No Sudden Moves in K&R Market

Large and small companies all over the world have been purchasing the coverage for years as they invest and send employees to countries where there is a high risk of kidnap or extortion, Mr. Harrison said.

"Most Fortune 500 companies and most major financial institutions purchase the coverage," stated Maureen Richmond, senior vice president of the global, financial and executive risks practice of the Willis Group in New York. She added that she is not seeing "any new people looking for the coverage."

But Barry Mansour, Chubb vice president and underwriting manager for kidnap, ransom and extortion in Simsbury, Conn., said that the environment for K&R coverage is changing.

He explained that the last several years have seen kidnappings increase around the globe. "It continues to be a problem in Latin America, [including] Colombia and Mexico, and it's a growing problem in the Philippines and Indonesia," he noted.

Mr. Mansour also believes that the terrorist attacks of Sept. 11 made many American companies realize "that the Israeli-Palestinian conflict and terrorism abroad can come home to roost on American soil."

Unlike Willis, Chubb has been seeing many new customers, a phenomenon that will likely continue "especially if the State Department continues to put out advisories," he said. He believes that these travel advisories help keep Chubb's customers thinking about employee security and about being prepared for incidents both domestically and abroad, he stated.

Aon's Mr. Harrison said that to the extent there has been any noticeable increase in interest and demand for K&R products, it has come not from companies, but from "wealthy, high-profile peoplewho travel," he said.

Keith Thomas, vice president, corporate markets for Zurich North America, based in New York, noted that K&R coverage "used to be a sleepy product to a certain extent for a lot of buyers." But now it has "taken a larger place in the insurance renewal process, certainly for clients with a lot of travel exposure," he continued.

In the view of Ms. Richmond, underwriters have used the events of Sept. 11 "as a catalyst to secure more rate."

In fact, all of the experts interviewed for this article agreed that premiums for K&R coverage are rising.

Mr. Thomas stressed that the increases are "not necessarily in line" with those seen in the directors and officers liability line. "But these [K&R] premiums tend to start for the lesser-hazard types of companies at much lower bases," he pointed out.

Ms. Richmond added that after Sept. 11, the profits of K&R insurers underwent some erosion. As a result, she said, "there is a more conservative underwriting approach."

There is evidence of this more conservative approach in the way insurers are starting to manage limits. While some customers, in the past, might have enjoyed limits of $25 million to $50 million, Mr. Thomas said, they will now see some paring back of those limits, particularly "the higher-risk types of companies."

Mr. Harrison also noted that some insurers "have sublimited the losses in certain countries" that represent higher risks. (A sublimit is a smaller limit of coverage for a specified type of loss.)

Insurers also may require the training for all travelers going to high-risk countries or for current senior employees located in those countries, he added.

Other changes noted by Willis' Ms. Richmond involve the difficulty in or outright unavailability of some of the ancillary coverages such as accidental death and dismemberment and, of course, terrorism.

Ms. Richmond, as well as the other persons interviewed for this article, stated that the K&R policies offered by the various carriers are essentially standard. She said that along with the core policy–which provides for the reimbursement of a policyholder for the amount of ransom or extortion paid–insurers also offer extensions such as for business interruption, accidental death and dismemberment, and emergency political repatriation.

Zurich's Mr. Thomas added that most insurers are aligned with a security firm that provides consultation services to the client. The firm might also negotiate with kidnappers or extortionists, he said.

These services are usually outside the insurance contract, Mr. Thomas said, but they give clients access to security expertise. "That's really what the client is buying at the end of the day," he noted.

Similarly, Chubb's Mr. Mansour believes that recent events "have brought to light the value of the [K&R insurance] product and how we can assist our customers in assessing their risk and in managing their way through a crisis."

Aon's Mr. Harrison noted that in the last two years or so the profits in K&R insurance were "very, very slim" due to competition driving the rates down.

But this has been changing as insurance companies increase rates, particularly in certain high-risk areas, Mr. Harrison stated.

He was unable to state an average premium rise because the increase depends on the country and underwriter involved. "But certainly in Colombia or Mexico, if you have a large riskyou would see larger increases than you would in lower-risk countries," Mr. Harrison said.

Mr. Thomas is convinced that insurers can still make money with K&R insurance, particularly now that they are underwriting more carefully than in the past and are looking for much more detail on foreign travel and the operations of insureds.

K&R coverage is available through monoline policies or as part of other policies, such as D&O liability or fiduciary liability policies, the interviewees all said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, June 17, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.