The coronavirus represents a potentially historic challenge for the world’s economy, and captive insurance companies are by no means immune from its potential impacts. In fact, unless risks are properly managed, captive insurance companies are potentially doubly exposed to coronavirus related losses. We explain why below, and we also note some steps that you might take now to mitigate much of the potential risk.
Despite presenting some challenges, the coronavirus pandemic may well be captive insurance’s finest hour. Times likes these are when captive insurance shows its real value in protecting America’s small and mid-sized businesses from disaster. To the extent that you have insured relevant risks via a captive insurance company, your operating business has both more insurance and access to more capital than most of your competitors do. As a consequence, your business will be far better prepared to survive the uncertainties of the market place, and indeed to prosper in the face of them.
So, congratulations on your foresight in forming and operating a captive insurance company when times were good.
Are Insurance Companies Doubly Exposed?
In a worst case scenario, captive insurance companies are potentially doubly exposed to losses from coronavirus effects. This is because the value of their assets may decline (due to market panics) at the precise moment that their potential liabilities expand (due to higher potential claims). Some captive insurance companies have already hedged against potential market losses to a greater or lesser degree, but others as yet have not.
With this in mind, we are providing the following information to our clients and other interested parties for their immediate consideration, and we are asking clients to take the steps noted at the end of this message.
Higher Claims Expectations
Most captive insurance companies should expect and plan for higher than normal claims activity for 2020 and potentially even 2021, especially under the following types of policies (but potentially others also):
- Business Interruption & Extra Expenses related to Supply Chain Interruption, Loss of Key Customer/Supplier/Employee, Regulatory & Legislative Changes, and Reputational Damages
- Property (e.g., loss of access to business premises due to quarantines, etc.)
- Employment Practices Liability
- Subcontractor Default
- Catastrophic Risks (i.e. disruption to critical infrastructures)
And, although your business may not suffer directly (or indirectly) as a result of the virus, it’s likely your captive will experience higher than normal claims activity as a result of its participation in the Reinsurance Pool.
The Potential for Market Losses
Unless properly managed or hedged, the challenge of higher claims may be compounded by market losses in your insurance company’s asset portfolio as economic conditions deteriorate. In a worst case scenario, which most clients will immediately take steps to avoid, your captive may be required to liquidate investments at a significant loss in order to raise funds to cover higher than normal claims.
Action Items for You to Consider
To help you and us manage these risks most profitably for you, please take the following steps as soon as possible:
- Consider Holding More Cash Than Usual (Consult your investment advisor for details). Given the possibility of higher-than-normal claims and also the possibility of market losses, as a consequence of deteriorating economic conditions caused by spread of the coronavirus, consider whether it may make sense to retain larger percentage of assets than usual in cash or highly liquid cash equivalents (e.g., liquid life insurance cash values that are not exposed to downside market risk).
For instance, consider the advisability of holding the reinsurance premium payments received from the risk distribution pool during 2020 in cash or cash equivalents in case some portion of them need be returned to cover your captive’s share of excess losses. And, if you expect to file more direct claims than normal against your captive insurance company during 2020, consider the advisability of liquidating some investments sooner rather than later to raise cash to cover those expected claims.
Remember that investment decisions should be consistent with any investment policy statement adopted by your insurance company.
- Notify us of Losses. Notify us if your operating business has suffered/suffers any losses related to the coronavirus, even if you’re not certain they’re covered by your captive. Please do so even if you don’t know the exact amount of those potential losses. Rough estimates will suffice for now and will aid in planning. A copy of our Claim Notification Form is attached for your use in reporting these losses.
- Keep Us Updated on Losses Each Month. Please don’t wait until year-end to notify us of any new potentially insured losses sustained by your business during 2020 or of any adjustments to prior estimates that you may have previously provided, whether related to the coronavirus or not. Timely reporting of all potential losses will greatly assist us in managing your captive insurance company for your benefit.
Claims this year may be larger than normal, but these are not normal times. And protecting your business in unusual and unexpected situations is why your captive exists in the first place. You are likely far better positioned than many of your competitors to weather any storm. Remember that the cost of higher claims in unusual times like these is in most cases more than offset by cost of insurance savings and the other economic benefits of owning and operating your own insurance company.
Congratulations again on your foresight, and please let us know how we can be of assistance as things develop.