BURLINGTON, Vt. – Businesses are increasingly looking to captives to address emerging risks as commercial insurance market conditions remain difficult, experts say.
Demand is growing for innovative insurance programs for cannabis and cryptocurrency risks, among others, panelists said Tuesday at the Vermont Captive Insurance Association’s 2023 annual conference.
“The search for capacity doesn’t end when your insurance broker says there’s no combination for you,” said Joseph Ziolkowski, co-founder and CEO of Relm Insurance Ltd., a Bermuda-based specialty insurer for emerging businesses.
“That’s the point at which the creative element should start kicking in,” he said.
Companies operating in emerging sectors such as digital assets and blockchain, cannabis and psychedelics face challenges getting insurance, Mr. Ziolkowski said.
“There needs to be a ton of collaboration with the operators of these businesses to put them in a position to reduce their dependence on the way insurance has functioned for the last 350 years,” he said.
New businesses face a classic “chicken and egg” problem where they need insurance to operate, but underwriters may not be able to provide coverage without knowing more about the probability and severity of a loss, said Ed Koral, New York-based director, strategic risk consulting, at Willis Towers Watson PLC, who moderated the session.
“Captives are frequently the answer, but part of designing that new product is deciding whether you have something that could be considered an insurable risk,” he said.
There are many examples of risks that people think may or may not be insurable, such as extended warranty, “and the Internal Revenue Service has gotten into the act of discussing that as well,” Mr. Koral said.
Large businesses with established captives are seeing opportunities to use them to solve problems, said Paul Carleton, executive vice president at Old Republic Risk Management Inc., a Brookfield, Wisconsin-based subsidiary of Old Republic International Corp.
Captives are being used to insure third-party exposures in business relationships “to maybe solve a business need and also generate the opportunity to bring third-party capital into their captive,” Mr. Carleton said.
For example, a retailer with a network of appliance installers that sometimes didn’t do a good job faced reputational risk when unhappy customers complained about their claims experience on social media, he said.
A general liability policy was crafted that rolled all the installations into their program with a third-party administrator of their choosing, and the risks were reinsured by the retailer’s captive, he said.
