The novel coronavirus has certainly hit every industry across the nation as details of the virus have come to light in the last nine months. Businesses have shut down. Workers have moved to remote environments. Many have had to put contingency plans into play.

The impacts COVID-19 has had on the insurance space are just starting to be felt.

“We were already entering a very hard market, and when you have an uncertainty like the pandemic, it just makes a tough market tougher,” said David Provost, Deputy Commissioner, Captive Insurance, Vermont Department of Financial Regulation.

“Companies will not know the full impact this will have on their business, let alone their insurance program, until they get through the brunt of it.”

It’s added another layer of complexity to mitigation efforts. Luckily, captive solutions are a viable option for many businesses contending with the unexpected exposures the virus has unveiled.

Captives work differently. Adding a captive insurance company to an enterprise’s risk solution portfolio can “help add some certainty to the current environment. You can control what you retain. You can control how you work with insurance companies to get the coverage you need,” Provost explained.

Here’s a closer look at how captives have been responding to the pandemic since day one and the benefits insureds can gain with such a program in place.

Captives Are Helping Insureds Muddle Through the Storm

Captives have been on the frontlines during this tumultuous and uncertain time, especially as more and more insureds look to tackle their virus-related exposures and keep business in operation. For Provost, the key part of getting through the pandemic has been about working with captive members throughout the process.

“We have group members who are working in close contact with us,” he said. Many have been impeded by business shutdown since March. For some, the question of coverage during that time away from the job has come up frequently.

“The members were not operating, so the exposure to the insurance company that they had formed was not there.”
Provost and his team were able to work with one group captive to provide certainty that coverage would remain intact regardless of downtime.

“Premium was not changed, the policy was extended to match the terms agreed upon pre-pandemic,” he said. “If you paid for a year of coverage for your business, you’re going to get a year of coverage while your business is open, and not pay for insurance when you’re not operating.”

Others are contending with gaps in coverage.

“A lot of companies are realizing they have developed holes in their global programs, because their reinsurers might exclude COVID-related claims,” Provost said. “They’ve turned to captives to help fill the holes in their plans.”

Hospitals, for example, have been expanding medical professional liability. Others have added telemedicine coverage to meet the growing need for virtual check-ups.

Event managers, hospitals, airlines and other industries disproportionately impacted by the virus “have all reviewed and even significantly changed the coverage they offer. They’ve been able to work with their captive manager, with the regulator and with the reinsurance market to remodel their programs quickly to fit their needs,” said Provost.

Captive Formation Is on the Rise

Captives present a promising alternative to traditional insurance, especially as the virus places added pressure on businesses to figure out their coverage gaps.

The hard market coupled with the stressors of COVID have magnified the opportunities within captive insurance. “Anytime the market tightens up with less availability and less capacity, the place to go is captives,” said Provost.

This has brought on an increase in captive formation over the last few months as well. According to Provost, there has been no slowdown in captive formation since the market began to harden two to three years back. COVID has only exacerbated this trend.

“We’ve seen a substantial increase in new formations this year,” Provost said. “We’ve already formed more captives [in 2020] than in all of 2019, and we’re projecting that this pace will continue through the end of the year.”

Captive formation can be a great benefit to insureds looking into alternative risk solutions for their growing pandemic concerns. A captive can offer more premium stability, an improved risk management strategy, access to reinsurance, as well as cost savings.

“Parent companies do not know the full impact of the virus on their business, nor do they know when they’ll be back in business. If they can’t find outside coverage, they can look toward captives.”

Captives Are Looking Forward to Pandemic Coverage Solutions

Managing through the pandemic isn’t just about stepping up during the worst of it; it’s also about looking ahead and seeing how to continue to provide coverage opportunity in the future. If a second global pandemic hits, will captive members be prepared?

“Pandemics are not normally considered to be insurable risk. Insurance works well when a lot of people pay in and a few people have a claim paid out,” Provost said, “but it doesn’t work when everybody’s hit at the same time by the same event. In such circumstances, a government program or private/public partnership may be needed to develop a solution. “There are several bills proposed in Congress, some with a fair amount of backing, that are similar to the Terrorism Risk Insurance Act, trying to gain footing to cover pandemic risk,” Provost said.

One bill in question, the Pandemic Risk Insurance Act, has been gaining traction in both Congress and the insurance space. Like the Terrorism Risk Insurance Act, created in response to the events of 9/11, the federal government would serve as a backstop to maintain marketplace stability and to share the burden alongside private industry in the event of another global pandemic.

“The language in this proposed bill is already open to allowing captives to participate,” Provost said. “And we’re open to being a part of the solution. We support the regulators encouraging Congress to pass some kind of insurance vehicle to help address this exposure.”

What to Keep in Mind When Turning to Captive Solutions

For those looking toward captives as a risk and insurance option, now may very well be the best time to invest. COVID-19 has upended many organizations in how they conduct business. It has shed light on the holes in long-existing practices and procedures and has encouraged many to branch out to find new solutions.

“A captive can be part of that process,” said Provost.

“It’s really hard to estimate what the loss severity is going to be with a pandemic, what it’s going to cost,” he continued. “Frequency is also something that can’t be predicted, but at least insureds can start putting money aside in their captive and formulate a plan now.”

Vermont Captives have been at the forefront of the captive insurance industry for nearly 40 years, with over 1,100 licensed captives to date. They know what they’re doing when it comes to captive solutions.

And the team has been diligently working to provide captive members with the tools they need to combat pandemic risk.

“We’ve been open this whole time — remotely, of course. We’re keeping up with the applications and plan changes to ensure companies are not facing any delays,” Provost said.

“Pandemics are not predictable; but utilizing captives during this time can help businesses prepare for both predictable and unpredictable events.”