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The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

A FREE 12-page special report from Captive.com

The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance explores the challenges presented by today's business and economic upheaval, as well as the hardening insurance market, and what it means for the captive insurance industry.

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Virtual VCIA Conference Begins Amid Busy Year for Vermont Formations

Welcome to Vermont Spelled Out in Red, White, and Blue with Stars at Bottom and Top
August 12, 2020

The Vermont Captive Insurance Association (VCIA) 2020 Virtual Conference began Tuesday against a backdrop of an active year for new captive insurance company formations in the state.

Interviewed during the first day's program by VCIA President Richard Smith, Michael Pieciak, commissioner of the Vermont Department of Financial Regulation, said the state has licensed approximately 20 new captives thus far in 2020. At the time of last year's VCIA conference, Vermont's new formations were in single digits, Mr. Pieciak said.

New formations are coming from all sorts of businesses, he said. "We certainly have seen an increase in captive insurance licenses since the pandemic has arrived in Vermont and the United States," the commissioner said. "We're certainly getting our fair share of new applications and new licenses."

In addition to new captives, Mr. Pieciak said the state is seeing existing captive insurance companies taking on more risk or new kinds of risk. Companies are looking to take control of their risks and enjoy the security a captive can offer, he said.

Mr. Pieciak added that Vermont has seen no evidence that businesses' interest in forming new captives might have cooled as they look to address the operational issues they're facing due to the COVID-19 pandemic.

"If people have slowed down their interest in captives, we haven't seen it. We've been as busy as we've ever been," Mr. Pieciak said. "We've seen the interest increase during the pandemic."

The COVID-19 pandemic prompted the VCIA's decision to hold this year's conference as a virtual event, and Mr. Pieciak spoke about some of the impacts the pandemic has had on Vermont, the insurance industry, and captive insurance companies.

The commissioner attributed Vermont's recovery from the pandemic to Vermont residents' compliance with business closing and stay-home/stay-safe orders. "People were really highly compliant," he said. "And we really saw our numbers drop very quickly."

"Now, 3 1/2 months into reopening our economy, we haven't had to take a step back," Mr. Pieciak said.

Mr. Pieciak told VCIA conference attendees that the Department of Financial Regulation played a significant role in Vermont's pandemic response, helping monitor the effort and guiding policy by taking charge of modeling and forecasting the COVID-19 outbreak.

Mr. Pieciak noted that while such work is out of the department's traditional bailiwick, it was able to match the skills of the department's financial forecasters with outside partners who could bring the needed epidemiological expertise to forecast the outbreak effectively. "That work was really important in setting the policy," he said.

Regarding insurance policy issues associated with COVID-19, Mr. Pieciak noted that it was clear that most existing commercial insurance policies didn't cover business interruptions caused by the pandemic.

Retroactively forcing insurers to cover those losses would likely have bankrupted many insurers, he said, and financially distressed insurers would have a profound impact on the economy more broadly even as the country tries to recover from the pandemic. "So, a much better approach was to try and find a federal solution," Mr. Pieciak said.

Lack of pandemic business interruption coverage has been a hardship for many businesses, and it wasn't a risk insurers could write in a way that would be affordable, the commissioner said. A federal pandemic risk backstop similar to the Terrorism Risk Insurance Act might well be a solution to addressing future pandemic exposures, Mr. Pieciak said.

"I think there really is a demand and an interest to think of a solution similar to TRIA, that kind of framework, that would work for a future pandemic," he said, adding that he thinks there's a good likelihood such a measure will be passed.

"I am optimistic that something will be created at the federal level, and I think there will be a good opportunity for captives to participate in that as well as captives have participated in TRIA," Mr. Pieciak said.

Asked whether Vermont might consider a sort of pandemic captive collective for all Vermont captives, Mr. Pieciak said, "Vermont has always been an innovator and a leader, so I certainly wouldn't rule anything out." To make such a mechanism work, however, it would have to achieve sufficient scale, which might only be possible with a federal program, he said.

Premium rebates insurers have offered for some lines of coverage such as auto that have been affected by decreased activity as businesses closed and people worked remotely and sheltered in place was another interesting result of the COVID-19 pandemic, the commissioner said. "The vast majority of people have a considerably different risk profile than they did at the beginning of the year," he said.

Mr. Pieciak said he expects the National Association of Insurance Commissioners (NAIC) to ultimately respond to changes in the insurance industry and the economy resulting from the pandemic but not until after the crisis is past and it's clear just what those changes might be. For now, he said, most state insurance commissioners' focus is largely internal, he said.

"I think we're so myopically focused on our home state and reacting to what was going on in our own marketplace," Mr. Pieciak said. "I think a lot of the focus has been inward in our states." He noted that the organization hasn't had an in-person meeting since last fall and said there will be opportunities in the future for the NAIC to think long-term about how the pandemic changes the insurance industry.

"We're not even through the pandemic yet," he said. Once the industry is on the other side of the crisis and its permanent impacts become clear, commissioners will be able to take stock and make permanent policy, Mr. Pieciak said.

The VCIA Virtual Captive Insurance Conference continues through August 13.

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