Not much of anything is clear these days. And, even now in the eighth month of the pandemic, things seem no more certain than they did when it started. Yet, to operate efficiently, sustainably, and profitably, businesses still must assess, navigate, and protect against risk. One thing which has become clearer, however, is that captive insurance is becoming an even more effective tool in providing risk protection.
Commercial insurance costs increasing
The commercial insurance market is hardening. Commercial insurance premiums are on the rise, costing businesses millions of dollars at a time when they particularly can’t afford such increases. This has made captive insurance much more attractive as companies move to manage risks on their own. “Captives are very much alive and well,” said Michael Serricchio, managing director at Marsh Captive Solutions. “They’re exploding from a growth perspective.”¹ This appeal has resulted in the increased use of captives in various industries, especially those that have become more problematic to insure through traditional markets. Actually, this shouldn’t be too much of a surprise since captives were designed as a means of covering risks in difficult commercial insurance markets.
Flexibility – coverage and financial
Captive insurance has also become more appealing because of the flexibility it affords. Coverage can be tailored to the specific risks that a business wants to cover and policies can be written to cover those risks. This is of particular interest now when coverage for business interruption due to COVID-19 or other pandemics is of great value. Like with other coverages, however, regulators will need to be assured that the level of capital and pricing are appropriate for the risk incurred.
Another aspect of the flexibility that captives provide is on the financial front. The pandemic has significantly impacted business cash flow. From government-ordered closures and supply chain interruptions to unexpected costs like PPE needs and cyber risk management, the pandemic has forced businesses to deplete available cash. Captives can help support their parents through intercompany loans, investment in parent assets, dividends, premium discounts or forbearance, paying risk management expenses (e.g. expenses connected to employees returning to work, as well as expenses connected to employees sustaining remote work environments), and more. Of course, the investments and surplus must be sufficient to take these measures and some will be subject to regulatory approval.
More lines of coverage
Captives are also seen as a means to provide more lines of coverage for businesses. In this time of hardened commercial insurance markets and with the coverage flexibility that captives offer, businesses are looking to protect themselves and their employees from an increasing variety of risks. Captives are being used more and more to protect against cybersecurity breaches and environmental liability, increase employee benefits (e.g. employee wellness programs), and provide director and officer liability coverage. Captives are increasingly being used to cover third-party risks, as well, such as extended warranties, vendor liability, and affinity programs.
Businesses have always had to assess and protect against risk to the best of their abilities. Unfortunately, that exercise has become even more critical today as the risks have become greater and more diverse, disrupting and hardening traditional commercial insurance markets. Fortunately, though, captive insurance is well equipped to help businesses protect against risk in difficult markets like these. It is and will continue to be a useful and valuable tool as businesses move forward in these turbulent times.
For more information on Vermont’s captive industry, visit www.vermontcaptive.com, call Brittany Nevins at 802-398-5192, or email brittany.nevins@vermont.gov.
Resources: The following resources were utilized in creating this blog.
