Governing Kidnap for Ransom

Kidnap insurance depends on orderly and stable markets for protection and hostages. The governance system for these three interlinked markets is best described as polycentric—i.e. consisting of multiple decision-making centres. Agents employed by the insurers are motivated and disciplined through financial incentives and peer monitoring. However, the system also needs an effective and completely confidential enforcement mechanism that compels all insurers to comply with the market-stabilizing norms and protocols. This is achieved through club governance. Insurers must be members of the Lloyd’s club to access crucial market information to operate profitably: losing club membership is the ultimate sanction in this market. We thus observe a polycentric system governed by a members’ club. Cases settled by outsiders threaten the stability of the system.