Kidnap and ransom has grown into a thriving criminal practice over the past 10 years, with the rise of the Islamic State in the Middle East, not to mention the recent spike in piracy in the Gulf of Guinea off the west coast of Africa.
The scale of the kidnap and ransom (K&R) problem is massive, with combined media reports putting ransom demand figures at more than $1 billion per year globally.
A series of independent studies by the crisis response firm Olive Group estimates that there are about 100,000 kidnappings every year, of which about 40 percent involve a ransom demand.
Among the highest profile cases in recent years was the kidnap and murder of American journalist James Foley by ISIS in northern Syria last year. ISIS demanded $132 million for Foley’s release.
“K&R is a very lucrative criminal endeavor with a high return on investment,” said Michael Sharp, lead underwriter for kidnap and ransom at Ironshore International.
“The rise of Islamic State and their use of kidnapping Westerners as a political tool has increased the number of kidnappings in the Middle East and Africa, in particular.”
Experts say that the bulk of these crimes go unreported because victims and their relatives fear retribution or have been warned not to do so by the authorities or the company that secured their release.
“It’s hard to say the true extent of the problem,” said Bert Van Wagenen, senior vice president of specialty underwriting at HCC Specialty.
“There’s a tremendous amount of publicity about kidnappings in the news right now, but there have been similar incidents in the past that didn’t receive the same attention, so it’s difficult to gauge if it’s getting any worse.”
Chuck Regini, director of global response at crisis response company Unity Resources Group, said that only an estimated one in 10 kidnappings actually gets reported.
However, despite this, he warned that there has been a clear rise in the number of incidents over the last 10 years. In particular, he has seen a spike in kidnappings of foreigners working overseas this year. The spike has occurred across all business sectors and socioeconomic groups, he said.
“As long as international commerce continues to grow in the developing world, and as long as security conditions remain the same and crime goes unchecked, kidnapping numbers will likely grow,” he said.
Insurers have responded to the upsurge in kidnaps and ransoms by increasing their capacity. Most recently, Ironshore’s professional and management liability subsidiary, IronPro, announced that it had extended its coverage capacity for U.S.-based businesses by $5 million, to $25 million, and HCC now offers a limit of $50 million.
Premiums written in this area have also risen as a result of the heightened threat of kidnappings. At least 75 percent of Fortune 500 companies now hold K&R policies, according to industry estimates.
Christopher Arehart, global product manager for crime insurance at Chubb, said that at a rough estimate, global kidnap and ransom operations by terrorists and other criminals brings in hundreds of millions of dollars every year.
Among those most at risk, he said, are exploration firms, non-governmental medical and humanitarian aid organizations, and journalists operating in the world’s harshest and most dangerous environments. Colleges and universities with faculty and students overseas are also at high risk.
“The biggest areas of risk are in countries where there is political instability and poverty,” he said.
Kidnap and ransom was traditionally more widely known in Latin America, in Mexico, for example, but has now spread to Africa, the Middle East and parts of Asia-Pacific.
In terms of underwriting, HCC’s Van Wagenen said that Mexico remained the No. 1 hotspot for kidnap and ransom, followed by Nigeria, Libya, Syria and Pakistan.
Arehart said that while recent media coverage highlights the increase in the use of K&R as a business by terrorists, kidnap and ransom has been used by criminals and thugs throughout history.
“The business aspect of kidnap and ransom remains tried and true,” he said. “At the end of the day it’s about one thing — money.”
He said that kidnappers will always target low-risk, high-reward situations — the risks are that they get caught, prosecuted, jailed or even killed; the rewards, however, are much greater, with the chance to extort millions of dollars out of victims’ families, and their companies, he said.
“When a plant has been infiltrated by a gang or terrorist cell, often the only option is for the company to shut down its operation completely, resulting in a significant loss of business income.” — Christopher Arehart, global product manager for crime insurance, Chubb
“In the Western Hemisphere, the risk is greatest to the local manager,” he said.
