1 December 2020ArticleAnalysis

Taking a fresh approach

The COVID-19 pandemic has had a devastating impact on the world but, if we are to garner some positives, it is surely the innovation that has taken place over the past two years. While innovation in the healthcare world has rightfully taken centre-stage, the captive insurance industry has seen its fair share of transformation and new ideas.“COVID-19 has essentially accelerated innovation in almost every industry,” says Robert Walling, principal of Pinnacle Actuarial Resources. The captive insurance industry is no exception.He adds: “It almost doesn’t matter where you look, people are trying to use captives in innovative ways. Some of the innovation stems directly from the pandemic, such as pandemic coverage for nursing homes, or business interruption for TV and movie studios. “Some of it is more subtle, such as supply chain coverage for manufacturers or builders where disruption of the supply chain has led to pretty significant expenses.”Amid the pandemic, Cayman’s captives market continued to post strong numbers for new captive formations between 2019 and 2020, with 69 new captives established during this period, according to Sherman Taylor, director at Ocorian’s Bermuda office. He says: “More than 50 percent of these new captives cover medical malpractice risks and/or workers’ compensation risks, and the Cayman market is recognised as a centre of excellence for captives specifically covering these risks.“While this is not new to the Cayman market, we expect 2021 figures to display additional growth due to impact of the COVID-19 pandemic on these types of risks.”The innovation shortlist
Taylor believes that a global trend has emerged where lawsuits and workers’ compensation claims have increased from employees claiming to have contracted COVID-19 in the workplace.“This is a developing situation, but the immediate challenges include exactly how employees go about proving they caught COVID-19 at work. This is one to watch given that the Cayman market has significant exposure to workers’ compensation risks. It would not be surprising to see coverage language in workers’ comp policies begin to be tightened because of this development,” he adds.Coverage language has been a recurring challenge amid the pandemic, with disputes between traditional insurers and insureds over contract wording in business interruption claims hitting headlines.Walling says: “Captives did a terrific job of providing protection for their policyholders during the pandemic in a way that a lot of traditional insurers didn’t because of their policy exclusions. Hundreds of medium-sized and large businesses in US were saved by their captive insurance companies.”Additionally, no article on innovation amid the pandemic would be complete without a brief foray into pandemic insurance. “Pandemic risks coverage is certainly a major concern across industries because of the experience of COVID-19,” says Taylor.He adds: “The extent of business disruption and economic losses brought about by this pandemic is still not fully quantified, and we are still experiencing global logistics and supply chain issues that have additional economic consequences.”Taylor notes that many of these risks may be excluded from coverage under traditional all-risks and business interruption policies, for various reasons.“Subject to the availability of capital, we could see the insurance market move towards providing more specialised products covering these types of risks,” he adds.Aside from the pandemic, variations on all types of new products are going through Cayman.“The Island is on the shortlist for domiciling innovative captives of all shapes and sizes,” says Walling, adding that it’s fair to say that Cayman is developing a reputation as being open to innovative coverages and emerging markets.As an example, Walling notes: “Innovative approaches are being taken to address the impacts of climate change, but these are not tackling climate change directly. The impact of climate change is affecting so many coverages. All of that turns into financial risk which turns into insurance which ultimately turns into captive insurance.”Sherman says that the intensity of climate-related catastrophe events has a direct link to climate change, according to many scientists.He adds: “The severity of these events has exacerbated pricing and coverage distress in a hard insurance market, and placed an additional strain on the balance sheets of the traditional insurers and reinsurers.“This has created an opening for new captive formations as the market chases fresh capital, and it is conceivable that some of this capital can be deployed to address climate-related risks more directly.”

“The impact of the forthcoming global corporate minimum tax is still unknown.” Sherman Taylor, Ocorian

A nimble approach
Walling cites crop insurance as a prime example of innovation. Emerging crop types are pushing the boundaries of what federal multi-crop insurance cover in the US can do.He says that many farmers are using captives to retain some of their crop insurance coverage and that big cooperations that use captives have been successful for a while.Farm-raised salmon and catfish are very large industries, says Walling, noting that they have been “extremely underserved globally for insurance” but that we are now seeing some innovative approaches to offering aquaculture insurance to fisheries.Meanwhile, several large group captives, particularly in Cayman, are targeting gig economy couriers, and having tremendous success, he says.“If you’re still buying automobile coverage from your admitted carrier, you’re actually in the minority,” Walling says. And, unsurprisingly, insurtech is disrupting the traditional industry.“We are seeing innovation in coverage in the form of insurtech, where data-driven technology and the application of more precise data points are increasingly being used to streamline coverage, tailor policies, and set premium rates more efficiently,” says Taylor. As evidenced above, the captive insurance industry is on the cutting edge, innovating in response to events such as the pandemic quickly and effectively.“The captives industry continues to demonstrate how nimble it is. We were endorsing pandemic coverage on senior care professional liability by September last year,” says Walling.He adds: “The industry is so remarkably light on its feet that innovation naturally prefers captives. Innovation happens in captives long before the traditional market embraces these advances.”However, says Taylor, the impact of the forthcoming global corporate minimum tax is still unknown. In October this year, the Organisation for Economic Co-operation and Development announced that nearly 140 countries had agreed a global deal to ensure big companies pay a minimum tax rate of 15 percent, to be imposed by 2023.“However, if innovation and growth are not stifled by this new global tax initiative, innovation around cyber risks, climate risks, and pandemic risks coverage can be expected,” he says.Taylor adds: “While some of these are not new, the innovations may come in the form of how the market provides coverage. We are also likely to see innovation come from the application of environmental, social and corporate governance standards throughout the insurance industry.”It remains to seen how the global tax initiative and the aftermath of the pandemic will impact innovation in the captive insurance industry, but the outlook is very positive.