Kidnapping is hard — because of problems of trust, problems of bargaining, and problems of execution — but there is a well-organized market for hostages:
The first principle that insurers adopt is that safe retrieval of hostages is paramount. The second guiding principle is that kidnapping cannot become too wildly profitable, for fear of further destabilization. In the language of economists, there must be no “supernormal profits.” If victims’ representatives quickly offer large ransoms, this information spreads like wildfire and triggers kidnapping booms. A good example is Somalia, where a few premium ransoms led to an explosion of piracy that could only be stopped by a costly military intervention.
Insurers have therefore created institutions to make sure that ransom offers meet kidnapper expectations and produce safe releases but that do not upset local criminal markets. Insured parties obtain immediate, free access to highly experienced crisis-response consultants in the event of a kidnapping. These consultants find out whether the person demanding the ransom actually holds a live hostage to bargain over, they advise on the appropriate negotiation strategy, and they reassure families when they inevitably receive dire threats of violence.
Because insurers can communicate outcomes confidentially, they can stabilize ransoms — as well as discipline rogue kidnappers. One kidnapper summarized this perception in the criminal community as “No one negotiates with a kidnapper who has a reputation for blowing his victims’ brains out.” Crisis responders also manage the ransom drop, removing a further obstacle to a successful conclusion. About 98 percent of insured criminal kidnapping victims are safely retrieved.
Of course, this “protocol” for ransom negotiations is costly. Tough bargaining takes time, imposing huge psychological costs on negotiators and on the victim’s family and tying up productive resources in firms. Experienced consultants are paid a substantial daily fee. It is very tempting to conclude negotiations early. Most of the cost of quick ransoms that are bigger than they ought to be is borne by future victims and their insurers, not the current victim’s stakeholders. An effective governance regime for kidnapping resolution therefore requires rules to prevent anyone’s taking shortcuts.
It would be impossible to prove beyond reasonable doubt that an insurer’s crisis responder deliberately cuts corners because ransoms are naturally variable. This makes it impossible for insurers to formally contract with each other and punish those who “overpay” kidnappers.
Insurers resolve this through an ingenious market structure. All kidnapping insurance is either written or reinsured at Lloyd’s of London. Within the Lloyd’s market, there are about 20 firms (or “syndicates”) competing for business. They all conduct resolutions according to clear rules. The Lloyd’s Corp. can exclude any syndicate that deviates from the established protocol and imposes costs on others. Outsiders do not have the necessary information to price kidnapping insurance correctly: Victims are very tight-lipped about their experiences to avoid attracting further criminal attention.
The private governance regime for resolving criminal kidnappings generally delivers low and stable ransoms and predictable numbers of kidnappings. Most kidnappings can be resolved for thousands or tens of thousands of dollars. This makes profitable kidnapping insurance possible. When the protocol fails, insurers sustain losses and must innovate to regain control.
The outcomes of privately governed “criminal” kidnappings (where private firms or individuals pay the ransoms) contrast starkly with those of “terrorist” kidnappings (where governments are asked to pay ransoms or to make concessions). Here, insurers are prevented by law from ordering the market, leaving governments in the firing line.
Governments struggle to contain ransoms, and they often end up making concessions to terrorists despite their public “no negotiation” commitments. Government negotiators have no obvious budget constraints. They often prioritize quick settlements over containing ransoms. Finally, there is no international regime for preventing spillovers to subsequent negotiations. Citizens of nations who refuse to negotiate with terrorists are often tortured or killed to raise the pressure in parallel negotiations. Multimillion dollar ransoms in terrorist cases are therefore not really surprising — and such settlements reliably trigger new kidnappings.