“The reverse is true of the Eastern Hemisphere, where the locals have less exposure and the expatriate is the one most at threat.
“The perception among kidnappers in this region of the world is that Westerners are wealthy beyond their dreams, and that they will be able to extort large sums of money out of them.”
Jim Kardaras, senior vice president at Marsh’s FINPRO practice, said that the biggest motivating factors behind kidnap and ransom after political instability and poverty are corruption and the presence of organized criminal gangs.
“The key driver for kidnap and ransom is mass civil uprising or civil war, producing a favorable environment for armed gangs and criminal groups to operate in,” he said.
“Organized criminal activity is predominantly financially motivated and where that is the case, hostages are treated as a commodity for financial gain.”
Another key driver has been the global credit crunch, said Tom Dunlap, kidnap, ransom and extortion underwriter at Liberty Mutual.
“This has led to an increase in criminal activity in many parts of the world,” he said.
“It has been exacerbated by the fact you can get all kinds of information online about who’s being targeted and the ransom sums being demanded, and this in turn has resulted in many copycat type crimes.”
Van Wagenen said that a typical K&R policy would cover kidnap and ransom, extortion and detention. That includes the value of any ransom to be paid as well as any expenses incurred along the way, he said.
The policy also covers the fee for using a qualified crisis response firm retained by the insurer that is on call 24/7 to help find an individual and secure his or her safe release, he said.
“Being able to respond immediately in a kidnap and ransom situation is the most important part of any policy,” he said.
Arehart added that a standard policy will cover companies for any litigation costs that don’t come under the sphere of general liability or workers’ compensation.
“They are designed to protect you against any lawsuits brought by an employee and any indemnity that you may need to pay as part of a settlement with the individual,” he said.
One of the biggest factors that is overlooked, he said, however, is business interruption — which is often not included in a standard policy.
“When a plant has been infiltrated by a gang or terrorist cell, often the only option is for the company to shut down its operation completely, resulting in a significant loss of business income,” Arehart said.
“Being able to respond immediately in a kidnap and ransom situation is the most important part of any policy.” — Bert Van Wagenen, senior vice president of specialty underwriting, HCC Specialty
In terms of the market, capacity is plentiful, he said, although it’s limited to around five or six key players.
Kardaras said that despite the surge in interest and new entrants to the market, brokers have long resisted the insurers’ urge to increase the price of their premiums and that rates still remain low, compared to many other lines.
“On the occasions where premiums have gone up, we have still managed to get enhanced coverage for our clients,” he said.
There are, of course, a number of preventative steps that companies can take to protect themselves and their employees against kidnap and ransom, said Arehart.
Among the most important is to evaluate and understand the environment in which employees are working and to come up with an appropriate contingency plan, he said.
“Essentially you need to know the risks associated with the country you operate in and who is going to be most at risk,” he said.
He recommended that company employees keep a low profile, dressing down and removing any expensive jewelry they may have, and to make any travel arrangements well in advance using their own private transport.
Steve Balmer, kidnap and ransom product manager at Travelers, said: “It should be noted that while kidnapping is a low frequency crime, its impact is substantial.
“The effects are not just felt by the hostages, who are usually left psychologically, if not physically, scarred,” he said.
“It also affects the hostage’s family and friends, who often have to make difficult decisions that could impact the outcome of a case, and their employers, whose reputation and profile could be affected as a result of the event.”
Small and medium-sized independent brokers face an ever-increasing battle to maintain their independence, according to industry experts.
A growing number of independent brokers are being swallowed up by big publicly traded firms and private equity (PE), with nearly 60 deals completed in the first two months of this year alone.
The recent upsurge is being fueled by hungry capital-rich investors keen to tap into a lucrative market and by the need for larger brokers to increase scale through mergers and acquisitions.
According to one market insider, it has reached the point where today it is tougher than ever for firms to stay independent.
Phil Trem, senior vice president at consultancy firm MarshBerry, said that is because many companies don’t have a natural successor in place to continue the business.
