Captives fill gaps amid pandemic
By Claire Wilkinson
As in previous times of insurance market dislocation, captive insurers are playing a key role amid the COVID-19 pandemic, as owners file claims and focus on business continuity, while trying to lower their total cost of risk, experts say.
More pandemic-related risks will likely be written by captives as commercial insurance buyers grapple with tougher market conditions in the coming months, they say.
In previous times of stress, such as after the Sept. 11, 2001, terrorist attacks and the medical liability crisis in the 1980’s, captives have always been able to “step in and help pay claims when commercially things were stalled or debated or mitigated,” said Anne Marie Towle, Indianapolis-based senior vice president at Hylant Group Inc.
“So particularly in this time, we have already seen growth in captive interest. People are looking at how they can protect their organization if they haven’t in the past with a captive,” Ms. Towle said.
Business interruption, event cancellation, supply chain, trade credit and surety are some of the areas where captives may see claims, experts say.
While pandemic losses are excluded by some captives, others offer their owners broader coverage, allowing them to recover some of the lost profits and extra expenses incurred amid business closures and government lockdowns, they say.
On the liability side, there is the potential for employment practices, professional liability and workers compensation claims, especially in areas such as health care and hospital-owned captives, Ms. Towle said.
Medical stop loss is another area where captive participation has been increasing in recent years and where there is potential exposure, experts say.
An area where Hylant Group has seen claims submitted is under all-risks coverage, where the difference in conditions policy would step in and provide coverage, Ms. Towle said.
“I have seen both interest in that type of coverage going forward and captive owners utilizing and leveraging it under those types of policies,” she said.
These policies and claims have been mainly in the manufacturing sector where a business has been completely shut down and operations interrupted, she said.
The other area where Hylant has had “discussion with clients but not seen any claims so far” is contamination to the business property.
“If you have an outbreak, like the Tyson food plants and facilities like meatpackers, how does that have an impact to contamination of their actual property and recovery from that and cleanup potentially? That’s something we’ve had discussions about,” Ms. Towle said.
Cyber liability is another exposure that could potentially lead to COVID-19-related captive claims, she said. With so many people working from home, internet connections may not be as stable and safe as they would be in an office, she said.
Several captives managed by Marsh LLC provide coverage for pandemics and for non-damage business interruption with triggers for pandemics, but it’s too soon to say whether claims are being made against the policies in place, said Michael Serricchio, a managing director with Marsh Captive Solutions, a unit of Marsh LLC in Norwalk, Connecticut.
“We have various property business interruption and contingent business interruption policies in captives that are triggered by different events, namely pandemics and outbreaks of infectious disease,” he said.
Some captives also provide broad coverage for non-damage business interruption, difference in conditions, differences in limits that may see claims, Mr. Serricchio said.
Real estate, hospitality and mining are some of the business sectors with captives managed by Marsh that have the coverage, he said.
“A lot of these coverages are direct between the captive and the parent, so it won’t show up for another quarter in terms of proceeds coming out of the captive,” he said.
Limits vary according to the risk appetite of parent companies and tend to be in the millions and tens of millions of dollars, rather than hundreds of millions, according to a recent Marsh webinar.
Some businesses are “more vulnerable” than others to pandemic-related disruptions, said Martin Eveleigh, chairman, Atlas Insurance Management, based in Charlotte, North Carolina.
“Hospitality, fine dining restaurants, yes, if they have a captive, they’d almost certainly be making claims,” he said.
Group captive policies usually are issued on standard forms so any exclusions that exist in commercial property policies would still apply, but many single parent captives issue policies with “much broader coverage,” Mr. Eveleigh said.
These include policies issued by smaller captives, including some that elect to be taxed under Section 831(b) of the Internal Revenue Code, he said.
“Many of those captives will be issuing business interruption policies, supply chain interruption policies, some work stoppage, inability to access premises, that kind of coverage, so they will certainly be responding in terms of paying the claims,” Mr. Eveleigh said.
“We have a number of captives under management where the captive owner, the insured’s interpretation of the policy language is that there is some coverage afforded to them for COVID-19 losses,” said Jason Palmer, director at Willis Towers Watson Management (Vermont) Ltd.
“We’re talking with claims professionals and others trying to document and quantify what that claim will ultimately be and submit it to the captive,” Mr. Palmer said.
Meanwhile, in the economic downturn, companies may be leveraging the additional capital in their captives for other needs.
A lot of companies that don’t have pandemic coverage are looking to their captive for liquidity, Mr. Serricchio said.