Governing kidnap for ransom: Lloyd's as a “private regime”

Abstract

Kidnap for ransom raises significant governance challenges. In the absence of formal regulation and enforcement, insurers have created an effective private governance regime to facilitate smooth commercial resolutions. Controlling ransoms is paramount: “supernormal” profits for kidnappers create kidnapping booms and undermine the market for insurance. Ransom control requires cooperation, but there are high transactions costs in enforcing a collusive agreement. The Coasean prediction is that a single firm will form to internalize the externalities arising from lax insurance and mismanaged ransom negotiations—or a government must order the market. There is indeed a single source of kidnap insurance: Lloyd's of London. Yet, within the Lloyd's market several insurers compete for business. Lloyd's is a club providing private governance: Its members issue standard contracts, follow the same regime for kidnap resolution, and exchange information to stabilize ransoms. Lloyd's, therefore, combines aspects of Coase's “single firm” and “government” solution to the externalities problem.

Governing criminal markets: The role of private insurers in kidnap for ransom

“…Finally, Lloyd's of London, where almost all kidnap for ransom insurance is underwritten, can close member syndicates that destabilize the market (Shortland, 2016). A credible threat of sanctions ensures compliance by customers and competitors and incentivises experts to provide high-quality services.…”

“…Insurers do not want to interact with (organized) criminals. Globally, fewer than 20 insurers routinely underwrite and reinsure kidnap for ransom, all of which maintain syndicates at Lloyd's of London (Shortland, 2016). However, polycentricity goes beyond "optics."…”

“…However, the Lloyd's Corporation can close any syndicate that acts in contravention of the market's interest (Shortland, 2016). If customers are suspected of a breach of contract or fraud, reimbursement is withheld and the case is disputed in court.…”

“…Yet, abductions of members of this highrisk group are surprisingly rare and the vast majority of hostages returns safely and quickly for remarkably low ransoms (Bankrate, 2012;Control Risks, 2016;Lobo-Guerrero, 2007;Shortland, 2016). Shortland (2016) explored how special risk insurers at Lloyd's of London order the trade in hostages. This article argues that insurers have created a complex governance architecture to limit and order kidnap for ransom and thereby make it insurable.…”

“…Private firms have therefore created a plethora of norms, institutions, and regimes to fill this governance vacuum (Cutler, Haufler, & Porter, 1999;Jakobi, 2015;Stringham, 2015). Apart from Shortland (2016), no attention has been paid to the role of insurers in ordering the international criminal activities against which they insure. The focus has been on the interaction between insurers and governments-particularly regarding what is "insurable" (Haufler, 1997)-and insurers and their customers (Heimer, 1985;Lobo-Guerrero, 2007).…”