“Roughly 75 percent of agencies that want to perpetuate will be unable to because they haven’t properly reinvested in the next generation to create a market for their stock.” — Phil Trem, senior vice president, MarshBerry
“Most firms want to retain their independence but the practicality of that is limited,” he said.
“Roughly 75 percent of agencies that want to perpetuate will be unable to because they haven’t properly reinvested in the next generation to create a market for their stock.”
He added that most independent brokers or agency owners are worried that if they sell or merge their company, they will lose control of its ability to grow.
“It may seem trivial but most of the owners have not had a boss in many years — the thought of working for someone is hard to contemplate,” he said.
For those that do decide to take the plunge, he said, the two biggest influencing factors to consider are the effect on the company’s corporate culture and access to resources once the deal is completed.
“After all, sellers only want to make sure they can gain a competitive advantage in the marketplace to help themselves and their staff be more successful,” he said.
However, in the face of increasing consolidation, some independent brokers have stood firm and managed to maintain their independence — and many of them believe they are better for it.
With an estimated 429,101 insurance brokers and agencies in the United States, according to the latest research by IBISWorld, it’s no surprise that some firms are natural takeover targets.
Last year, 321 deals were announced, up 43 percent from the previous year, and only four off the record high of 325 in 2012, according to MarshBerry.
That trend is only set to continue through 2015, driven by new demand and the formation of the National Association of Registered Agents and Brokers (NARAB), enabling agencies to compete on a national basis.
Added to that, increasing financial and regulatory burdens are forcing many businesses to sell up or merge just to survive.
While the prospect of partnering with a larger firm can seem attractive at first, offering access to wider markets and the ability to go after bigger and more complex accounts, it can also result in layoffs and office closures, as well as having to tear up entire technology platforms.
So it’s easy to see why some brokers are reluctant to become part of a bigger company and why they are so keen to maintain their independence.
David Lockton, chairman of Lockton Cos., the world’s largest privately held independent insurance broker, said that the key advantage to being independent is the ability to report in to one person and not to be held to account by a group of shareholders, or PE or hedge fund.
“At the end of the day, I want my team of lawyers, accountants and business and risk management consultants reporting in to me, not a group of public shareholders,” he said.
“Being independent means that they can do that and that they aren’t encumbered by other stipulations such as profit centers and quarterly margin requirements.”
John Lumelleau, president and CEO of Lockton, said that being independent also enables brokers to focus solely on their clients’ needs rather than worrying about other distractions.
“Many organizations that were maybe once independent and have become part of a larger company or bought by private equity have had their whole structure and dynamic changed as a result,” Lumelleau said.
“Remaining independent, however, enables you to maintain your connectivity with your clients, which disappears to some extent when you are working for or are owned by somebody else.”
Lockton has been regularly voted in the trade press as the best insurance brokerage to work for, and David Lockton believes that is due to the firm’s culture of empowerment, which wouldn’t be possible if it was part of another company.
“We’re not about financial engineering,” said Lockton. “Our scorecard is not about top line revenue or margins. It’s about winning and keeping customers, which is something that has served us very well from a financial standpoint too.”
Lockton added that the company’s strategy is focused on organic growth through the acquisition of new clients and it would only take over another firm if it shared the same values and type of culture, sticking true to its independent philosophy.
David Walker, president of Hartland Insurance Agency and chairman of the Insurance Agents & Brokers of America (IIABA), said that the main benefit of being independent is the flexibility and capability it allows.
“It provides you with the flexibility to represent multiple carriers in multiple markets and the ability to access all of them on behalf of your customer and to determine where that business gets placed,” he said.
Walker, however, believes that it’s a different story for those independent brokers and agencies with revenues of between $1 million and $2 million who face the critical decision of whether to sell up or grow their business, due largely to economies of scale.
“There’s going to be pressure put on them by insurance carriers and by the marketplace, forcing them to decide whether to expand their business or sell up,” he said.
John Hahn, co-founder and CEO of California-based EPIC Insurance Brokers & Consultants, said that independence has enabled his company to build a platform and culture that allows its employees to prosper.
