Insuring Against The Two-Headed Monster

One of the benefits of captive insurance companies is their ability to write customizable lines of cover.  This is particularly important for non-core, non-traditional and evolving risks.  There are many risks that cannot be adequately or affordably insured by third party commercial insurance.  This may be the case because commercial insurers refuse to cover risks that are difficult to quantify and price.  It may also be the case because commercial insurers don’t have enough experience with a form of risk to provide adequate and affordable coverage.  Also, this may be the case because a risk is relatively new and rapidly evolving.  The result is that commercial insurance policies offered are often overpriced and filled with exclusions.

Risk management and purchasing business insurance policies can be a daunting task.  It can be particularly challenging when you’re not sure about what you are paying for.  What exclusions apply to the insurance policies you are purchasing?  Is there coverage for all the secondary damage caused by an accident or loss including possible lawsuits and reputational damage?

This article will address two growing threats that small and mid-market businesses face and outline why these threats are often best addressed via an Enterprise Risk Management (ERM) approach with a Captive Insurance Company (CIC)

CYBER

It is difficult for businesses to get as much cyber coverage as they need, and this leaves them vulnerable to uncertain losses.  One of the main problems with cyber claims is quantifying losses from attacks, because they are often intangible — lost sales or damage to a brand name, like the public relations disaster Target suffered after the breach of its point-of-sale systems late last year.

Commercial insurers are reluctant to extend adequate coverage, and coverage is expensive.  This is often the case because underwriters lack the data they need to figure out how likely it is that an attack will occur, or what it will cost.  The result is that commercial insurers often keep policies narrow simply because there are too many unknowns.  This makes cyber insurance a particular challenge for small and mid-size businesses who cannot easily afford to pay large cyber premiums for sketchy coverage.  If there are no losses, the business has paid out significant premiums with nothing to show for it.  Purchasing cyber insurance from a captive insurance company can have the three-fold benefit of providing cyber cover, providing cover with few or no exclusions and building captive reserves in the event of no claims.  And, captive reserves insure future losses and also can be translated into profit for the business or its owner (s).

Another reason that cyber insurance is difficult and expensive to acquire is that the nature of the threat isn’t static.  Information on past attacks is not particularly helpful because attackers are always getting more advanced, and the risk is increasing as companies put their most valuable data online.

Clearly, cyber attack insurance is a very logical choice as a line of cover to be included in many captive insurance policies.  Business owners and risk managers could easily justify cyber policies to pay for clean-up,  administrative actions, lawsuits and other costs.  Business owners with a captive in place should also consider insuring several years of future profit via a reputational risk policy through their captive insurance company.

TERROR

Terrorists can strike anywhere, and it’s certainly reasonable to assume they would strike in the “heartland,” or in a rural area, or hit our power grid, or poison drinking water, or disrupt communications.   Also, a terrorist strike would not have to directly destroy a business or its facilities to severely injure a company.  Terrorism can cause indirect – but overwhelming – losses by destroying key customers, destroying key suppliers or interrupting business in a myriad of ways.

Recent history has demonstrated that terrorists can strike the U.S.  Furthermore, our porous borders, large-scale international student visas, and history of lax immigration standards raise the specter of future terrorist attacks on our soil.  Small and mid-size  businesses would be wise to have terrorism insurance in place and doubly-wise to insure against terrorism via a captive insurance company.

Two things are certain.  First, many commercial insurance policies exclude terrorism.  Second, similar to cyber-attack, the impact and true losses from a terror attack can be far reaching with any third party insurance in place only covering a fraction of the total damage.

Because a terrorist attack could permanently sink a business, particularly a small or mid-sized business, it is a strategic risk.  And the slipshod development of trustworthy and fairly priced terror insurance to date does not inspire confidence in the U.S. government or the commercial insurance market.  Clearly, insuring terrorism in a captive insurance company is a very logical choice for a small or mid-size business.

Purchasing terrorism insurance from a captive insurance company can have the three-fold benefit of providing terrorism cover, providing cover with few or no exclusions and building captive reserves in the event of no claims.  And, captive reserves insure future losses and also can be translated into profit for the business or its owner (s).  Business owners with a captive in place should also consider insuring several years of future profit via a terrorism insurance policy through their captive insurance company.