In the developing world, kidnapping is relatively common, and a market for kidnap insurance has arisen in response. We provide a model that allows us to analyze how kidnap insurance affects the interaction between the kidnapper and the victim’s family when both are self-interested and have complete knowledge. We find that a market for kidnap insurance can be supported because it benefits a risk-averse family, as long as the introduction of insurance does not increase the risk of kidnapping too much. Families should fully insure if purchasing insurance does not increase the probability of kidnapping, and partially insure otherwise. Kidnapping insurance allows families to redeem hostages from kidnappers with a greater willingness to kill, which may reduce the number of kidnapping fatalities as long as the insurance does not increase the risk of kidnapping too much.
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The Lloyd’s of London syndicate was the first to offer kidnap and ransom insurance after the famous kidnapping and death of Charles Lindbergh Jr. in the United States in 1932 (Clendenin 2006–2007: 750).
If the victim’s family is advised by an insurance company, reputational effects of the insurance company vis-à-vis potential clients and vis-à-vis the current and future kidnappers may be of importance. We do not discuss reputational effects of this sort. We leave for future work the misalignment of incentives that may exist between an insurance company and the family when the insurance company represents the family in negotiations, for this it seems requires the introduction of imperfect information.
In this sense, our model is less general than that of Lapan and Sandler (1988). We leave to future research the analysis of the implications of kidnap insurance in a game of imperfect information.
Our findings are related to Leeson and Nowrasteh (2011), who argue that in the 18th and 19th century Coasean “plunder contracts” between maritime privateers and their merchant victims reduced the expected losses from plundering. Similarly, kidnap insurance may be welfare-increasing in a world in which kidnappings occur and families enter negotiations with kidnappers.
Selten (1977: 150) introduced the idea that K does not necessarily contemplate kidnapping, but contemplates it only with probability P. Assuming that P may be impacted by the amount of insurance coverage purchased is an extension of Selten’s model. A news announcement of a ransom payment being paid with insurance, for example, might increase the likelihood that kidnapping is contemplated.
This is the assumption made by both Selten (1977) and Crettez and Deloche (2009). We have explored introducing a different probability of capture when the hostage is killed, which is intuitively appealing. However, we found that adding this extra complication to the model does not generate significant additional insight, so we also adopt the simpler assumption of an exogenous probability q that K is caught.
In contrast to Lapan and Sandler (1988), we thus implicitly allow the kidnapper to be concerned about his reputation but not that of the party with which he negotiates, in our case the family.
Crettez and Deloche (2009) analyze the Aldo Moro case where the positive net benefit of killing was the perceived possibility of instigating a revolution. In a dynamic kidnapping model, the positive net benefit of killing could be greater ransom payments received from future kidnappings, but we do not pursue a dynamic model here.
For the derivation of the family’s marginal utility of insurance, please consult the online Appendix I available at http://www.alexander-fink.com.
For a demonstration that if an insurance market arises, there is an optimal level of insurance between 0 and C, see online Appendix II available at http://www.alexander-fink.com.
A comparison of the coverage sections of kidnap and ransom insurance policies by CHARTIS, a brand of the U.S. insurance company AIG, for the U.S. market and for the British market is telling. The policy for the U.S. market includes a statement that frees the insurer of liability if the insured person or a person authorized by the insured person to have custody of the ransom engages in a criminal act. That statement is followed immediately by an exemption stating that the liability exclusion does not apply if local authorities declared ransom payments illegal. A policy for the British market appears to reveal the effect of the informal agreement between the British government and insurers. There is no mention in the British policy that the exclusion does not apply if local authorities declare ransom payments illegal.
Before the law of 1991 was passed representatives of the state’s enforcement agencies were allowed to freeze the assets of the family of a kidnap victim. Action was at the officials’ discretion. The 1991 law made temporary asset-seizure mandatory (Detotto et al. 2012: 12).
Other factors may have been responsible for the decline in kidnapping in Italy. The Red Brigades, who had kidnapped Italy’s former Prime Minister Aldo Moro (Crettez and Deloche 2009) and were responsible for numerous kidnappings, dissolved in the 1980s. Auerbach (1998: 249–250) contends that, in addition, it became more difficult for members of the mafia in Calabria to conceal kidnapping victims as their territories were more frequently searched by the police, leading Auerbach to conclude that “it appeared that what was really curtailing kidnappings in Italy were other phenomena that just happened to coincide with the passage of the law.”
We are indebted to one of the referees to direct our attention to this possibility.
Similarly, it is possible that previous ‘successful’ kidnappings have a positive effect on the ‘price’ of kidnappings, which can in our model be understood as the kidnapper’s greater willingness to kill. It is in a sense his reservation price. The higher this reservation price is the less likely it is that the family can redeem the hostage. The possible effect of previous ‘successful’ kidnappings on the kidnapper’s willingness to kill would thus also leave less room for kidnap insurance.
For example, the insurance company might instruct the family on preventative measures.
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We thank Andreas Hoffmann, Marek Hudik, Benjamin Larin, the editors, and two anonymous reviewers for helpful comments and suggestions on earlier drafts of the paper. Alexander Fink gratefully acknowledges the support of the International Center for Economic Research (ICER).
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Fink, A., Pingle, M. Kidnap insurance and its impact on kidnapping outcomes. Public Choice 160, 481–499 (2014). https://doi.org/10.1007/s11127-013-0108-4
- Unintended consequences
- Fatalities from kidnappings