K&R market ‘caught in a perfect storm’

Despite global lockdowns, the kidnap and ransom (K&R) insurance market has been buffeted by losses, and dwindling capacity is pushing up prices.

The secretive market – whose clients are encouraged not to say they have a policy – has been seen as a lucrative niche in the past. “It was always seen as a licence to print money but several players have lost capacity after having made losses,” said one insider.

“Ours is a standalone market, so it never has a proper hard market, but this is the first time I’ve seen a hardening for decades. It’s been caught in a perfect storm,” said Stuart Allen, line underwriter for K&R at Hiscox London Market, which is the market leader with about two thirds of the business.

“Capacity has shrunk, as some players have as much as halved their limits and put aggregates in that reduce the amount of capacity they give. Reinsurers are tightening up, which is also having an impact on the market, as some players either are not able to offer the same line sizes or are having to increase rates. And finally, the pandemic is creating political upheaval and social unrest that is also leading to losses,” Allen explained.

No respite during pandemic
The idea of kidnap insurers making losses when Covid-related lockdowns have meant foreign travel has been at its lowest level in living memory might seem counterintuitive, but the K&R market, contrary to its name, isn’t driven by the number of kidnaps taking place around the world.

The cover has morphed since the 1990s from a policy bought by wealthy families in trouble spots such as Mexico and Colombia, into now being an emergency service for multinationals operating in far-flung regions of the world.

The policy now offers cover against a wide range of threats under the umbrella of kidnap, ransom and extortion, from industrial espionage and dirty tricks, to negotiating the release and repatriation of workers caught in revolutions or coups.

“It’s a much broader cover today than it was in the 1990s. Threat is offered as part of the policy, which is important to clients now, both individual and corporates,” said Allen. “It’s a more sophisticated product now. It’s broad, but in a controlled way, to allow us to use our consultants’ expertise to mitigate our clients’ problems.” Hiscox has an exclusive partnership with Control Risks going back decades.

But the market has made losses from a rise in the number of extortions and piracy attacks (which many in the K&R market still underwrite), as well as ransomware claims – policies have in the past included all forms of extortion, including digital, although insurers have now moved to effectively eliminate cyberattacks from their coverage, although multiyear deals mean it will still take a little time for insurers to update their wordings.

Looking to 2022
While many countries have reimposed lockdowns due to the Omicron wave, they are likely to be shortlived, and when borders reopen, travel will increase, leading to an inexorable rise in K&R claims.

As restrictions ease, social and political unrest is likely to resurface. People’s unhappiness at their governments’ handling of the Covid crisis, added to long-simmering resentments, is causing resentment to overflow, as seen in South Africa last year. Border disputes, such as those between Russia and Ukraine, which is dragging in NATO powers, reported political in-fighting in Kazakhstan, and tensions between the US and China mean the global political situation is highly volatile. In Haiti, the situation remains lawless, shown by the kidnapping of 17 North American missionaries in December. Meanwhile, civil wars in Yemen and Ethiopia drag on.

K&R insurers had to hastily evacuate foreign nationals employed by their clients from Afghanistan, Sudan and Ethiopia in 2021. Other international emergencies are likely to test the market further this year – some companies are reportedly on the verge of repatriating their employees from Kazakhstan, which has grown wealthy on its plentiful supplies of oil and gas.

It’s in such a febrile global political atmosphere that multinational companies and aid agencies need the help of a good crisis consultant, provided by a K&R policy. With many developing countries struggling to recover economically from the devastating recession caused by the Covid crisis, more criminals are turning to extortion, including anything from product contamination to snatching a family member of a rich footballer, to taking foreign workers hostage.

But Allen worries that, just as the number of security consultancies mushroomed after pirate attacks against merchant ships in the Gulfs of Aden and Guinea in 2013 and 2014, so too is the recent spate of extortions encouraging many new self-styled crisis consultancies to step forwards claiming they can handle tense negotiations with hard-bitten criminal gangs.

“Just as many ex-servicemen seem to think they can be security consultants, the same is true of those who see the extortion epidemic as an opportunity,” said Allen. “The truth is that unless you’re a well-established company used to dealing with extortions almost every day, then you’re not an expert. There are plenty who are, but there are also now plenty that aren’t or have been out of the business for far too long.”

The problem is a raw negotiator can do more harm than good. “The quality of the crisis consultants you have is essential. You need a consultant that balances sensitivity with practicality and knows when and how much to pay, because each time you pay a ransom at a certain point, you set a market rate. There are certain territories where market rates for ransom have been pushed up because they haven’t been dealt with by good consultants – and so the problem gets worse rather than better,” explained Allen.