by | Sep 12, 2018 | KJ Howe | 6 comments

Appetite for Risk

A big bowl of risk!
by K.J. Howe
“Appetite for risk” conjures up images of kite boarding off the Al-Arab hotel in Dubai or bungee cord jumping from the Victoria Falls Bridge in Zimbabwe—but it’s also an insurance industry term.  Appetite for risk reflects the amount and type of risk that an insurer is willing to take on, or underwrite, in order to meet its strategic objectives.  
Some risks are simple to calculate based on proven statistics.  For example, in a sampling of 1,000 men of a certain age, we can predict with some accuracy how many members of that group might pass away in any given year.  This analysis allows insurers to calculate premiums so they can ensure they make a profit when handling life insurance claims.
But calculating insurance premiums for KRE—kidnap, ransom, and extortion—is a more complicated process.  KRE insurance must take these variable factors into account:
·      *Some locales have no data available on the rate of kidnapping and extortion.
·     * Kidnapping and extortion is grossly underreported.
·      *Claims can vary from a few hundred dollars up to fifty million dollars.   
Statistical analysis is a critical tool that insurance companies use to design policies to protect against kidnap, ransom or extortion.  KRE insurance is a rapidly growing field that demonstrates insurers have plenty of appetite for risk.  Estimates suggest that at least 75% of Fortune 500 Companies hold one or more KRE policies.
Kidnap insurance is not a new product, as these types of policies came into being around 1932, shortly after the tragic kidnapping of Charles Lindberg’s son.  KRE remained a niche market for extremely wealthy families until the 60’s and 70’s, when a series of high profile kidnappings of Italian bank executives’ wives occurred, and a corporate response system was needed.  Highly sophisticated insurers like Lloyd’s of London stepped in to fill this need.

KRE insurance can be purchased by individuals, organizations, and families, and the policies can be underwritten on an individual or group basis.  The same way that a large corporation can purchase “fleet insurance” on the hundreds of vehicles, it may go under one policy, a company like Coke or Nike—or an NGO like AMREF—can buy a blanket KRE policy to cover all employees while they are working overseas.  In fact, many people who are covered by KRE policies aren’t even aware they have coverage.  Certain policies include confidentiality clauses that prohibit confirming the individuals are covered, and most policies require the amount of coverage be kept secret from the insured for fear they will tell their kidnappers the policy limits under duress. 
Like other types of insurance, certain losses are covered in basic policies, while more emergencies can be covered through the purchase of further riders or “Cadillac” policies with policy limits of up to $50,000,000 available.  
A basic policy will normally cover:
·         Kidnapping
·         Extortion
·         Illegal Detention
·         Hijacking

KRE policies are policies of indemnity.  That is, they only pay out once the insured has suffered the loss, not before.  In practical terms, this means that the insurer never directly pays the ransom.  The relatives or company responsible for the hostage must pay the funds, and then they are reimbursed later by the insurer.  However, many international banks are willing to advance ransom funds using the policy as security. 
Normal claims under this type of policy will include rehab expenses, loss of income, paying for transport, the ransom, and the insurer providing a hostage response consulting firm—like Thea Paris’ Quantum International Security—to assist in dealing with the kidnappers.  The policy will usually also cover any harm that comes to whoever ends up delivering the ransom.

The types of additional coverages that can be purchased are also fascinating in their own right.  Some of these options include:
  Business Interruption
  Cyber extortion
  Disappearance (they hire investigators to find you)
  Political Evacuation & Repatriation
 Express Kidnap  (usually defined as less than 4 hours)
  Hostage Crisis  (which allow for hostage negotiations to take place when a prisoner exchange or ideological statement has been issued, not just a ransom demand)
  Threat
  Product Loss
  Tiger Kidnap (when an non-insured is kidnapped for the purpose of influencing an insured)
As you can imagine, these policies are incredibly detailed and analyze issues like post-kidnapping plastic surgery, the cost of interpreters, hiring PR agencies, and a multitude of other costs that can arise from a KRE event.
The policy itself can give rise to all sorts of conflicts if an insurer suspects fraud or denies coverage.  And creative plaintiff lawyers add to the confusion as they are now arguing—often successfully—that some of these policies offer coverage for cyber-kidnappings or data or capacity detention by events such as the WannaCry ransomware outbreak.
KRE insurance is just one of a long list of risks that insurance companies will offer coverage for, along with alien abductions, Tom Jones’ chest hair, immaculate conception insurance, and many other bizarre risks.  For most people, reading insurance policies can act as a cure for insomnia, but when I study one, a number of new plot ideas immediately spring to mind.  Which reminds me…time to get back to work on the next book!
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  1. Gayle Lynds

    My goodness, KJ, this is fascinating. but then so much of your research is. Your blog reminds me of the old Lloyds of London, which made much of its wealth back in the day assessing risk for sailing ships — against pirates, attacks from France, mutiny, and of course old-fashioned theft. And now we have this new iteration. Me, I'm going to go read all of my policies.

  2. Robin Burcell

    I expect that if one's husband suddenly pulls out a policy on his wife and she ends up kidnapped, that might raise a red flag or two. Of course, I also expect that the clientele who would need this sort of protection are a bit higher on the stratosphere of us mere (poorer by wealth) mortals.

  3. Lisa Black

    I would love to write a policy insuring one against alien abduction!!

  4. Lisa Black

    Didn't they also insure Betty Grable's legs?

  5. Karna Bodman

    Such an interesting analysis of risk insurance, K.J. – a complete "tutorial"– which, once again, shows how you do such extensive research for your terrific novels! I recall some years ago when my husband took a job with a certain company, I had to undergo "training" about safety, being followed, kidnapping and how to react (basically "don't react or make eye contact") if we were ever involved in a hijacking. Serious stuff to be sure – and as you say – great grist for your next thriller.

  6. Christine Goff

    When I was younger, my mother was a good friend of Barbara and Marvin Davis, the millionaire/billionaire Oil Tycoon. I remember her telling me that the family had kidnapping threats and policies on everyone. For a while they could go nowhere without bodyguards posted at the entrances and exits of restaurants, at school, etc. One time Mom was at lunch with Barbara, and Barbara insisted on paying. The only problem, her credit card was denied. Mom laughed and reached down and into her purse and immediately there were three men prepared to stop an attack.