Kidnap & Ransom

Covering a Dangerous Risk

Demand is growing for kidnap, ransom and extortion insurance, with a specific need for real-time security intelligence around the world.
By: | December 14, 2016 • 5 min read

Two people are kidnapped and held for ransom somewhere in the world every hour, according to some estimates, and approximately $1.5 billion in ransom is paid to kidnappers every year.

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Kidnap and extortion is on the rise across the globe, and demand for KRE (kidnapping, ransom and extortion) coverage is growing. Insurers are offering more comprehensive policies to meet the risk.

KRE insurance typically covers all risks related to kidnapping events. Most policies offer reimbursement for things like ransom and extortion payments, independent security consultants, crisis management, public relations campaigns, and accidental death and dismemberment.

These policies can also reach well beyond the event itself to include rehabilitation services, psychiatric care, salary replacement and relocation.

A typical cap on KRE policies is $1 million per occurrence. Due to the low claim rates, theses policies also offer cost-effective premiums relative to the risk they cover and the value they provide.

A March 2016 report by Arthur J. Gallagher & Co. said premiums range from $600 per million for companies with limited exposure to up to $3,000 per million for high-risk exposure.

Despite the growth in the KRE market, it’s hard to obtain accurate data on kidnappings and ransoms paid because many go unreported, said Christopher Arehart, senior vice president at Chubb. Organizations are unlikely to publicize the kidnapping of an employee, or even that they have a KRE policy.

While there’s no evidence to prove that having a policy could attract kidnappers or extortionists, it’s something most clients want to keep private.

“It’s a quiet product that is often sold discreetly and they hope they never have to use it. The last thing they want to do is let everyone know something like this has happened,” Arehart said. “But I can say we have seen a steady drumbeat of submissions and interest in our policy.”

A “Network of Expertise”

Dan Burns, president and CEO of specialty risk underwriters Pro Financial Services in Chicago, said customers aren’t just paying to insure the risk, they’re also buying a “network of expertise.”

Clients can often tap their KRE insurer and policy for security and legal advice, employee training and insight into local risks.

Dan Burns, president and CEO, Pro Financial Services

Dan Burns, president and CEO, Pro Financial Services

While a KRE policy can be a literal lifesaver in terms of securing the freedom of an employee, they are infrequently triggered and used more for peace of mind with employees, he said. Increasing publicity about global instability and kidnappings has more companies looking to these policies to establish a relationship with security experts.

“What you’re buying is access to a very experienced global security network that has experience and familiarity in dealing with situations that most clients have and never will encounter,” Burns said.

Arehart said that Chubb offers its KRE policyholders security advice, training and up-to-the-minute risk analysis on more than 100 countries from the Ackerman Group, an organization that specializes in crisis management, executive protection and hostage recoveries.

Paying Ransom is Illegal

“Kidnap and Ransom Insurance: At an Inflection Point,” a 2015 report by Cognizant, said the KRE market will be a $12.4 billion opportunity by 2019. Major insurers include AIG, Travelers, Hiscox and Chubb.

Cognizant noted, however, that insurers are grappling with challenges in underwriting, claims adjudication and loss control.

One issue that falls into a gray legal area is that under U.S. law, it is illegal for organizations or individuals to provide “material support or resources” to terrorists, which could be interpreted to cover ransom payments if a kidnapping is committed by a group the U.S. Department of State considers a terrorist organization.

In June 2015, President Obama said in a statement that the federal government would work closer with families to resolve hostage situations with a dedicated coordinator.

“What you’re buying is access to a very experienced global security network that has experience and familiarity in dealing with situations that most clients have and never will encounter.” — Dan Burns, president and CEO, Pro Financial Services

He reaffirmed that the government would not make ransom payments to terrorist groups, but left the door open for families to proceed without fear of government prosecution.

“In particular, I want to point out that no family of an American hostage has ever been prosecuted for paying ransom for the return of their loved ones. The last thing that we should ever do is add to a family’s pain with threats like that,” said Obama.

Neither the U.S. nor the Canadian government has ever prosecuted individuals or companies for paying ransom.

Brianna Guenther, an attorney at Burnet, Duckworth & Palmer law firm in Calgary, Alberta, said there is no definitive case law on when or if an insurance company can legally reimburse an insured for a ransom payment to a terrorist organization, although arguably there are statutes that could prohibit it.

“Based on past practice, if you end up paying to get someone back, it doesn’t seem likely that they would go after and prosecute you. But they still do have laws that give them the power to,” Guenther said.

The global legal environment isn’t any clearer. Since 2014, the U.N. Security Council has been urging countries to bar the payment of ransoms.

In November 2014, the U.K.’s Counter-Terrorism and Security Act banned the payment of ransoms by insurers. That affects all KRE policies written in the U.K.

Peter James, account executive in the global organizations division at Clements Worldwide, noted that all KRE policies only cover ransom payments on a reimbursement basis.

Evolving Criminal Tactics

KRE policies are also adapting to keep pace with evolving strategies including hoax “virtual kidnappings” and “virtual extortion.”

The Arthur J. Gallagher report identified virtual kidnapping as a “significant trend” that is increasing due to availability of data and the low cost of the crime.

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The report said that many KRE policies offer coverage for virtual kidnapping without additional endorsements.

Regardless of how these schemes use technology, Arehart of Chubb said, a KRE policy provides value.

In most cases, risk consultants can evaluate and rule out virtual kidnappings with a proof of life evaluation, he said. A properly constructed KRE policy can also respond to some ransomware events where a criminal demands money or threatens to destroy files.

“A KRE policy can really shine when it’s less about the virus coming into the system and more about the human extortionist using a computer to get information,” Arehart said.

