Policy Centre, March 2001.

For details about 'The Kidnapping Business' by Rachel Briggs, please see 'Current Publications'.

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Introduction

The kidnap and ransom (K&R) insurance industry has long been regarded with scepticism in policy circles. In the 1980s, Margaret Thatcher went so far as to instigate an investigation into the sector, prompted by her concern that it encouraged the proliferation of kidnapping. Her arguments hinged on the issue of ransoms: firstly, she was concerned that insurance encourages policyholders to pay; secondly, she was worried that cover allowed policy makers to be less cautious about how much they paid given that they would be reimbursed later. The result, she argued, would be more frequent and higher ransom payments - and this would ultimately lead to a proliferation of the crime.

Mrs Thatcher didn't get her way, and the K&R insurance industry is still going strong today. It has been estimated that it is growing at 15-20 per cent each year and British underwriters can boast much of the FTSE 100 companies as clients. However, while K&R insurance is fast becoming a mainstream part of doing business in high risk areas such as Latin America and parts of Asia, the industry's negative image has not faded.

The case for non-concession

However, the scepticism with which K&R insurance is viewed is as much a reflection of the way the kidnapping policy framework is constructed as of misconceptions about the nature of the sector's business activities. The current focus for kidnapping policy is on how individual cases are resolved and, in line with Thatcher's policy stance on kidnapping in the 1980s, the UK government holds non-concession as the principle method for delivering the shared objective of reducing the number of Britons kidnapped each year. And in line with this, K&R insurance seems at odds with UK government policy.

But can this type of policy deliver results? Where one group, say national governments, is able to control responses, it is possible that this policy will help to reduce the number of kidnappings. But in cases where anyone can take control - as is increasingly the case where money rather than politics calls the shots - this consistency is difficult to achieve. While reducing ransom payments must always be a central aim for all policy makers - government, business, charities and individual families - we must accept that this alone can no longer deliver the objectives we want to achieve.

The case for K&R coverage

We need a new preventative focus for kidnapping policy that can bring results in the short-term while such important long-term policies are being pursued. We should focus on reducing the opportunities for kidnapping through enabling those who are at risk to manage their risks more effectively. This is an area of policy where there is much potential for success - and where the insurance sector is already playing a key role.

Firstly, and most importantly, kidnap and ransom insurers are actually interested in minimising the risks of their policyholders in order to reduce the likelihood that they will have to pay-out. In order to do this, underwriters add incentives and penalties for 'good' and 'bad' behaviour - as is true in homeowner's insurance, where coverage may make policyholders less concerned about burglary, as they know they can recoup the costs. To counter this, underwriters offer lower premiums to those willing to act to reduce their risks by, for example, fitting locks to windows.

K&R insurers have adopted similar mechanisms to encourage the responsible, low-risk behaviour of their policyholders. The pricing structure of premiums alters according to the amount of effort that the policyholder is prepared to make to reduce their risk.

Secondly, and related to this, many of the largest underwriters exclusively secure the services of a particular security consultant for their policy-holders in order to ensure that they are taking their security policy seriously. In this sense, the K&R insurance industry has contributed towards an accumulation of expert professional knowledge about economic kidnapping and helped to promote methods that lower the policyholder's susceptibility to the risk of kidnapping.

Thirdly, when a kidnapping does occur, there are safeguards in place to minimise the amount of money that will be paid out. The total amount that a person or organisation can be insured for is relative to a policyholder's ability to pay, and this means that the insurance policy recovers the amount that would have been paid without insurance cover.

Learning from the experience of others

This argument is backed up by the fact that policies only pay out retrospectively, preventing ransom payments from spiralling out of control. And policies also cover the cost of an expert to handle the case and advise about negotiation techniques and practices, a role that may previously have fallen to a CEO or regional manager with no previous experience of handling such a high-pressure incident as kidnapping. As a senior security manager from a major multinational company commented, "We as a company have a very strong central security and employee security capability. But we haven't had a kidnap since 1989 so we need the experience of people who have".

Whether the motives of the K&R insurance industry are altruistic or financial, it is important that policy makers harness all activities that could deliver the objective of reducing the number of kidnappings each year. Such an overarching framework could bring clarity and help to ensure that individual efforts come together as a whole to be worth more than the sum of their parts.

The insurance sector is far from perfect, and there is undoubtedly more that it could do, but while we continue to have an unbalanced debate in which those who pay are bad, and those who don't are good, we will not realise the objectives that are universally shared. And as the investment and operations of UK companies in risky areas of the world grows, this is an issue that must be faced head-on.