1 September 2017Analysis

Hurricane Harvey highlights need for comprehensive captive programme

Houston-based captive manager Capstone Associated Services has confirmed that it is still up and running in spite of Hurricane Harvey impacting large parts of east Texas.

In light of this catastrophe, Capstone believes this raises questions among business owners as to whether they are properly insured for a major weather-related event.

“The events of the last week underscore the need for a comprehensive insurance programme, which has an alternative risk/captive programme as one of its key components,” said Capstone vice president of insurance operations David Overbeck. “Solely relying on the limited Federal flood program and few, limited conventional market alternatives leaves most businesses with large gaps in critical risk areas. How many risk management professionals would have objected to a coverage exclusion of an 800-year flood with over 40 inches of rain in a few days? This is why a broad-based, enterprise risk management program, with few exclusions is necessary.”

David Osbourn, regional director of client development at Capstone, noted that flood insurance under the National Flood Insurance Program (NFIP) is limited, with maximum business limits of $500,000 for each of the buildings and another $500,000 for each building’s contents, which he said is a fraction of what most businesses need.

Osbourn added: “Further limits above the NFIP program must come from the commercial insurance market, if available, or from a captive program. And commercial insurers limit their exposure to loss by excluding high flood risk properties, or by charging uneconomical rates, forcing reduced limits or high deductibles. It is problematic obtaining coverage in the Gulf Coast, in many areas of the Southeast, in Florida and in areas affected by Storm Sandy. Said another way, a captive programme is often the best alternative.”

Commercial insurance policies as well as coverage under the NFIP have many exclusions, according to Capstone. Business Income losses are not covered; neither is damaged caused by mildew or mould. Coverage is also limited in areas below the lowest elevated floor.

Capstone also highlighted that many flood losses have recently occurred on properties not located in designated flood zones. Heavy rains despite long adequate storm drains have caused significant flood losses to properties outside of the NFIP’s Zone A and other flood prone areas. These claims often go uninsured with the entire loss being borne by the property owner, absent a captive insurance programme in place.

The captive manager suggested that planning for flood losses is critical in any business’ enterprise risk management programme, and that a captive insurer can provide a business the necessary funds to pay for flood as well as other business losses due to risks that are otherwise uninsured or underinsured.

Lance McNeel, vice president at Capstone, provided further historical context to the lack of availability of flood coverage.

“Almost ninety years ago, the commercial insurers largely abandoned the flood insurance market following the Great Mississippi River Flood, which was one of the worst natural disasters in US history,” McNeel said. “Flooding inundated dozens of counties in seven states. To put matters in perspective, damages totalled about one-third of the federal budget at the time, the equivalent of more than $1 trillion dollars today.

“With a pre-Harvey NFIP deficit of close to $25 billion, the Federal government is unlikely to increase its role, so proactive business owners need to take the lead and pre-fund business risks in their captive for the proverbial ‘rainy day’ that inevitably happens.”