Kidnap and ransom insurance: A strategically useful, often undiscussed, marketplace tool for international operations

• DOI: http://doi.org/10.1111/rmir.12134
• Author: Stephan Zaparolli,Patrick L. Brockett,Linda L. Golden,Jack M. Lum
• Published date: 01 December 2019
• Date: 01 December 2019

© 2019 The Authors. Risk Management and Insurance Review published by Wiley Periodicals, Inc. on behalf of American Risk and

Insurance Association

Risk Manag Insur Rev. 2019;22:421–440. wileyonlinelibrary.com/journal/rmir

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DOI: 10.1111/rmir.12134

PERSPECTIVE

Kidnap and ransom insurance: A strategically

useful, often undiscussed, marketplace tool

for international operations

Patrick L. Brockett

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Linda L. Golden

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Stephan Zaparolli

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Jack M. Lum

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1

Department of Information, Risk and

Operations Management, McCombs

School of Business, The University of

Texas at Austin, Austin, Texas

2

Departments of Marketing and of

Business, Government and Society,

McCombs School of Business, The

University of Texas at Austin, Austin,

Texas

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Department of Information, Risk and

Operations Management, Center for Risk

Management and Insurance, McCombs

School of Business, The University of

Texas at Austin, Austin, Texas

Correspondence

Patrick L. Brockett, Department of

Information, Risk and Operations

Management, McCombs School of

Business, The University of Texas at

Austin, Austin, Texas.

Email: utpatrickbrockett@gmail.com

Linda L. Golden, Departments of

Marketing and of Business, Government

and Society, McCombs School of

Business, The University of Texas at

Austin, Austin, Texas.

Email: utlindagolden@gmail.com

Abstract

With kidnaping rates rising, the disruptive forces of

kidnaping threaten the stability and success of corporate

investment projects and put stress on appropriate corpo-

rate governance response methodologies. While kidnaping

targets vary considerably among countries where it

frequently occurs, most often the goal of kidnapers is

money from ransom payments. Financial consequences of

a kidnap ransom payment can be severe for companies,

and psychological damage can be lasting to employees and

their families. Given the increasingly global nature of

business and increasing expansion into less politically and

legally stable emerging markets, kidnap, ransom, and

extortion pose a problem for management of corporations

wishing to take advantage of emerging market opportu-

nities. Kidnap and Ransom (K&R) Insurance is a risk

control technique used by about 75% of Fortune 500

companies, nongovernmental organizations, and an in-

creasing percentage of small to medium sized companies.

It is a bundled package policy that includes the purchase of

an insurance policy to indemnify the company for the

costs of kidnap, ransom, and extortion. Such policies can

also provide protective consulting beforehand, provide

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This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

crisis response and negotiation assistance, as well as

psychological support services after the fact. In this paper,

we describe the K&R policy, its history, other nonfinancial

corporate benefits provided by K&R policies, and discuss

its use by corporate managers for the benefit of corporate,

financial, and personnel stability. It can also be used in

course on managing international risk.

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INTRODUCTION

At least 12,000 kidnap‐for‐ransom situations occur globally each year (McAvoy and Randall

2010). More recently, Bell (2019) provides a higher estimate of 15,000–20,000 kidnapings per

year, with fewer than 20% of kidnapings being reported to authorities. The financial cost of

kidnaping is high—an estimated $50 million in Mexico alone (the number one kidnaping

country) and $1.5 billion annually worldwide (Bell, 2019). While kidnap risk may not be a usual

or familiar risk consideration for many Boards of Directors or corporate risk managers, as firms

become more global and transact business (and have supply chains extending) in wider and

more unfamiliar areas, kidnap and ransom (K&R) risk can present an overlooked but

tremendously impactful risk consideration to firms when making strategic investment or

personnel travel or assignment decisions.

K&R insurance policies aim to reduce these hardships by not only providing insureds with

indemnification of ransom payments, but also providing proper safety training, kidnap

negotiation teams, crisis management responders, and much more. As companies continue to

extend operations to risk‐prone regions, the market for K&R insurance becomes increasingly

dynamic. This paper provides an overview of this specialty insurance marketplace, important

for international risk management (and for classes in managing international risk). It also

examines the demand, coverage, pricing, and availability of this insurance useful for corporate

risk coverage considerations.

Often, market growth opportunities for businesses (or their required natural resource

materials), are located in environments that are either less politically stable or are lacking in

adequate security for employees. Moreover, the class of risks associated with moving into these

more insecure environments will increasingly become a factor in future corporate strategy

decisions as more employee travel is necessarily done to emerging markets. Indeed, close to 80%

of global economic growth is from developing economies and emerging markets, and close to

85% of the worldwide growth in global consumption of consumer goods and services occurs in

developing economies and emerging markets (Gruss, Nabar, & Poplawski‐Ribeiro, 2017). The

emerging market and developing economy countries actually surpassed the advanced

economies in terms of output around 2007 (IMF DataMapper).

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More small and medium

size enterprises (and of course larger enterprises) are now increasingly doing business in these

less stable emerging and developing market countries that sometimes lack adequate personal

security for the personnel sent by the enterprise to these locations.

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While the advanced economies accounted for roughly 59% of world output at the beginning of the century (compared with the emerging market and

developing economies share of 41%), the situation completely reversed by 2014 with emerging market economies accounting for 59% and the advanced

accounting for 41% of world output.

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