Distribution companies turn to captives as COVID takes its toll

A growing number of distribution companies are using captive insurance to either replace or supplement their commercial insurance, according to Randy Sadler, principal at CIC Services.

The distribution industry is particularly susceptible to the challenges posed by COVID-19, noted Sadler.

According to a 2020 analysis by McKinsey & Company, transportation and warehousing rank in the top five on the list of industries that will take longest to return to normalcy following the pandemic. It predicted the sector will be negatively affected for more than five years.

Research conducted by Protiviti and North Carolina State University’s enterprise risk management initiative identified evolving changes in global trade policies, cyber threats and increases in labor costs among the challenges faced by distribution companies. They are also wrestling with disruptive innovations and new technologies, and scarcity of supply.

They are also particularly exposed to the impact of natural disasters. “Anytime a natural disaster strikes, warehouses are often at risk of flooding or damage or loss of inventory—sometimes to the tune of millions of dollars,” said Sadler. “The earthquake that ravaged Salt Lake City last year created power outages, gas leaks and a chemical spill within a warehouse. Disasters, such as this, pandemics and many risks facing distribution companies are nearly impossible to predict and challenging to insure against.”

While third-party commercial insurance policies can be written to cover risks like pandemics, natural disasters and supply chain interruption, these policies are often expensive, difficult to procure and may be riddled with exclusions, warned Sadler. Commercial policies often exclude, flood, sink holes, earthquakes, terrorism, chemical, nuclear, biological and environmental events. Business interruption insurance does not always cover the fallout.

Sadler advised distribution companies to consider captives to plug any gaps in their coverage.

“Captives are uniquely suited to address complex risks such as those facing distributors,” he said. “In addition to customising the policy, captives also provide a stronger business model, improved risk management, improved cost control, insurance profits, asset protection, asset accumulation and receive advantageous tax treatment.”

He added: “A captive insurance company can increase profit and wealth—generally by millions of dollars, lower or control insurance costs and insure uninsured or under-insured risks.”