For many risk managers, the ongoing pandemic has made a bad situation worse.
Already dealing with steep rate hikes and restricted capacity as insurance markets harden globally due largely to conventional losses, commercial insurance buyers are coming under more pressure with insurers tightening their offerings further as they face up to the threat of present and potential future virus claims.
The size of the increases being pushed through, which are way up in the double digits for some lines, and some severe restrictions in capacity, especially for umbrella liability coverage, have stretched risk management budgets and complicated placements at a time when many organizations are enduring incredibly difficult times economically.
In addition, more restrictive policy wordings and the realization that a worldwide health crisis is a reality rather than a theoretical threat, means that insurance coverage for virus-related losses is even less available than it was before COVID-19 struck.
As a result, risk managers must come up with alternative approaches for a wide range of risks.
One of the main resources at hand is, of course, captive insurance. Risk managers have a long history of using captives to help manage hard markets. The structures allow them to better manage retentions, access additional capacity in the reinsurance market and gain more direct control over their exposures.
Captives can also be turned into profit centers by writing third-party risks and go some way to easing financial pressures on their parent companies.
And many organizations have quickly turned to their captives during the current hard market. According to a report issued last month by Marsh LLC, which owns the world’s largest captive management firm, most captive owners expect to expand the use of their captives (see chart).
Perhaps the most interesting expansion of captives in the current environment is to use the vehicles to cover emerging risks.
Caution is needed because one of the main reasons for buying insurance is to offload liabilities an organization can’t handle on its own, but if insurers are not willing to cover a risk, then maybe managing the risk through a captive is a better option.
For several years, captive managers have promoted the use of captives to cover newer risks such as cyber liability, which in most cases is only partially covered by products offered by insurers, but with the onset of COVID-19 some are also saying pandemic exposures are another emerging risk that captives can cover.
According to Marsh, at least 25 of the captives it manages write coverage for pandemic risks, and the firm expects more to use them in the future.
While there is no perfect solution to the risk management problems that COVID-19 presents, there are tools at hand that could help manage the crisis, provided they are handled with care.
