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Industry experts discuss the increase in business interruption coverage after the COVID-19 pandemic caused large disruption for many firms worldwide
Last year saw many businesses struggle due to the impact of the COVID-19 pandemic. A lot of companies were not prepared for the impact of the virus which saw some shut permanently or suffer considerably due to months of closure.
The hard market and the outbreak of the COVID19 has forced companies to take a second look at their risk management programmes to be sure they have adequately addressed business interruption issues and well-designated risk plans, according to Sandy Bigglestone, director of captive insurance, Vermont Department of Financial Regulation (VDFR).
Bigglestone suggests that business interruption issues are emerging and may produce risk that captives can cover. 22 In agreement, John Mina, CEO of Risk Strategies, believes there will be an “increased focus” on business interruption coverage.
Mina explains: “Pandemic protection will surely be a part of it, but that will spur analysis into what other interruptions the traditional market is not addressing well enough.” Elsewhere, risks such as property insurance, uncovered/exclusions that exist in the traditional insurance policies, and healthcare medical benefits are all being seeded into captives.
Brian McCarthy, CEO of eMaxx Assurance Group of Companies, explains: “The largest emerging area will be from property being assumed into captives and coverages that are not traditionally insured by the traditional insurance market, as there are exclusions and policies. For example, the COVID-19 pandemic, virus exclusions.”
Over the last few years, there has also been a “significant rise” in the interest of introducing employee benefits risk to captives in recent years and the COVID-19 pandemic is “destined to accelerate this trend,” according to Sven Roelandt, global expert employee benefits financing strategies at Aon Global Benefits.
Roelandt also highlights that if your organisation’s captive is well capitalised, “that while pandemic risk requires a specific underwriting approach, captives now have the opportunity to deliver what they have to a large extent been created for – provide cover on unusual risk and help face extraordinary risk-related challenges such as we are confronted with today”.
Pandemics are typically not considered to be an insurable risk because they affect so many lives all at once.
Bigglestone explains: “It will be interesting to see what solutions are implemented with a forward-look, including any government programmes that are developed.”
The business interruption losses are a huge liquidation issue in the US right now, there are over 5,000 cases filed. The court’s ruling in different directions in different states.
McCarthy says: “There’s been a consolidation ruling to consolidate them to certain courts for certain classes. It’s going to take years to find out what the outcome of that is going to be because of the liquidation in the courts today.”
“I think there will be a huge demand for the need to have coverage for a rainy-day fund. Banks and financial institutions that finance these businesses will drive that demand,” he adds. Timothy Kolojay, president of eCaptiv, suggests that like the Terrorism Risk Insurance Act (TRIA), that was created by the insurance industry and the government, there’s a possibility we will see the Pandemic Risk Insurance Act (PRIA) come into play.
The aim of the legislation is to create a programme that will cover losses and protect the US economy in anticipation of a resurgence of COVID-19 and future pandemics.
The Self-Insurance Institute of America (SIIA) advocated for PRIA to include captive insurance participation in its early stages.
SIIA highlighted that “the flexibility of captives is important, as a one-size-fits-all approach does not oftentimes work for the complex risk management needs for a captive owner”.
Bigglestone notes: “We have seen companies realise they have gaps in insurance coverage because reinsurers have excluded COVID- related claims.”
“These companies turn to captives to fill any holes in their global programmes and remain protected. A few examples are found with hospitals expanding telemedicine services, which increases exposure for medical professional liability and cybersecurity,” she adds.
Opportunities and adapting
One of the biggest challenges around emerging risks is timing. Bigglestone says that getting adequate coverage in place in a timely manner so the business is protected can be an issue.
It remains important for businesses to perform risk evaluations and seek quotations from the commercial marketplace should they choose to transfer the risks.
“A captive programme is a solution, a sense of certainty, that can ease the burden and stress of placing needed coverage, when and if it is needed because it is controlled by the owner/ insurance buyer,” she adds.
If you could look into a crystal ball to spot the emerging threats to the market it would be easy to protect a company against most risks that emerge, however, at the end of 2019 no one was prepared for the year we experienced in 2020.
Bigglestone believes the biggest opportunity is the increased knowledge about risks that businesses are faced with, improved risk management strategies and potential cost savings over the commercial marketplace.
She explains: “The hard market coupled with a pandemic can reveal insurance coverage gaps in an organisation’s business operations pressuring them to find new solutions.”
“A captive insurance company can provide some level of certainty by putting aside money to cover future losses,” she adds.
Although getting on top of new and emerging risks can be beneficial, how easy is it for a captive to adapt? Kolojay suggests that it depends on the statistical data available.
He says: “Captives need to have feasibility study put together by independent actuaries and they will look at whatever data they can dig up that can come close.”
“If the actuaries don’t have the proper data, then sometimes it’s a hit-and-miss on how fast to put together the pricing to go along with the coverages,” he adds.
However, Bigglestone says captives can adopt these new risks “very well”.
She explains: “We find that owners of captives know their risks best. A captive provides an incentive to control losses, and the business can benefit from premium stability and access to reinsurance.”
“Captives are designed to be adaptable to the needs of its owners,” she adds. ■ 23