Tuesday, April 14, 2009

Kidnap and Ransom Insurance

Kidnap and ransom insurance or K&R insurance is designed to protect individuals and corporations operating in high-risk areas around the world, such as Mexico, Venezuela, Haiti, and Nigeria, certain other countries in Latin America, as well as some parts of the Russian Federation and Eastern Europe. K&R insurance policies typically cover the perils of kidnap, extortion, wrongful detention and hijacking.

K&R policies are indemnity policies - they reimburse a loss incurred by the insured. The policies do not pay ransoms on the behalf of the insured. The insured must first pay the ransom, thus incurring the loss, and then seek reimbursement under the policy. Losses typically reimbursed by K&R polices are ransom payments, loss-of-ransom-in-transit and additional expenses, such as medical expenses.

The policies also typically indemnify personal accident losses caused by a kidnap. These include death, dismemberment, and permanent total disablement of a kidnapped person. They also typically pay for the fees and expenses of crisis management consultants. These consultants provide advice to the insured on how to best respond to the incident.

The policies may be written to cover families and corporations. Some policies include kidnap prevention training.

That is Wikipedia's current description. Most people have no idea about this elegant feature of American business but it has been around for several years now. I first heard about it a few months ago on some NPR report and thought little about it until this last weekend when the pirate story took a couple of loops in the news cycle. I heard passing reference in some early reports to several hundred other hostages already being held by pirates. My first reaction was amazement that they were not already in the news. What's going on?

Then the penny dropped: They're probably waiting for ransom negotiations to be concluded. Hostages are part of the pirate enterprise backlog, the criminal equivalent of a high value inventory. I wonder if they keep maintenance records tracking expenses like food, shelter, ammunition and other costs of doing business. So hey, what's the holdup? Wait! I know! They're waiting for K & R insurance claims to be processed! And that's why the story isn't exciting enough to be newsworthy.

Sarcasm aside, it doesn't take much imagination to see that kidnap and ransom insurance feeds a flourishing worldwide enterprise in criminal activity. It's the insurance equivalent of derivatives in the securities trading market. There's no stated law against it, so it must be okay. I know that fire insurance does not pay if arson can be proved. That makes sense. Otherwise, we would all burn down investment property and collect for the damages. What a deal!

But in the case of kidnapping and ransom, there is no such exclusion. In fact, the insurance is created precisely to pay off when (and only when) a criminal activity is proved. And all that indemnity and reimbursement language is all it takes to make the package legal.

Insurance companies can provide this product in exactly the same way they can insure against property damage, injuries, loss of life, or just about anything one wants insured. Like casino operators everywhere, they know the odds and what it takes to play them against premium payments to make a profit. No matter what happens, barring some extraordinary event (which is probably excluded anyway in fine print) the insurer will make a profit.

Client companies simply add the cost of K & R insurance as just another line item in the expense column of doing business.

And the perpetrators, the ones really taking the risk (other than their victims, of course) receive the most. And like the insurance companies and their clients, they are becoming, along with drug dealers and the rest of a swelling global underground economy, opportunistic entrepreneurs in a tax-free scheme now becoming one of the world's fastest growing, recession-proof economies.

Four years ago I picked up on a couple of enterprises in Gaza taking advantage of the unstable situation there. Cigarettes and other everyday items were being smuggled in from Egypt (and still are, btw) duty-free, but that strikes me as a special case. Also special, but similar to this piracy enterprise, was another odd arrangement by which automobiles stolen in Israel were being fenced in Gaza in such numbers that the Palestinian Authority (then in charge in Gaza) was issuing special tags for the stolen cars. That item made part of another post.

If piracy were an isolated phenomenon, such as those in Gaza, I wouldn't be concerned. But the the growth of piracy is a world-wide trend. It's getting worse and becoming a growth industry, at least in part, because of K & R insurance. A web search for "kidnap and ransom" insurance returns 78,000 hits. A blog search for the same term gets over five hundred hits, mostly published in the last few weeks, many in the past few days.

Here is an interesting bit that struck me as bitterly funny.You can't make this up, as they say.
Arguing that piracy is driving up K & R insurance rates is like saying that obesity is hurting the good name of junk food and sugar.
(At the beginning of the Iraq adventure Dan Schorr noted that the Irish Republican Army had stopped bombing innocent people because Al Qaeda was giving terrorism a bad name.)

Posted On: April 09, 2009 3:45 PM CST
Zack Phillips

LONDON—The cost of kidnap and ransom insurance today is 10 times as expensive as it was in October 2008 for ships transiting the piracy hotbed of the Gulf of Aden, according to Aon Risk Services.

