Kidnapping, both by criminal enterprises and terrorist groups, has waxed and waned many times across the world. To this day, the biggest confirmed ransom ever paid was $275 million (in today's dollars), to leftist guerillas in Argentina in 1975, for the release of Jorge Born, one of the executives at the grain exporter Bunge & Born.

The payment was noteworthy for several other reasons. First, like any good businessman, Born participated in the negotiations himself. And the haggling actually talked the kidnappers down from a much larger initial demand. The payment also marked the culmination of a massive bout of "ransom inflation" in Argentina: Over the preceding years, as the guerillas first began taking captives, each ransom demand that was quickly acceded to encouraged the kidnappers to make their next demand that much higher, setting off a crisis of more abductions and ever-increasing demands.

The episode also helped kickstart the modern incarnation of a strange corner of the international insurance market: kidnapping and ransom. ("K&R" for short.) The negotiating that Born did, rather than being seen as a terrible risk taken in a hostile situation, is now a standard part of the business. The goals, admittedly not always successful, are to both get the victims home alive, and to contain the kind of upward spiral of demands that bedeviled Argentina in the '70s.

A private market for insuring and dealing with kidnappings might sound, at first blush, like a terrible idea. A kidnapping is already a fraught situation; a mix of fear, greed, violence, and coercion that occurs outside the bounds of the law. And private insurers often have a reputation for being cold-blooded and predatory themselves. The average person could be forgiven for balking at the idea of combining the two.

Yet not only does a private market for insuring kidnappings and advising the negotiations exist — by all accounts it's quite effective. If you're the victim of a kidnapping where professional insurers and negotiators are involved, the chances that you'll come back alive are roughly 97.5 percent.

The K&R market consists of 20 or so firms, all operating out of Lloyd's of London, an international marketplace based in Britain, where insurance providers, clients, brokers and underwriters can all find one another. The K&R firms compete for business, and provide their clients with both insurance to backstop potential ransom payouts and consultants who help guide and strategize the actual negotiations with the kidnappers. While some wealthy individual families do occasionally buy the services of K&R providers, the vast majority of customers are companies insuring their employees who work in risky areas. Roughly three-fourths of Fortune 500 companies have some sort of policy, with total premiums reaching $250 to $300 million a year.

The inherent problems the K&R business has to overcome to operate effectively and humanely are enormous. For both the kidnappers and the family or company who are trying to get the victim home safely, the kidnapping and the ransom is a one-off event. On top of that, it obviously operates outside all the normal rules and incentives of lawful activity. That creates huge temptations for the kidnappers to cheat; to lie, manipulate, renege on their deals, refuse to return or even kill hostages, and so forth.

"The only way that kidnapping can work as well as it does is that the kidnappers understand that they're in a repeated business," Anja Shortland, an economist at King's College London, who's written a book on the K&R insurance market, explained to The Week. "They keep their promises this time and they treat the hostages well this time because they know that if they don't then their business will decline in the future."

That's where the private firms who provide the consulting and the insurance coverage come in: "It's a one-off transaction between the family and the kidnapper, but it's a repeated interaction for the insurance market," Shortland said.

That's only the beginning. To make the repeated interactions effective, the private firms need to be able to share information. They need to understand the attributes of the various kidnappers, they need to develop strategies that work, and they need to gather all that information and learn from one another. But they have to do it discreetly. It's not like the K&R insurance industry can have an annual public conference with seminars that discuss best practices. If the kidnappers know who's insured and who's not, they may run up their ransom demands accordingly. If they know what strategies the insurers employ, they may adapt. And since most of the time it's employers insuring employees, the employees also shouldn't know they've been insured — lest they behave more recklessly or divulge information to the kidnappers.

Here's where the involvement of Lloyd's becomes crucial. Lloyd's isn't an insurance provider itself, but an organized marketplace for the insurance industry. It sets rules and regulations and best practices for the insurers that participate, and it decides how much they need to charge in premiums and how much money they need to kick in to cover their potential risks. Lloyd's has been operating in some form since the late 1600s, and did a lot of its early work organizing insurance coverage for the burgeoning maritime shipping industry. Today, it's a marketplace for a vast array of insurance products across hundreds of countries. And some of those products are highly specialized: If you're a dance troupe that wants to insure its star dancers' legs, or a feature film production that wants to insure its lead actor's looks, for example, you probably get that through Lloyd's.

