Businesses, Captives Look To Learn Lessons from the COVID-19 Pandemic

Businessman uses tablet to analyze COVID19 economic fallout data

August 30, 2021 |

Businessman uses tablet to analyze COVID19 economic fallout data

In addition to the direct impacts of the COVID-19 pandemic on many captive insurance companies and their parents, the disaster also highlighted vulnerabilities.

The result is that many organizations are looking to learn from the experience, while responses to the pandemic might lead to some permanent changes in the way business is done.

"The captive insurance industry saw changes on a macro level arising out of the pandemic that identified certain vulnerabilities," said Julie Bordo, president, PCH Mutual Insurance Company, RRG.

Ms. Bordo shared her thoughts while moderating a session titled "Disaster! Lessons Learned" during the Vermont Captive Insurance Association's recent virtual Annual Conference.

Panelist Michael O'Malley, managing director at Strategic Risk Solutions Vermont Ltd., noted that one of the changes driven by the pandemic will be more specificity in business interruption policy language.

Typically, business interruption coverage requires a physical loss, Mr. O'Malley said.

"The challenge then becomes showing that there is a connection to your physical location when it is a societal event," he said. "And then the other challenge is policies typically don't include a definition of direct 'physical loss.'" The result is coverage can become a question of interpretation of the policy language.

"The movement in the future is more specific definitions," Mr. O'Malley said. He noted that while the courts have largely ruled for insurers in pandemic-related business interruption disputes, the cases that have found for insureds typically saw courts interpreting the policy language as such that a reasonable person would consider the pandemic an insured event.

As these policy definitions are tightened, buyers will understand "that going forward, this type of exposure is clearly going to be borne by their balance sheet or the captive," Mr. O'Malley said.

Many business interruption policies did have virus exclusions, Mr. O'Malley said. "Where there have been virus exclusions in the policies, those decisions have heavily favored the insurers," he said. That will likely lead to more virus exclusions in business interruption policies in the future, he said. "I think that what's clear is that the absence of a virus exclusion creates uncertainty for the insurer," Mr. O'Malley said.

The experience of the COVID-19 pandemic, along with insurers tightening policy language, is leading many organizations to consider how to better manage exposures like pandemics and how they might finance the risk in their captive insurance company.

Gail Newman, vice president of risk management at Bright Horizons, said the pandemic has led her company to reconsider several aspects of its insurance program and risk management.

"As we've started to recover from this pandemic and reopened the business, we took this as an opportunity not to sit back on our laurels and just go back to business as usual," Ms. Newman said.

She's in her company's current insurance renewal and is seeing increased underwriter scrutiny about their approach to COVID protocols, health and safety practices, and the company's approach to updating policies and procedures, Ms. Newman said. "What that tells me as a risk manager is that there is more and more focus on our prevention strategies," she said.

"We're starting to take more direct control of exploring our insurance fate, exploring more options to leverage our captive, whether it's taking higher retentions, placing more lines of cover in the captive," Ms. Newman said.

To increase its comfort level with ramping up the use of its captive, Bright Horizons has strengthened its enterprise risk management approach, she said. That includes increased focus on the risk register, how it manages risk, having risk owners, and having frequent communications with those risk owners.

The company also recognizes the possibility of another disaster like the pandemic, so it has taken several steps to address future risk, including investing in business continuity. "Our business believes that business continuity is a key risk mitigation tool," Ms. Newman said.

Joe Layman, disaster recovery and business continuity manager at Bright Horizons, noted that a business continuity plan should include a business impact analysis, risk assessment, an emergency action plan, an incident management team, crisis communications, information technology disaster recovery, and a business recovery strategy.

Panelist Hugo Crawley, chairman of TigerRisk Partners (UK) Ltd., noted that the reinsurance industry has raised considerable capital in the past 18 to 24 months.

"I think the vast majority of what has taken place in the last 12 to 18 months is due to the perceived exposure to the pandemic," Mr. Crawley said. "I don't think this is about losses to COVID as much as the changes that are going on in the marketplace as a result of COVID."

He noted that the reinsurance industry has been experiencing a "correction," which has been responsible for attracting much of the new capital.

"When you look at what this means, $14 billion of new capital coming into the market is a significant amount of capital," Mr. Crawley said. "And it is to take advantage of what people believe is going to be a much harder insurance market and a hardening reinsurance market."

That inflow of capital has probably moderated the market hardening, however, Mr. Crawley suggested.

One of the major lessons learned from the pandemic in the reinsurance market is the opportunities offered by doing business in a virtual environment.

He cited the example of the Lloyd's Virtual Room, which was created to allow the market to continue doing business after the pandemic forced Lloyd's to suspend in-person operations.

"I think this is going to be part of a significant dynamic change that's going on in the market overall, which is to create a virtual room and be able to trade with underwriters via this type of medium," Mr. Crawley said.

"It's not the same as being able to go see people and be able to trade with people face-to-face," he said. "But I think the ability to be able to maintain a marketplace that has always thrived on that face-to-face exchange, and to find a different medium to do it, it's not as straightforward and as easy as I would like it to be, but I think that's because the same as any business that's so relationship-oriented, physical presence makes a big difference versus doing something virtually."

He also cited the use of the London market's Placing Platform Limited electronic placing platform, which enables brokers and insurers to quote, negotiate, bind, and endorse business digitally. While the platform existed before the pandemic, the need for social distancing made its use mandatory.

"For every broker who was resisting this, they had no choice," Mr. Crawley said.

He believes the electronic approach will increase efficiency in the marketplace, resulting in better premiums for insureds and reinsureds. "From that standpoint, I think that's been a major win for the London and Lloyd's market," Mr. Crawley said.

"The reality is, London was able to stay open, people were able to trade even though the market was shut down for that period," he said. "We had to use a lot of new technology, and we found new ways to endorse the whole placement and processing of business."

August 30, 2021