More shipowners are inquiring about kidnap and ransom cover, for which a shipper now could pay up to $30,000 in premium for $3 million in coverage for one trip through the Gulf of Aden, the London unit of Chicago-based Aon Corp. said in a statement.

The Gulf of Aden, off the coast of Somalia, is the site of a dramatic uptick in pirate attacks over the last couple of years. Ships in the Indian Ocean must traverse the Gulf of Aden to reach the Suez Canal or steam around the Cape of Good Hope, a longer and much costlier trip around the southern tip of Africa.

In 2008, pirates hijacked 49 ships and took 889 crew members hostage, according to the International Maritime Bureau's Piracy Reporting Center.

Attacks by Somalian pirates dropped considerably in January and February, but they picked up markedly in March. After a total of 14 attacks and one successful hijacking in the first two months of the year, there were 25 attacks with four successful hijackings in March alone, according to the piracy center. So far in April, shippers have suffered at least six attacks with four successful hijackings near Somalia, according to the center.

Security experts say the return of frequent attacks is due in part to the waning monsoon season, which had curtailed pirate activity earlier in the year. Security experts also say the presence of about 15 naval war ships devoted at least in part to combating piracy in the Gulf of Aden has pushed the pirates to operate farther south in the Indian Ocean, where the U.S.-flagged Maersk Alabama was attacked this week.

"I think the message here is that there aren't any really clear limits on the range and ambition of these groups," said David Hunt, head of research and development at Exclusive Analysis Ltd., a London-based intelligence firm that forecasts political risks. "Clearly any ships routing from the Gulf (of Aden) down to the Cape (of Good Hope) will probably want to be keeping the maximum distance they can from the Somali coast."

Somali pirates have typically returned the ships, cargo and crew unharmed in exchange for ransoms between $1 million to $3 million, according to published reports. Traditionally, ransom has been paid by the hull insurance policy, although marine underwriters say the London market has begun to shift piracy coverage to war risk insurance. Kidnap and ransom policies offer additional cover that can include consultant and negotiator costs and medical care, in addition to ransom payment.

About 70% of shipowners are selecting kidnap and ransom policies specifically for the Gulf of Aden as well as two other piracy hot spots—the Gulf of Guinea near Nigeria and the Malaccan Straits near Indonesia—Aon said in the statement.

This is not an American problem. This is an international problem calling for an international response. From a business standpoint companies at risk are doing the rational thing. Thirty grand per trip is all it costs. And the insurance people are selling their usual risk management products in response to demand. (We learned the going rate is now from one to three million dollars for the safe return of cargo, crew and ship. It's hard to know what an individual hostage might bring, but probably not much.)

Having K & R insurance for piracy is like pouring gas on a fire.


Addendum, May 13

Somali pirates guided by London intelligence team, report says

The Somali pirates attacking shipping in the Gulf of Aden and Indian Ocean are directed to their targets by a "consultant" team in London, according to a European military intelligence document obtained by a Spanish radio station.

The document, obtained by Cadena SER radio, says the team and the pirates remain in contact by satellite telephone.

It says that pirate groups have "well-placed informers" in London who are in regular contact with control centres in Somalia where decisions on which vessels to attack are made. These London-based "consultants" help the pirates select targets, providing information on the ships' cargoes and courses.

In at least one case the pirates have remained in contact with their London informants from the hijacked ship, according to one targeted shipping company.

The pirates' information network extends to Yemen, Dubai and the Suez canal.

The intelligence report is understood to have been issued to European navies.

"The information that merchant ships sailing through the area volunteer to various international organisations is ending up in the pirates' hands," Cadena SER reported the report as saying.

This enables the more organised pirate groups to study their targets in advance, even spending several days training teams for specific hijacks. Senior pirates then join the vessel once it has been sailed close to Somalia.

Captains of attacked ships have found that pirates know everything from the layout of the vessel to its ports of call. Vessels targeted as a result of this kind of intelligence included the Greek cargo ship Titan, the Turkish merchant ship Karagol and the Spanish trawler Felipe Ruano.

In each case, says the document, the pirates had full knowledge of the cargo, nationality and course of the vessel.

The national flag of a ship is also taken into account when choosing a target, with British vessels being increasingly avoided, according to the report. It was not clear whether this was because pirates did not want to draw the attention of British police to their information sources in London.

European countries have set up Operation Atalanta to co-ordinate their military efforts in the area.

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