3 October 2019Analysis

Worried about hail damage? There should be a captive for that

US companies should set up captives to provide cover for the damage hailstones do to their roofs, according to Matthew Queen, general counsel at Venture Captive Management.

Queen said: “Captives have no hope if they go up against large commercial carriers writing general liability insurance. What they want to focus on is lines where rates are high, risk management is almost impossible and the traditional carriers are failing to provide good coverage.”

One example that fits the bill, Queen said, is hail damage insurance. There were 4,610 major hail storms in 2018, according to the National Oceanic and Atmospheric Administration’s Severe Storms database.

Texas was the hardest hit state, with 508 hail events, followed by Kansas and Colorado, with 493 and 332 events, respectively, according to the US Department of Commerce, Storm Prediction Center, National Weather Service (SPC).

Last year hail caused 11 injuries, and $810.2 million in damage, of which $722.8 million was to property and $87.4 million was to crops. In 2017 the numbers were even higher, with 14 injuries and $1.8 billion of total damage, according to SPC figures.

Many commercial property policies provide some coverage for hail damage, but in many cases it is insufficient to cover the full cost of the damage.

“Frequently the cost of the deductible exceeds the cost of the roof,” explained Queen. “For a $1 million building that’s not so bad but many buildings are $10 million-plus in the commercial space.”

Car dealerships have similar problems, Queen noted. “The dealers affiliated with Fortune 500 companies like GM & Ford have captive programs providing specialty coverage. However, the independent dealers and used car dealers are frequently stuck with expensive options,” he said.

Queen argued a protected cell structure would work well for hail damage insurance, allowing the numerous small companies that may be interested to participate via their own cell. “It means they can share the risk and get an aggregate rate for the coverage shared among the whole group,” he said.

Queen said it would be relatively cheap to get the protected cell structure up and running. “Companies could get the 831(b) tax advantage and they wouldn’t have a problem with the IRS because it would have meaningful risk behind it. There is no doubt in my mind that if a captive started selling this protection it would have claims within 36 months,” he added.