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• The kingdom requires it, consider something like Emissions Trading but the measurement was the number of reported bandit incidents in an area, and the kingdom would evoke fines on the insurance broker for an increase in his patrolled area. Problems: This has some unfortunate side effects of making it monetizable for insurance brokers to do bandit work in an area they want to edge out the competition, or even to spoof incidents, making the measurement of reported incidents unreliable. Furthermore, the value prospect of insurance brokering goes down because you are now paying your "hero bands" to police an area; which is bad cause the kingdom would need these brokers.
• Insured villages require one or more members of the band to be locally sourced. This speaks to the "don't soil your nest" principle. Problems: The locally sourced "hero" would need to be of upstanding character and capable fighting ability. This is a requirement something near a chivalric code, which may not be easy to find within the village's populous.
• The "hero band" is also responsible for freeing the area of bandits, protecting the kingdom, and general policing of the area. The insurance broker rolls that into the cost charged to villages, and is also subsidized by the kingdom with the money that would have otherwise gone to mustering or maintaining troops. Problems: "Hero bands" now perform all the primary functions of government; would there be an incentive for villages to pay tribute to the kingdom, why not just pay an insurance premium? Additionally, if "hero bands" replace the kingdoms standing troops the government is aiding the arming of militia; see also: https://en.wikipedia.org/wiki/Militia#Political_issues

• Insurance has always been about protecting the lives and property of individuals. This is a primary government responsibility. If the government is able to outsource some of it's workload by maintaining some direction over these "hero bands" the reduction in governmental responsibilities may pay for itself. In this scenario rather than internal affairs the government agent would take on a leader role of the "hero band." Problems: Having a singular government point of contact who's responsible for maintaining order in the area could easily devolve into an Extortion racket.
• Make another kingdom pay for it. The government could pick a village nearby a "hero band"'s operating area, which pays tribute to a different kingdom, and direct the "hero band" to require tribute from that village at threat of violence. Problems: This is going to escalate quickly. It'll easily devolve into war, or at least unauthorized skirmishes along the border (which will quickly become well defined.)

• The kingdom requires it, consider something like Emissions Trading but the measurement was the number of reported bandit incidents in an area, and the kingdom would evoke fines on the insurance broker for an increase in his patrolled area. Problems: This has some unfortunate side effects of making it monetizable for insurance brokers to do bandit work in an area they want to edge out the competition, or even to spoof incidents, making the measurement of reported incidents unreliable. Furthermore, the value prospect of insurance brokering goes down because you are now paying your "hero bands" to police an area; which is bad cause the kingdom would need these brokers.
• Insured villages require one or more members of the band to be locally sourced. This speaks to the "don't soil your nest" principle. Problems: The locally sourced "hero" would need to be of upstanding character and capable fighting ability. This is a requirement something near a chivalric code, which may not be easy to find within the village's populous.
• The "hero band" is also responsible for freeing the area of bandits, protecting the kingdom, and general policing of the area. The insurance broker rolls that into the cost charged to villages and is also subsidized by the kingdom with the money that would have otherwise gone to mustering or maintaining troops. Problems: "Hero bands" now perform all the primary functions of government; would there be an incentive for villages to pay tribute to the kingdom, why not just pay an insurance premium? Additionally, if "hero bands" replace the kingdoms standing troops the government is aiding the arming of militia; see also: https://en.wikipedia.org/wiki/Militia#Political_issues

• Insurance has always been about protecting the lives and property of individuals. This is a primary government responsibility. If the government is able to outsource some of its workload by maintaining some direction over these "hero bands" the reduction in governmental responsibilities may pay for itself. In this scenario rather than internal affairs the government agent would take on a leadership role of the "hero band." Problems: Having a singular government point of contact who's responsible for maintaining order in the area could easily devolve into an Extortion racket.
• Make another kingdom pay for it. The government could pick a village nearby a "hero band"'s operating area, which pays tribute to a different kingdom, and directs the "hero band" to require tribute from that village at threat of violence. Problems: This is going to escalate quickly. It'll easily devolve into war, or at least unauthorized skirmishes along the border (which will quickly become well defined.)

1. The members of these "hero bands" could be sourced locally, which would make sense given the need of close proximity to communities. That wouldn't totally prevent "hero bands" from abusing their power, but it would place some impetus that they "don't soil their nest."
2. A form of internal affairs is not unforeseeable if there is a trend of these "hero bands" resorting to villainy. Perhaps the insurance brokers add an individual to each band, or if that proves insufficient a government official be attached to each "hero band" may be a feasible government investment.

1. The members of these "hero bands" could be sourced locally, which would make sense given the need of close proximity to communities. That wouldn't totally prevent "hero bands" from abusing their power, but it would place some impetus that they "don't soil their nest."
2. A form of internal affairs is not unforeseeable if there is a trend of these "hero bands" resorting to villainy. Perhaps the insurance brokers add an individual to each band, or if that proves insufficient a government official be attached to each "hero band" may be a feasible government investment.

EDIT

Option 2 seems to be the more interesting of these. I was going to elaborate on that a bit. Where would the motivation and/or compensation for maintaining an internal affairs department to keep an eye on these "hero bands" come from?

1. Why would insurance brokers be interested in doing this:

• The kingdom requires it, consider something like Emissions Trading but the measurement was the number of reported bandit incidents in an area, and the kingdom would evoke fines on the insurance broker for an increase in his patrolled area. Problems: This has some unfortunate side effects of making it monetizable for insurance brokers to do bandit work in an area they want to edge out the competition, or even to spoof incidents, making the measurement of reported incidents unreliable. Furthermore, the value prospect of insurance brokering goes down because you are now paying your "hero bands" to police an area; which is bad cause the kingdom would need these brokers.
• Insured villages require one or more members of the band to be locally sourced. This speaks to the "don't soil your nest" principle. Problems: The locally sourced "hero" would need to be of upstanding character and capable fighting ability. This is a requirement something near a chivalric code, which may not be easy to find within the village's populous.
• The "hero band" is also responsible for freeing the area of bandits, protecting the kingdom, and general policing of the area. The insurance broker rolls that into the cost charged to villages, and is also subsidized by the kingdom with the money that would have otherwise gone to mustering or maintaining troops. Problems: "Hero bands" now perform all the primary functions of government; would there be an incentive for villages to pay tribute to the kingdom, why not just pay an insurance premium? Additionally, if "hero bands" replace the kingdoms standing troops the government is aiding the arming of militia; see also: https://en.wikipedia.org/wiki/Militia#Political_issues

2. Why would the government be interested in doing this:

• Insurance has always been about protecting the lives and property of individuals. This is a primary government responsibility. If the government is able to outsource some of it's workload by maintaining some direction over these "hero bands" the reduction in governmental responsibilities may pay for itself. In this scenario rather than internal affairs the government agent would take on a leader role of the "hero band." Problems: Having a singular government point of contact who's responsible for maintaining order in the area could easily devolve into an Extortion racket.
• Make another kingdom pay for it. The government could pick a village nearby a "hero band"'s operating area, which pays tribute to a different kingdom, and direct the "hero band" to require tribute from that village at threat of violence. Problems: This is going to escalate quickly. It'll easily devolve into war, or at least unauthorized skirmishes along the border (which will quickly become well defined.)