As the reality of an anonymous, decentralized assassination market sank in, nation-states wouldn't collapse so much as surrender, devolving into smaller and smaller states until the free market supplied all necessary services.

For a brilliant analysis of, among other things, the role that insurance companies would play in this regard, see Hans-Hermann Hoppe's "Democracy: The God That Failed": http://www.riosmauricio.com/wp-content/uploads/2013/04/Hoppe_Democracy_The_God_That_Failed.pdf