The pandemic and its effects on the captive insurance industry
COVID-19 has presented challenges to the captive insurance industry, just as it has done to most other industries around the world; however, it has also created opportunities to step up and provide innovative, responsive insurance solutions to an ever-widening range of organizations. Meanwhile, organizations within the captive insurance industry have had to quickly pivot their operations to suit new ways of working—resulting in many long-lasting benefits.
Heather McClure, chief risk advisor, US Healthcare Practice at Aon, says that the captive insurance industry is better placed than many sectors to meet the challenges posed by the pandemic.
“Although COVID-19 took the world by surprise, this kind of unexpected risk is exactly what captives are built to address,” McClure says. “Formations increased, and for the captives that already existed, the nimbleness of captive risk financing structures was highlighted for many entities.
“New risks and exposures were identified, endorsements or full policies written. It has been great to see captives work as designed during this time, providing exactly the kind of protection and customized support for which they are designed.”
Nick Hentges, chief executive officer/principal at Captive Resources (CRI), has seen group captive members impacted in a variety of ways, depending on their sector—and this has in turn affected what they require from their captives.
“The hospitality industry—hotels and restaurants—as we all know, was strongly impacted, and there are some members from that industry in our client captives,” he says. “We were proud of their resilience and ability to carry on their businesses in different ways during the toughest times of the pandemic.”
However, the majority of Captive Resources’ member companies are manufacturers, contractors and transportation companies—and those companies were growing, not shrinking, during COVID-19.
“Most of the member companies did very well, and were financially strong to begin with,” Hentges says. “As far as interest in group captives is concerned, 2020 was the best year CRI had ever had from a new business perspective, with over 500 new captive members. And 2021 was a better year than 2020, so in total we’ve added over 1,000 new members in the middle of the pandemic.
“That’s a great testament not only to our group captive model, but to the fact that the industries and companies we’re trying to attract to captive insurance are still doing very well, even in the middle of a pandemic.”
Another factor that Captive Resources has watched very closely is the impact of COVID-19 on workers’ compensation.
“At one point, there was a great deal of concern that there would be a lot of COVID-19-related workers’ comp claims,” says Hentges. “There have been a number of them, but not to the extent that we were concerned might happen, so we think that’s a very positive thing as well.”
For many organizations, however, COVID-19 has created a lot of new expenses that had to be paid for somehow—and they have looked to their captives for some of that relief. The adaptability of the captive structure makes it possible to respond in ways the commercial insurance market cannot.
“Depending upon your captive’s ability to help out its parent, the captive industry could pay for some of those new expenses that arise as a result of the pandemic,” says Courtney Claflin, executive director–captive programs, University of California Office of the President.
“Captives have been put into a position where they are always the risk-financing mechanism of first resort or last resort—when you can’t get coverage any longer for things like pandemics, so you’ll probably see some captives providing some degree of direct coverage to their parents.
“We have an employee benefit program, with ancillary benefits, and we added some COVID-19 coverages to that benefit plan during the pandemic. We launched brand new benefits that help pay for hospitalization and testing and things of that nature.
“I think that other captives would do something similar, because captives always respond when things go haywire in the traditional industry,” Claflin explains.
Challenges for the industry
Claflin believes the number one pandemic-related challenge for the industry is providing coverage.
“COVID-19 isn’t covered in most instances, so the question is, how are you going to cover it? Can you do a lot, can you do a little? There may have been some coverages triggered as a result of COVID-19.
“For example, study abroad programs have suffered tens of millions of dollars of losses—and we happen to have a policy that responded to that, so we were fortunate enough to help pay the study abroad program for a large portion of the losses.”
He notes that there has been a significant decrease in the amount of claims from other lines of coverage. Lines such as property liability, workers’ compensation and automobile employment practices have not had the same exposure basis during the pandemic that they would under normal circumstances because people are working from home and students and professors are not going to classes.
“Elective surgeries at our medical centers were shut down for an extended period of time— so your exposure to loss goes down,” he adds.
These situations create an unusually high underwriting profit compared to past years—but the question is, how to manage that with your eyes on the future?
“You have to be careful,” says Claflin. “Do you immediately redeploy that underwriting profit to either launch new programmes or give back rate relief or whatever the case may be, when you know the courts are now open and suits are being brought again?
“From a liability perspective, there’s probably going to be some clawback.”
Another challenge has been the need to operate in a very different work environment after March 2020. Captive Resources rose to the challenge and has seen long-lasting benefits as a result of embracing remote working.