“We’re seeing more companies carry these policies out of a sense of duty or care,” Burns of Pro Financial said. “You need to do right by your employees and having this type of coverage in place is pretty important for them.” &

Craig Guillot is a writer and photographer, based in New Orleans. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Liability

Fresh Worries for Boards of Directors

New cyber security regulations increase exposure for directors and officers at financial institutions.
By: | June 1, 2017 • 6 min read

Boards of directors could face a fresh wave of directors and officers (D&O) claims following the introduction of tough new cybersecurity rules for financial institutions by The New York State Department of Financial Services (DFS).

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Prompted by recent high profile cyber attacks on JPMorgan Chase, Sony, Target, and others, the state regulations are the first of their kind and went into effect on March 1.

The new rules require banks, insurers and other financial institutions to establish an enterprise-wide cybersecurity program and adopt a written policy that must be reviewed by the board and approved by a senior officer annually.

The regulation also requires the more than 3,000 financial services firms operating in the state to appoint a chief information security officer to oversee the program, to report possible breaches within 72 hours, and to ensure that third-party vendors meet the new standards.

Companies will have until September 1 to comply with most of the new requirements, and beginning February 15, 2018, they will have to submit an annual certification of compliance.

The responsibility for cybersecurity will now fall squarely on the board and senior management actively overseeing the entity’s overall program. Some experts fear that the D&O insurance market is far from prepared to absorb this risk.

“The new rules could raise compliance risks for financial institutions and, in turn, premiums and loss potential for D&O insurance underwriters,” warned Fitch Ratings in a statement. “If management and directors of financial institutions that experience future cyber incidents are subsequently found to be noncompliant with the New York regulations, then they will be more exposed to litigation that would be covered under professional liability policies.”

D&O Challenge

Judy Selby, managing director in BDO Consulting’s technology advisory services practice, said that while many directors and officers rely on a CISO to deal with cybersecurity, under the new rules the buck stops with the board.

“The common refrain I hear from directors and officers is ‘we have a great IT guy or CIO,’ and while it’s important to have them in place, as the board, they are ultimately responsible for cybersecurity oversight,” she said.

William Kelly, senior vice president, underwriting, Argo Pro

William Kelly, senior vice president, underwriting at Argo Pro, said that unknown cyber threats, untested policy language and developing case laws would all make it more difficult for the D&O market to respond accurately to any such new claims.

“Insurers will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure,” he said.

Going forward, said Larry Hamilton, partner at Mayer Brown, D&O underwriters also need to scrutinize a company’s compliance with the regulations.

“To the extent that this risk was not adequately taken into account in the first place in the underwriting of in-force D&O policies, there could be unanticipated additional exposure for the D&O insurers,” he said.

Michelle Lopilato, Hub International’s director of cyber and technology solutions, added that some carriers may offer more coverage, while others may pull back.

“How the markets react will evolve as we see how involved the department becomes in investigating and fining financial institutions for noncompliance and its result on the balance sheet and dividends,” she said.

Christopher Keegan, senior managing director at Beecher Carlson, said that by setting a benchmark, the new rules would make it easier for claimants to make a case that the company had been negligent.

“If stock prices drop, then this makes it easier for class action lawyers to make their cases in D&O situations,” he said. “As a result, D&O carriers may see an uptick in cases against their insureds and an easier path for plaintiffs to show that the company did not meet its duty of care.”

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One area that regulators and plaintiffs might seize upon is the certification compliance requirement, according to Rob Yellen, executive vice president, D&O and fiduciary liability product leader, FINEX at Willis Towers Watson.

“A mere inaccuracy in a certification could result in criminal enforcement, in which case it would then become a boardroom issue,” he said.

A big grey area, however, said Shiraz Saeed, national practice leader for cyber risk at Starr Companies, is determining if a violation is a cyber or management liability issue in the first place.

“The complication arises when a company only has D&O coverage, but it doesn’t have a cyber policy and then they have to try and push all the claims down the D&O route, irrespective of their nature,” he said.

“Insurers, on their part, will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure.” — William Kelly, senior vice president, underwriting, Argo Pro

Jim McCue, managing director at Aon’s financial services group, said many small and mid-size businesses may struggle to comply with the new rules in time.

“It’s going to be a steep learning curve and a lot of work in terms of preparedness and the implementation of a highly detailed cyber security program, risk assessment and response plan, all by September 2017,” he said.

The new regulation also has the potential to impact third parties including accounting, law, IT and even maintenance and repair firms who have access to a company’s information systems and personal data, said Keegan.

“That can include everyone from IT vendors to the people who maintain the building’s air conditioning,” he said.

New Models

Others have followed New York’s lead, with similar regulations being considered across federal, state and non-governmental regulators.

The National Association of Insurance Commissioners’ Cyber-security Taskforce has proposed an insurance data security model law that establishes exclusive standards for data security and investigation, and notification of a breach of data security for insurance providers.

Once enacted, each state would be free to adopt the new law, however, “our main concern is if regulators in different states start to adopt different standards from each other,” said Alex Hageli, director, personal lines policy at the Property Casualty Insurers Association of America.

“It would only serve to make compliance harder, increase the cost of burden on companies, and at the end of the day it doesn’t really help anybody.”

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Richard Morris, partner at law firm Herrick, Feinstein LLP, said companies need to review their current cybersecurity program with their chief technology officer or IT provider.

“Companies should assess whether their current technology budget is adequate and consider what investments will be required in 2017 to keep up with regulatory and market expectations,” he said. “They should also review and assess the adequacy of insurance policies with respect to coverages, deductibles and other limitations.”

Adam Hamm, former NAIC chair and MD of Protiviti’s risk and compliance practice, added: “With New York’s new cyber regulation, this is a sea change from where we were a couple of years ago and it’s soon going to become the new norm for regulating cyber security.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]