Captives poised to capitalise on growing frustration at commercial insurance exemptions

The COVID-19 pandemic has created an opportunity for captive insurers to increase market share, according to Brady Young, president of Strategic Risk Solutions.

Speaking on an SRS webinar titled Captive Insurance Response To A Pandemic, Young noted that it may not be too late for businesses to use their captives to mitigate losses related to COVID-19, if the scale of the losses are still not known.

But he admitted it will be a challenge for actuaries to price such cover, and warned regulators may not allow it if stress testing showed captives would not be able to withstand the resulting losses. “It could be worth looking at for some clients, if they have a lot of excess surplus,” he said.

Young said commercial insurance relationships are coming under considerable pressure due to the number of exclusions that are leaving businesses facing uninsured losses, which presents an even greater opportunity for captive growth.

Many commercial insurers are receiving claims against risks that were excluded from policies such as business interruption. There have also been challenges around some workers’ compensation exclusions, including whether CVID-19 is covered and whether workers could demonstrate they had contracted the virus while at work. Around 16 states have decreed that acceptance of such WC claims is mandatory for essential workers.

Such disputes will inevitably put extra strain on insurance relationships. “This is an opportunity for captives to step up and solve some of the problems businesses are having,” said Young.

Joel Chansky, principal and consulting actuary at Milliman, agreed. “We could see insurers increasing rates to cover losses in premiums,” he said. Insurers may also increase rates to cover expected losses from reserve developments, he warned.

“If coverage is overpriced existing captives could take advantage, and it could even drive some to set up new captives,” said Chansky. There could be increased captives activity in the second half of the year, he predicted.

Young noted it has been broadly business as usual for most captives, even if things had slowed down slightly in some cases. Market volatility has taken a significant toll on many captive balance sheets, as it has for commercial insurers, but most seem to be avoiding making significant changes to their portfolios, and hoping the market turns in their favour, he said.

Captives can help their owners by issuing dividends, even if that money is then subject to tax, Young said. Some clients have also inquired about the possibility of closing captives down to release liquidity quickly, he added, though there is little evidence that businesses have been going through with this plan so far.

Many captives have actually seen a reduction in claims due to COVID-19. Captives writing a lot of auto liability coverage will likely be experiencing a drop in claims given the fall in traffic on the roads. Captives for businesses such as restaurants or retail - other than groceries - will likely also have seen a significant fall in claims. Workers’ compensation claims are also likely to be down, with so many employees working from home.

However, certain lines and sectors will have seen a dramatic increase in claims. Workers’ compensation captives for nursing homes, for example, will be seeing large increases in claims. Captives that write business interruption typically avoid using the exclusions that commercial policies use, and will experience a surge in claims, noted Young.

Overall, Chansky predicted business interruption, professional liability and cyber will see increased claims, while claims in auto liability and general liability will probably be down overall. Professional liability claims include directors and officers coverage, he noted, where managers are likely to see a surge of claims from employees claiming insufficient action was taken to protect them from COVID-19.

For commercial insurance customers, Read Davis, regional president at McGriff, Seibels & Williams, the commercial insurance and employee benefits broker, advised clients to file claims now, in preparation for the possible reformation of policies. “Don’t wait to file until the exclusion has been vetted,” he said. Even if claims are excluded, putting it in will put insureds in line for any Federal assistance that comes later, he explained.

Read said a government programme that looks like TRIA for pandemics is likely to emerge from the current crisis. However, government moves to force re/insurers to pay out on business interruption claims despite exclusions could threaten the viability of such coverage going forward, he warned.

An impending “tsunami of claims” of around $350-$400 million per month would be the equivalent of the industry having to deal with “five Hurricane Katrinas per month”, Read noted.

Young noted its COVID-19 captive response webinar had attracted more than 600 viewers, making it SRS’ best attended webinar to date, indicating the scale of concern in the industry.