“In some ways, we are a much more efficient company than we were prior to that time,” says Hentges. “Our business development folks are back on the road, travelling a great deal to conduct educational seminars, and we’ve learned how to do business remotely, supported by new technologies that we almost immediately invested in at the onset of the pandemic.
“Even today, we’ve gone from working most days in the office, to working a few days a week in the office, so we’ve had to learn how to operate and service our clients as well or better than we did before, in a very different environment, while working to maintain our company culture which we value so highly.
“It’s different for every company, but I’ve seen a lot of companies do it very well.”
In the healthcare sector, McClure has seen organizations face great challenges with workforce retention and recruitment, scarcity of medical resources, and concern over potential professional liability for treating in an unprecedented environment—but she notes that the captives industry, including its regulators, consultants, and service providers, responded with creativity and efficiency.
“Very soon after the first surge in the pandemic, the industry began publishing educational information around business interruption, employee liability, workers’ compensation, and other lines greatly affected by the pandemic,” she says.
CICA and COVID-19
While CICA has been able to support the industry remotely during the pandemic, it had to cancel its 2020 conference. In 2021 it again cancelled its spring conference and provided digital content instead but was able to offer an in-person event, the CICA 2021 Fall Forum, in October.
“Planning a conference during a pandemic is no easy task,” says CICA president Dan Towle.
“For two years we were able to quickly convert our conference education sessions into an on-demand digital education series that provided great education and helped the industry stay connected. But, at some point you have to forge ahead and that’s what we are doing—delivering the kinds of networking, education and conversation that only in-person conferences can offer.”
McClure says that CICA led the field when pivoting to a digital offering during the pandemic.
“CICA was one of the first to come out with educational material, digital and in webinars related to the pandemic, providing its members with meaningful and useful information,” she says.
Hentges has also been impressed by CICA’s COVID-19 response.
“CICA has done a great job offering online opportunities for learning and networking and keeping everyone in the industry informed and connected during the pandemic—and the Fall Forum last October, while a smaller group, was a great meeting and a welcome return to in-person conferences,” he says.
“We’re coming up to the annual March conference and it appears we’re going to have a very good turnout. I’m sure everyone is anxious to return to the annual conference which we all look forward to every year. It really is one of the premier events in our industry.”
Opportunities and resilience
The impetus to fully utilize online offerings is just one of several opportunities that have been presented by the pandemic. Another is the ability to demonstrate how nimble and adaptable captive insurance can be.
“It’s an opportunity for your captive to step into the breach and help where under normal circumstances you wouldn’t have to,” says Claflin. “For instance, we can pay for things that normally you wouldn’t be paying for. Every insurance contract in our portfolio of coverages has differences in conditions clause on it, which allows the captives to work with the university system and the board of directors to help out.
“Even though you may not have reinsurance support behind it because of the absolute exclusions, at least the way that we construct our policies allows us the flexibility, on an ad hoc basis, to provide funds to the university system and the medical centers where we deem it appropriate and necessary.”
McClure agree, saying: “Deep-diving into commercial policies and potential gaps was instructive for many entities. Using this information to better leverage the captive risk-financing structure helped organizations get their arms around what was insurable and how.
“The industry took the opportunity to shine as a support for insureds during COVID-19. It proved the captive structure’s worth on a world stage in a way it had never been called upon to do before.”
Claflin agrees that the past two years have raised the profile of captive insurance.
“A captive’s response to COVID can put it center-stage with the parent and highlight what it can do,” he says.
“Between the market and the pandemic, it’s fueled the greatest growth in the captive industry that I’ve seen in my professional career. Captives have become more high profile. When they help and respond, it shines a bright light on the effectiveness of the captive.
“It’s nimble and flexible, and it can respond without having to go to your parent’s balance sheet and take money out of there that is normally associated with helping grow and support the company.
“There’s an old saying in our business that captives don’t create problems, they expose them—and within these organizations, they’re seeing that when the parent has a problem, captives have been able to step into the breach and help out financially.”
As McClure emphasizes: “The industry is resilient because of the nature of our work—preparing for, mitigating, and financing risk in creative and bold ways, where accountability is a priority.”
Claflin notes that the combination of the pandemic and the hard market has brought a lot of organizations to the captive table that otherwise wouldn’t be there—and this bodes well for the future.
“These organizations are asking a lot of questions of their brokers, their consultants, and captive consulting firms, and consequently captives are seeing tremendous growth,” he says.
“I see innovation too; captives that weren’t structured to help the organizations have learned how they can help next time. I believe the future is very bright.”