Two terror-related rule changes emanating from the UK have put corporate property owners and those using London’s kidnap and ransom market on notice
With recent events in Paris serving as a fresh reminder that we are sometimes forced to adapt to terror threats, developments in the UK provide two new examples of this dynamic in progress.
Since 1993 the UK has had a terrorism fund, Pool Re, to cover major incidents and is also the largest market for kidnap and ransom (K&R) insurance in the world.
So, when two announcements happened within days of each other at the end of last year potentially affecting what Pool Re costs and the rules governing the K&R market’s ability to pay ransoms to proscribed organisations, corporate risk managers were forced to sit up and take notice.
In mid-November 2014, Pool Re announced it would be ceding a massively increased amount of its premium to the Treasury, jumping from 10% pa to about 50% pa in return for a continued guarantee by Whitehall.
London’s property market in particular has some of the highest penetration by overseas investors in the world. The value of portfolios held by overseas owners more than doubled, up by 129%, in the past decade to £94bn, according to the Property Industry Alliance, so the problem is far from a domestic issue alone.
Premiums could rise
It is not clear if the increased levy is merely part of a general revenue-raising campaign or is representative of a more specific concern about the heightened long-term risk of significant terrorist attacks against commercial property. However, if the latter is true then questions remain as to whether UK property insurers will be expected to increase the pricing of their conventional cover.
Property owners in business sectors such as hotels and retail are understandably concerned and brokers, including Marsh, have immediately stepped in with new terrorism facilities, suggesting that the Pool Re option may end up being too expensive. The starting gun has certainly been fired by the broking community and corporate risk managers may look at the Pool Re increase as a reason to consider an alternative, more flexible option.
What is Pool Re?
Opened after the 1992 Baltic Exchange bombing prompted commercial reinsurers to withdraw cover, this mutual fund for terrorism risks is guaranteed by the UK government and has amassed a £5.5bn fund in the past 20 years.
The war on terror
One topic on which the government does not wish to appear flexible, is the risk posed by the militant group ISIS. In the second of our terror-related issues, London’s place as the pre-eminent market for kidnap and ransom is certainly being called into question.
On 26 November 2014, home secretary Theresa May cited UN estimates that ransom payments had raised up to £28m for militant group ISIS in the past 12 months, when she announced plans to ban them with amendments to the Counter Terrorism and Security Bill.
The K&R market has existed since the much-fabled kidnapping and murder of US aviator Charles Lindbergh’s 20 month-old son by a German ex-convict in 1932. The insurance policy was created at Lloyd’s in response and has since developed into an essential service for many companies that put their employees into harm’s way.
However, the fact that ransoms were paid to undesirables as a matter of course frequently rankled policymakers. The issue has often been challenged by the UK government, in particular by prime minister Margaret Thatcher at the height of hostilities in Northern Ireland.
Fast-forward 30 or more years and the bill amendments that will be inserted into the Terrorism Act 2000 if passed, present a potential challenge to the established order and highlight the pivotal role of response consultants (namely, hostage negotiators).
K&R: the nuts and bolts
K&R insurance normally covers against losses related to kidnap incidents, particularly ransoms, lost earnings and the costs for an outsourced expert agency whose role is to handle the case and advise the policyholder on the negotiations. However, the indemnification is paid out to the policyholders retrospectively, only after the hostage situation is over. With such an approach insurers, on the one hand, prevent ransom payments spiralling out of control while remaining in the grey area of section 17 of the Act.
Kidnap & ransom v kidnap for ransom?
The proposed offence aimed at insurers provides:
17A Insurance against payments made in response to terrorist demands
(1) The insurer under an insurance contract commits an offence if –
(A) the insurer makes a payment under the contract or purportedly under it,
(B) the payment is made in respect of any money or other property that has been or is to be, handed over in response to a demand made wholly or partly for the purposes of terrorism, and
(C) the insurer or the person authorising the payment on the insurer’s behalf knows or has reasonably cause to suspect that the money or other property has been, or is to be, handed over in response to such a demand.
The new amendments
Under the new section 17A, it is now clear that the insurer commits an offence if “it knows or has reasonable cause to suspect” that payments will be handed over in response to a demand made for the benefit of a proscribed organisation.
The question for its response consultants will therefore be how much notice they can give their assureds as to whom they are dealing with. Although, historically, negotiations for release could be made without resorting to identifying the culprit, now the insurer will have to make sure that it is not engaging with a terrorist on Whitehall’s blacklist.
As of 28 November 2014, 74 international terrorist organisations were proscribed under the Act. However, a large number of organisations associated with kidnappings are not on the list, which, with a few exceptions, focus on organisations from Northern Ireland and those operating in the MENASA Region (Middle East, North Africa and South Asia). Of course, kidnappings have increased in the Middle East in recent years, but worldwide the most kidnappings are still taking place in Central and South America and Central and Southern Africa. Although the new law targets only proscribed organisations from the MENASA region, insurers have to remain attentive since the home secretary may at any time add organisations to the list.
One element that hopefully will remain protected are the fees and costs that hostage negotiators charge; this is a critical part of the industry’s service to a market believed to number at least 80% of the Fortune 500 as its clientele.
K&R still valid
From those companies’ perspectives, K&R is certainly still a valid class of business; there should not be any effect on pricing as the underlying risk has not changed.
However, if your policy is led by insurers domiciled in the UK, those insurers may be less likely to indemnify kidnappings where the culprits may be loosely associated with a proscribed group. Equivalent insurers in other territories may be less restrained and some insureds may therefore elect to have their business placed outside the UK, particularly if they have workers who are frequently operating in the MENASA region.
It is important to understand that corporates are also not allowed to fund payments. Where companies from a risk management perspective want to ensure they are able to lawfully pay ransom demands to release their employees, they need to consider in which jurisdictions they should be located so as to lawfully pay ransoms. On a practical level, they need to review with their response companies what protocols they use to identify or qualify the identity of kidnappers who allege, possibly incorrectly, that they are affiliated to terror groups.
Simon Kilgour is a partner in the insurance and reinsurance team at CMS