The UK government’s recently published Counter-Terrorism and Security Bill contains what the Home Secretary described as a ‘clarification’ for the kidnap insurance industry. Given that policies already exclude payments in breach of laws or sanctions, has the Bill provided clarification or has it added unnecessary complication?
One sector that was surprisingly ‘name-checked’ in the Home Secretary’s recent speech at RUSI prior to introducing the new Counter-Terrorism and Security Bill was the insurance industry. In what she described as a ‘clarification’, the Home Secretary said: ‘To put an end to uncertainty about insurance and reinsurance payments for kidnap and ransom, and to help prevent an important element of terrorist financing, the Bill will amend existing law to make sure UK-based insurance firms do not provide cover for the payment of terrorist ransoms.’
Why did the Home Secretary feel it necessary to clarify this matter? Although little statistical information is published in the world of kidnap for ransom (KfR) it is commonly estimated that there are 15,000-20,000 kidnap, extortion, and illegal detention events reported by the media each year. In reality there are certainly many more, as fear of publicity leads to the unreporting of as many as 70% of such events. Annual global ransom payments are very roughly estimated at US$500 million with most demands in the thousands or tens of thousands of dollars – few payments reach six figures. The vast majority of KfR cases occur in territories such as Mexico, unaffected by the terrorism that concerns the Home Secretary; only 2% of all kidnappings worldwide are committed by terrorist groups and few of those are covered by insurance. The large payments apparently made to terrorist groups for the release of foreign workers and tourists are almost certainly not reimbursed by insurance. Making ransom payments per se is not illegal in the UK. The Court of Appeal in the case of Masefield AG v Amlin Corporate Member ruled that the making of ransom payments, in this instance to pirates as the case concerned the Bunga Melati Dua, a tanker captured by Somali pirates whilst en route between Malaysia and Rotterdam, is not against English public policy and is therefore legal.
The first prominent case of KfR in the modern age occurred when the 20-month old baby son of pilot Charles Lindbergh was kidnapped in March 1932 from his nursery in the Lindbergh family home. The kidnapper left a ransom demand for US$50,000. After two months of negotiations and several payments, the baby was sadly later found dead. This act, as well as triggering changes in US Federal law, gave birth to the kidnap insurance business, an industry that has evolved over the past 80 years as kidnap and negotiation techniques have developed. Even if not illegal, the paying of ransoms is controversial. It is axiomatic that the payment of ransoms in response to kidnappings feeds further kidnappings with increased payment demands – in the past ten years payments have in some cases risen fifty-fold to reach US$10 million a head.
In the view of many KfR specialists, the main reason that ransom demands have increased so dramatically is government involvement. Insurers and negotiators are incentivised to minimise payouts by both obvious financial but also logistical imperatives. The larger the sum agreed, the more challenging payment becomes. Banks question multi-million cash withdrawals, and delivery to desolate locations is complex, time consuming, and expensive. Consider the recent case of Daniel Rye Ottosen, reportedly freed after payment of a ransom estimated at EUR 3.5 million, facilitated by the Danish government. For those working in the industry, payments in the ‘multiple millions’ must indicate the influence of governments. Once a government gets involved, operational barriers are removed, reducing the incentive to minimise payment amounts. Normally, at this point, the insurance company’s involvement ceases.
The draft ‘clarifying legislation’ issued by the UK government is viewed by some as ‘odd’ and unnecessary given the procedures that the industry already has in place to meet relevant counter-terror financing legislation. Leading KfR insurer Hiscox typified the industry view, noting that: ‘Our policies already exclude reimbursement for any illegally paid ransoms which, under current law, would include payments made to proscribed or terrorist organisations. This policy is in line with the UN’s position, which has prohibited the reimbursement or payment of ransoms to proscribed terrorist organisations for a considerable amount of time, and Hiscox, like the rest of the London market has and continues to operate under these parameters.’ Furthermore, policies typically include language excluding payments subject to sanctions or other breaches of applicable law, and to the extent an insurer has concerns about a particular claim, it will certainly seek ‘non-objection’ from government authorities before proceeding, providing the authorities with valuable intelligence. Many checks and balances already exist.
So will the government’s clarification help, or will it create confusion in a market that is only very rarely exposed to the sort of demand this clarification is intended to address and already seems to be well aware of its legal position? The Home Office impact assessment focuses on the potential economic loss to the UK insurance industry. At £60-160 million of gross written premium, this is minimal. More importantly, it is possible that just as banks have withdrawn financial services in high risk jurisdictions, insurance companies will decline cover requests in jurisdictions where terrorist groups may operate, leaving employees unprotected. Or this business will simply be driven away from the London-based market, depriving the authorities of the valuable intelligence insurance and response that companies provide.
 It should be noted that insurance payments are made on a ‘reimbursement basis,’ in other words the insurance covers the amount paid out (and associated expenses) not a predetermined sum.
Centre for Financial Crime and Security Studies