COVID-19 perfectly exemplifies gaps in commercial coverage: CICA panel
“COVID-19 is as good an illustration as you could come up with to show that companies face risks out there that will not be covered by standard coverages,” according to Barbara Ingraham, managing director of excess and surplus at Verisk.
Ingraham was speaking on a Captive Insurance Companies Association (CICA) webinar titled “Emerging Risks and Captives”.
At the start of the year, companies considered their big emerging risks to be things such as cyber and climate change, said Steven Bauman, global programmes and captives regional director North America at AXA XL.
The big risk they are now all thinking about is pandemic coverage. “I have no doubt that captives will help a lot of companies manage that risk,” Bauman added.
While 831(b) captives have attracted a lot of negative publicity in recent months, they could be ideal structures for allowing companies to manage pandemic risk, said Chris Ervey, senior vice president at Trean Reinsurance Services.
Much has been made of the lack of pandemic coverage in commercial business interruption policies, but COVID-19 is not the only source of business losses that such policies may not cover.
Ingraham said: “The UK’s departure from the EU is symbolic of issues that can come from huge governmental change,” and noted that 65 percent of Britain’s iron and steel imports come from the EU, meaning significant disruption is likely if the UK leaves with no trade deal.
Elsewhere, the fallout from the China–US trade war is also likely to create challenges for companies. Businesses therefore have greater need of business interruption coverage that is not tied to physical property damage, which captives are well positioned to provide.
Bauman said: “Early captives were very monoline and mainly wrote property coverage, but back then property was an emerging risk.”
In the 1980s and 1990s came the liability casualty crisis, when there was no cover available in the commercial market—captives stepped up, Bauman added.
Captives also helped their parents navigate the Y2K challenge, and then helped them write employee benefits coverage. All of these were new or emerging risks in their time, Bauman said.
He advised captives looking to move into covering emerging risks to use the “step in and step up” technique, where they first retain a very small amount of risk, to give them some experience of how that risk should be managed, before gradually increasing it.
“There is no better way of learning than taking a little bit of risk, but it is important to do that in a prudent way,” he said. As the captive’s understanding of the risk grows, so does its ability to retain more of the risk, he explained.
Captives benefit from partnering with reinsurers and fronting companies, which can help them manage the amount of risk they retain, Bauman added.
Ervey noted that there are more insurers offering fronting services than ever before, which he described as a positive trend for captives looking to insure emerging risks.
