Ronald Coase and Hijack for Ransom: Why “all Hulls End Up with Lloyds”

Abstract: Kidnap for ransom (KfR) is a growing global business. Ransoming is a one-off trade between a criminal organisation and a (random) victim’s representatives. Yet prices are often predictable and transactions appear well governed. Who provides the governance? Coase predicted that when there are significant externalities and high transactions costs, the most efficient market structure is a single firm. This firm internalises the externalities and orders the market. We apply this insight to the market for KfR insurance. Quick payment of premium ransoms generates ransom inflation and new market entry by kidnappers. This in turn raises uncertainty and costs across the sector, but contracting against “botched” negotiations would untenably compromise client confidentiality. We find that the vast majority of KfR insurance is indeed underwritten by and reinsured through Lloyds of London. Through reinsuring the monopolist acquires all contracts which confer externalities on each other. Within Lloyds several syndicates compete for business, but follow the same protocol for KfR resolution and exchange information to order and stabilise the market. We observe price wars when new entrants cut corners on KfR resolution. The expected externalities from botched negotiations lead KfR insurers to offer attractive contracts to corporates which might otherwise self-insure, as well as pro bono advice to uninsured parties. We conclude with policy implications regarding government involvement in KfR.