“I firmly believe that individuality is the trait that allows a professional to excel, and corporate culture is what guides behavior and binds the two together,” he said.
Hahn added that being independent also ensures that clients’ interests and company practices remain uncompromised.
“I firmly believe that individuality is the trait that allows a professional to excel, and corporate culture is what guides behavior and binds the two together.” — John Hahn, co-founder and CEO, EPIC Insurance Brokers & Consultants
Barnaby Rugge-Price, director, RK Harrison property and casualty — whose company, in March of this year, announced a merger with Hyperion Insurance Group to form the world’s largest employee-owned, independent insurance and reinsurance broker — said that independent brokers have the added advantage of attracting the best talent in the market.
As a result of that talent taking ownership of the business, he said, clients naturally expect a higher level of service from their broker.
“For us, independence means two things,” he said. “Financial independence leaves us free of outside control and allows us to make long-term decisions that are right for our business and for our clients.
“It also means that we are independent of any broking presence in the U.S. This allows our partners to have confidence that our interests are aligned with theirs — the best deal for their clients.”
Added Rugge-Price, “The Hyperion/RKH merger demonstrates that independents can continue to thrive but the bar is being raised all the time and in the face of a prolonged soft market, an ever-increasing burden of regulation and a consolidating client base, the next few years will be a test for everyone involved.”
David Howden, CEO of UK-based Hyperion Insurance Group, added that central to the new company’s success would be its ability to maintain its corporate culture.
“If there’s one thing I fight hardest to retain as our business develops, it’s the entrepreneurial dynamic and enterprising culture of our business,” he said. “Therefore, we are focused on the needs of our clients, not on internal politics.”
While M&A may be on the increase, with more firms changing hands, for many of those in the independent brokering market, the benefits of staying independent far outweigh becoming part of a larger company.
Risks of Celebrity Sponsors
While the use of celebrities or sports figures may generate publicity around a product or service for a company, not all of it is good publicity.
You only have to open up a copy of the newspaper to read about scandals engulfing stars such as Bill Cosby, Brian Williams or Tom Brady with the New England Patriots’ and the “Deflate-gate” saga.
Sponsors have reacted by withdrawing their support, most notably in the NFL, where domestic violence allegations hanging over the sport prompted Procter and Gamble to pull the plug on a deal to supply players with pink mouthguards during Breast Cancer Awareness Month and cancel all on-field marketing.
The risks for any sponsor associated with this type of negative publicity are infinite, said experts, often resulting in the cancellation of lucrative advertising and marketing contracts, ultimately costing the company millions of dollars in lost revenue.
Worse still, the sponsor may be forced to pull its product from the market altogether, with the end result that millions of dollars are wiped off its share value.
Lori Shaw, executive director of Aon Risk Solutions’ entertainment practice, said the main risk of hiring a celebrity to endorse a product is the unexpected or disgraceful behavior of that individual, or unforeseen events such as death.
“The first step is to analyze the potential risks; discuss ‘what if’ scenarios; outline the financial consequences; and to be aware of the risks that can be avoided, those that can be transferred contractually to the celebrity or talent, those that can be transferred to insurance and the risks that must be retained,” she said.
Shaw said that companies need to take a holistic approach to their branding and marketing activities in order to assess the potential impact of any adverse publicity on their balance sheet.
Nir Kossovsky, CEO of Steel City Re, a corporate reputation measurement and risk management specialist, said there are two instances when a company should walk away from a sponsorship.
“The first is if the costs of a parallel communication strategy coupled with the direct costs of sponsorship outweigh the value of the expected gain.
“The second is if, on objective reflection, there is a compelling case that the average stakeholder will hold management culpable for an adverse event no matter what the management says to the contrary.”
To mitigate against these risks, corporations are increasingly turning to specialized insurance plans and writing clauses into their contracts allowing them to cancel a deal if the celebrity is considered to have acted in an inappropriate manner that may damage the company’s brand.