US Navy caught prisoners by Iran's National Guard
US Navy caught prisoners by Iran's National Guard

A political scandal in the United States is shining a spotlight on an obscure and morally-questionable sector of the insurance market: kidnap and ransom coverage.

Republican presidential nominee Donald Trump and other critics are accusing the Obama administration of something that is everyday business at some insurance companies: paying a ransom. Critics are focussing on the release of $400 million (£300.30 million) in cash to Iran’s government by the US State Department shortly after American prisoners were released in that nation.

The administration claims that the cash was released to settle an old dispute between the two governments. Trump and others labelled it a ransom – a practice that is a violation of official US policy.

Even though ransoms are politically controversial they are business as usual for some of the world’s largest corporations. Havocscope estimated that around $1.5 billion (£1.14 billion) in ransom money is paid out each year, making kidnapping a very lucrative crime in some places. Kidnappers in Mexico raked in an estimated $50 million in ransoms in 2012.

Kidnapping is growing in popularity because the average ransom demand in 2012 was $2 million (£1.52 million). That makes the crime a very attractive proposition for some of the world’s worst people – including terrorists.

The US Treasury estimated that Al Qaeda collected around $125 million (£94.83 million) in ransoms between 2008 and 2013. Much of that money came from the taxpayers of various nations; France alone paid the terrorists $58.1 million to free some of its citizens from custody during that period.

Kidnap & ransom insurance is big business

An even greater source of ransoms is some of the world’s largest insurers; including AIG which offers Kidnap, Ransom & Extortion insurance. AIG even has a web page selling such policies to high-net worth individuals and corporations. Some of the policies available include theft, disappearance and hostage coverage and health insurance to cover medical expenses.

AIG currently offers up to $50 million worth of Kidnap, Ransom & Extortion insurance to its policyholder. Those covered get access to the services of NYA International, a global risk and crisis consultancy. NYA’s employees include “crisis response consultants” experts recruited from the military, law enforcement and intelligence agencies whose job is to respond to emergencies like kidnapping.

It is easy to see why companies like AIG are offering kidnap & ransom insurance. Battle Face estimated that the market for such coverage doubled between 2006 and 2011, rising from $250 million to $500 million (£379.32 million) in just five years.

Is the insurance industry financing terrorism

Even though it is profitable, kidnap and ransom insurance creates serious ethical and legal risks for insurers. On 25 May 2015, British Parliament passed a bill that makes it illegal for British insurance companies and residents of the UK to pay ransoms to terrorists.

White man captured by terrorist group
White man captured by terrorist group

The House of Commons action was prompted by a United Nations report that estimated that ISIS collected between $35 and $45 million in ransoms in 2014. The fear is that terrorists will use this money to fund operations such as attacks on civilian populations.

Interestingly enough this law seems to make a distinction between ransoms paid to criminals, and those paid to terrorists. That means it might still be legal for a British insurer to pay a ransom to a Mexican kidnap gang, but not to pay one to the IRA or ISIS.

A potential risk to insurers is that terrorists will pretend to be criminals in order to collect ransom money. To get around laws against paying terrorists, all ISIS fighters would have to do is not mention is their true identity in a ransom demand.

What is a “Terrorist?”

Another problem for insurers is the definition of “terrorist”, does the term only apply to organizations or individuals with political or religious agendas such as ISIS, or to criminal gangs that employ similar tactics. Mexican drug cartels; which have no agenda beyond making money, use many of the same terror tactics as ISIS.

An even murkier grey area; as President Obama discovered, is the payment of ransom to governments. Since the Iranian government is legally recognized it is not a terrorist organization. Yet that regime like many governments; including those in the USA and the UK, has sponsored terrorism for strategic reasons in the past.

To complicate matters some terrorist organizations, including ISIS claim to be governments. An insurer might try to get around laws against paying ransoms to terrorists by having a representative of a government such as an intelligence agent or a police officer make the payment.

Liability & PR risks from kidnap & ransom insurance

If such a payment were made public, serious legal problems would arise. Including the obvious question of criminal liability, who would face prosecution the company itself, its executives or the government agency involved and its employees?

Another legal risk that issuers of kidnap and ransom insurance have to consider is liability for damage done by terrorists. If terrorists used the ransom to purchase weapons, ammunition or explosives, would the insurer be liable for the death and destruction they caused?

A risk facing American insurers like AIG is the US court system. Under American law, attorneys have the right to file class action lawsuits on behalf of classes or groups of victims. That means a lawyer could sue AIG on behalf of all the victims of an organization like ISIS, if accusations of ransom payments were made.

A perhaps greater risk from ransom payments is that of bad publicity. The insurance industry might face the kind of intense criticism the Obama administration has received for the cash payment sent to Iran for paying ransoms. If the media or politicians learned of a large ransom payment to terrorists an insurance company might find itself facing a public relations nightmare.

The dilemmas created by kidnap and ransom insurance are an example of the complex risks that modern terrorism and crime pose to insurers. Even some of the insurance policies designed to cover the risks of terrorism, create serious risks for the insurers.

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