K&R is one of those little subfields of insurance coverage that grew up under the Lloyd's umbrella. It initially got started in 1932, in response to the kidnapping of Charles Lindbergh's infant son, and then really took off in the 1960s and 1970s. It's operated in its current form for roughly the last 40 years. In fact, there is literally a specific floor in a specific Lloyd's building in London where representatives of all the firms involved in K&R coverage work and congregate. They know one another, see each other across their desks, and get lunch together. They share knowledge, coordinate, and discuss cases, and all without publicly divulging secrets that kidnappers could benefit from. "You couldn’t think of a better setup in terms of discreetly exchanging relevant information," Shortland said.

Lloyd's also provides a form of quality control for the insurance firms themselves. Its rules for this particular field of insurance extend to the strategies and tactics K&R firms should use in helping kidnapping victims and in interacting with the kidnappers. Meanwhile, Lloyd's requirements for premiums and capital contributions create a barrier to enter the club: To effectively participate in the K&R market, an insurer needs to gain entry to that club, by both kicking in resources and following the rules.

That's important, because the people paying the kidnappers can suffer from temptation as much as the kidnappers themselves. As the formative experience in Argentina shows, there's a huge incentive to just cave immediately and give the ransomers what they want. But that encourages further kidnappings and higher demands. The Argentinian inflation convinced a lot of firms they couldn't just insure the ransoms; they needed to help guide negotiations by bringing in outside experts to consult with the companies and families as they interacted with the kidnappers. There's still unavoidable risk and unpredictability, but this brought a certain amount of structure to the process: Negotiators understand there's always some theatricality, haggling and going-through-the-motions needed to get to a final number. They also impose discipline on the people and companies who can be targets: To get coverage, or to lower your premiums, you have to go through a vetting process, and often put in place different security protocols to cut down the chance of a kidnapping to begin with.

Kidnappers can treat the ordeal as an organized business arrangement in response: They invest time and resources to keep their victims alive and in good health; they've been known to make accommodations for unusual medical needs, to write up codes of conduct, and even to provide receipts. The kidnappers themselves figure out that things will go better if they build a reputation for trustworthiness.

But the main goal is to prevent cost inflation. From Shortland's perspective, that makes sound moral sense as well as sound business sense: By controlling the ransom payouts, you minimize the profits kidnappers make from each ransom, and thus minimize the money they can pump into their next kidnapping, or whatever other scheme the criminal or terrorist group they're part of is working on. "If you left rich western families to negotiate these ransoms by themselves, they would probably do a lot more harm, and kidnapping would be a lot nastier, and more profitable for the kidnappers," Shortland said. "Once you're talking about multi-million dollar ransoms, then the people who can't afford it — they get killed, or they just rot for years and years."

Of course, only a small fraction of the $500 million to $1.5 billion paid in ransoms each year is done through the K&R market. There's a vast amount of "working-class" or "middle-class" kidnappings and ransoms that occur each year for small sums. But since these kidnappings tend to be local affairs, the need for trust and for repeated interactions between the same parties can get met naturally to a degree. For kidnappings as whole, including the ones not covered by the K&R market, the chances of a victim coming home alive are still around 90 percent. It's the very small percentage of kidnappings that involve foreigners and wealthier victims where the temptations of the one-off transaction can become really acute, and where K&R plays its role.

The economics world spends a lot of time debating the virtues of "big government" versus "the free market" in sweeping abstracts. What's interesting about the K&R market is how it scrambles these concepts. At first blush, you might view the success of the market as evidence for why government shouldn't interfere in private transactions. But the overall design of the Lloyd's marketplace actually provides a de facto governance structure. Competition under capitalism is really just a particular form of social cooperation, directed by collectively agreed-upon rules and norms. Once the insurance firms realized that the weird world of kidnapping and ransoms required some form of centrally and collectively enforced cooperation, they set about creating an institutional setup to do that.

The irony is, when actual governments get involved in kidnapping and ransom negotiations, Shortland found they tend to do poorly compared to the K&R firms — precisely because they don't have an overarching governance structure. There is no international body laying down rules and best practices for dealing with kidnappings that all national governments have to follow. Furthermore, a lot of kidnappings and ransoms are carried out by terrorists organizations, and international law tends to forbid negotiating with or paying them under any circumstances. Governments still do it, but they do it under the table, and they don't talk about it — so there's no chance to share experiences or learn. As a result, governments are more likely to cave to exorbitant demands, leading to ransom inflation that harms other people and other governments down the line.

"The French government doesn't really care about the costs that they inflict on the Swiss and the Germans and the Italians, et cetera, by paying a high ransom," Shortland, who has authored a paper on how the international community of governments could learn from the private K&R market, explained. "They just want the problem to go away. And that creates a fertile ground for ransom inflation."

In a sense, the private K&R market actually operates more under the heavy hand of governance than actual national governments do when they have to deal with kidnappings. And by all accounts, it's the private firms that have figured out the better approach.