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The Economist: Kidnap insurance: A king’s ransom

EXTRACT: Oil giants that operate in the Niger Delta, including Royal Dutch Shell, are reconsidering staffing levels. An oil workers’ union is threatening to pull members out after a botched attempt on August 20th to rescue a Nigerian Shell employee who had been seized.

THE ARTICLE

Insuring against kidnap and extortion is a growth industry

August 25, 2006

THE kidnapping of Charles Lindbergh’s infant son from his nursery riveted America and the world in 1932. Mr Lindbergh’s celebrity as an aviator prompted police and the FBI to conduct a big investigation and a ransom was ultimately paid. Sadly, the baby was later found dead, buried in the woods of New Jersey. As well as leaving a lingering imprint on the American psyche, the Lindbergh kidnapping has had a lasting affect on the global insurance industry. After the abduction, Lloyd’s of London began selling some clients kidnap and ransom insurance.

More than 70 years later, kidnapping, ransom and extortion insurance (known as “K&R” in the industry) is a growing niche with annual premiums of about $250m. A feeling that the world has become less safe after the terror attacks of September 2001, as well as a flurry of kidnaps around the world, has fuelled demand, insurers say. Inquiries surge so predictably after well publicised crimes that “I can almost plot it on a chart”, says one insurance executive. Hiscox (a Lloyd’s syndicate), AIG and Chubb are among the leading underwriters.

At least 60% of America’s largest 500 companies carry K&R policies, although they are much less common among smaller firms. Not only top executives are covered; field engineers working in remote places are much more likely to be taken hostage. Private bankers have recently begun encouraging clients–from plutocrats to pop stars–to buy the insurance too.

As business has become global, so the kidnapping threat has globalised (see chart), although it is hard to quantify precisely because many abductions go unreported. Nigeria is one hot spot: this month at least 17 foreigners–ranging from American and British citizens to Filipinos and Ukrainians–have been seized. Oil giants that operate in the Niger Delta, including Royal Dutch Shell, are reconsidering staffing levels. An oil workers’ union is threatening to pull members out after a botched attempt on August 20th to rescue a Nigerian Shell employee who had been seized.

The people doing the snatching range from thuggish revolutionaries, like the FARC in Colombia, to thuggish criminals in it just for the money. In Argentina and Mexico police have been charged with abductions. A growing trend in China involves what insurers politely call “unwarranted detention”: local firms try to influence foreign executives during their business negotiations by having them placed under house arrest, thanks to the co-operation of friends in the police or local government.

Those who pay to protect themselves are typically covered for everything from ransom to lost wages, death and dismemberment, travel costs for family and colleagues, and counselling. Crisis management is often included. Clients covered by Chubb, for instance, can turn to the Ackerman Group if one of their employees or relatives is nabbed. The Miami-based firm will handle everything from negotiations with the kidnappers to dealing with police or officials and “moving money around”, says Mike Ackerman, a former CIA operative who heads the company. His team includes other former spies, a Green Beret colonel, an FBI veteran and an ex-French Legionnaire. “We’re very hands on, but we take our marching orders from the victim corporation,” Mr Ackerman says.

How much a client must pay for such cover depends on its size, type of business, prominence, geographic scope and history (including past kidnappings). A small, mid-western manufacturer might pay $500 a year for $1m of liability cover, while a big multinational may be charged $50,000 for $25m in cover.

Discretion is important. Insurers reserve the right to cancel a contract if a client discusses it, even among friends. This is partly because in some places, an insured person may attract kidnappers–even if he is poor, the insurer is rich. Although K&R cover may not reduce the risk of being kidnapped, insurers say it does (barring the odd bungled rescue) cut the chances of being killed.

The Economist

Copyright 2006 Economist Newspaper

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