South-Western College Publishing - Economics  
Do YOU Need Kidnapping Insurance?
Topic Utility and consumer choice
Key Words kidnapping, ransom, insurance.
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Reference ID: A149997288

News Story After Charles and Anne Lindbergh's baby was kidnapped in 1932, some insurance companies began selling "kidnap, ransom and extortion (K&R)" insurance to individuals and corporations. Such policies cover ransom and related costs, counseling, family travel costs, death benefits and lost wages. Sales of such policies are on the rise.

After the tragic events of September 11, 2001, K&R policy sales increased significantly. In fact, many insurance industry analysts suggest that changes in the number of policies sold can be tied directly to current events. Firms that engage in global trade seek this type of protection for their workers in the event that their expatriate employees are kidnapped by revolutionary dissidents or by common criminals. Policy costs vary: Small firms may pay $500 annually for $1 million in protection; larger companies may pay $50,000 for $25 million in protection.

One really interesting result of these policies is not that they reduce the probability of kidnapping; they don't. But this insurance does reduce the probability that you will be killed by your kidnappers for failing to pay the ransom. At the same time, common knowledge that you are covered by such a policy can be inherently dangerous; some insurance companies forbid their clients to discuss their policies. They fear that people will be kidnapped because potential kidnappers know that their victims are covered by K&R insurance.

Discussion Questions:
1. What do you think happened to the cost of K&R insurance paid by corporations seeking coverage in the last five years? Why?
2. What kinds of people would be more likely to purchase such insurance? Why?
3. Does the availability of K&R insurance create incentives to take more risks in situations where kidnapping may be a possibility? Why or why not?
Multiple Choice/True False Questions:
1. If the probability of being kidnapped was 0.001 for a ransom of $1,000,000, how much would a risk-neutral individual be willing to pay for insurance?

  1. $0
  2. $1,000
  3. $100,000
  4. $1,000,000
2. True/False. The more risk averse individuals are, the more they would be willing to pay for insurance.

3. What type of person would be willing to pay $1,500 dollars for $1,000,000 in K&R insurance, if the probability of being kidnapped was 0.001?
  1. Risk-averse
  2. Risk-neutral
  3. Risk-seeking
  4. None of the above
Source "A King's Ransom." The Economist. August 24, 2006.
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