COVID-19: the risk of rushing the response

Most insurance folks agree that coverage for any part of the COVID-19 threat is questionable at best. Pandemic cover was never contemplated in rating, underwriting, claims or premiums. It is therefore a reach to offer coverage for it.

In the present circumstances, reaching for help is highly warranted—and universally expected. It is little surprise that legislators and regulators are rushing forward to pass laws and regulations requiring payment of COVID-19 claims in all lines, to all claimants.

While these new requirements are discussed, and in some cases implemented, there has been little discussion about how re/insurers are meant to pay for these claims. This appears to be yet another case of legislators and regulators being ignorant of how the insurance business actually works. They see large amounts of capital and surplus on balance sheets and assume, and even demand, that these be used to pay previously uncontemplated claims.

Some of the regulatory class have even discovered captives, and are now determined to find ways to make them share the burden of claims.

All of these forced positions of course miss the point. Claims are paid by premiums charged for the risk, whether in a traditional carrier or a captive.

Whether you are in the traditional insurance market or a captive, implementing coverage is a long and detailed process that should never be rushed due to external circumstances. The risk must be clearly identified, and exposures determined. All relevant factors must be worked into a rate for predicted loss by an actuary. If one does not know the risk and its costs and loss expectancy, how does one get the money to pay the claims?

This explanation is usually passed over by legislators, and even sometimes by regulators. These bodies are usually interested only in getting money to constituent voters, and people in need.

What role should captives play?

Captive management and regulation can move very quickly. Captives are regulated differently from traditional carriers. They tend to be much faster in making decisions, and more open to creative thinking, in terms of how captives can be used differently. In some jurisdictions, captive owners and managers have been known to make structural changes in a single day. Yes, it has happened.

However, even an institution as nimble as a captive needs to know a risk before it can make such a change. COVID-19 is still not thoroughly known. No actuary is therefore in a position to accurately measure the risk associated with it, or to price the exposure of insuring it.

In a captive some coverage, such as medical expense charges or meeting disruption, can be quickly added without a huge amount of thought about the risk or exposure involved. Many domicile regulators will move quickly to implement some of these coverages in a captive, while hard data is “pending.” Again, it has been done.

But such moves demand that all parties involved, including owners, managers, outside evaluators and regulators, match capital and surplus to predicted loss. That is usually already in the bank, with some of it allocated to other claims. Captives can be a bit looser on these manoeuvres, but money is still needed. Premiums must be paid.

Traditional carriers must go through a much longer and more involved process to predict the exposures, underwrite the risk and provide predicted capital for claims payment. This can take, and has taken, months.

Nimbleness is the major advantage of captives. Not all domicile regulators will agree to quick movement on such unknown issues, but many will. Many captive owners will find this a good way to deal with this volatile and largely unknown risk.

Help from outside the insurance structures, whether that is traditional or captive, is quirky at best. Simply sending money from taxpayers to insurer coffers, with no analysis of how much or what is being paid for, is unhelpful. More than that, it will definitely add to the bookkeeping and analytical morass of the traditional carriers.

Captives get their money from their owners. Are they willing to pony up more money in the face of their own companies facing fiscal issues? I wouldn’t expect help from the general public for captives.

While COVID-19 issues dominate the insurance challenges, cyber risk, which was growing exponentially before the pandemic threat emerged, continues to grow. The very structures being assembled to deal with COVID-19 will become a target for a coming wave of cyber attacks.

While all of this fun is unfolding, Congress has stepped up with legislation to force insurers to pay virus claims. Insurers will be allowed to charge premiums, but that brings us back to the aforementioned challenges: How much premium? What is the rate based upon? What exactly is covered?

Must the insurers pay before they have enough money in to operate? What about captives? And how exactly does the Federal government, with no authority over state-based insurers, both traditional and captive, actually force this coverage?

Only time will tell. What does seem clear is the insurance industry will be living with the consequences of the decisions authorities make today for decades to come.

Michael Mead is president of captive consultancy M.R. Mead & Company. He can be contacted at: mikemead@protonmail.com