As the health crisis continues, one issue that companies will likely face is the issue of renewing their insurance. In any bear market, the lack of liquidity can drive the insurance market 'hard,' making it more difficult to place new coverage or renew policies at anything less than substantially higher premiums, higher deductibles, or both. Businesses may find it best to self-insure a portion of their risk or renew their existing policies while retaining a higher deductible. Businesses facing these choices should strongly consider forming a captive insurance company to help better manage their risks. Several issues that business owners, CFOs, and risk managers should consider:
- Fronted coverage to meet business obligations. If your business has a regulatory or contractual requirement to maintain an insurance policy with a minimum rating from AM Best or other nationally recognized rating agency, a captive insurance company can help you self-insure those risks while maintaining the rating. Under a fronted captive program, you would still have a certificate of coverage from a nationally rated insurance carrier. That carrier would then reinsure some or all of that risk back to your captive insurance company. Although the rated insurer would require you to post collateral to guarantee that any policy claims would be covered, this collateral can be often be secured by a letter of credit or pledge of corporate assets. While this arrangement would likely not result in a substantial premium savings over a traditional commercial insurance policy on the front end, your captive insurance company would keep any unspent premium. This underwriting profit could then grow inside the captive to meet your future insurance needs or eventually returned as a dividend.
- Supply Chain and Operations coverage. Insurance policies that cover business interruption, key person, supply chain integrity, etc. are likely to be hit especially hard at the next round of renewals. Putting these risks inside a self-insured captive may be the only viable option if businesses want to maintain any level of coverage in the next few years.
- Excess/Umbrella. With the potential large number of claims businesses are likely to face, including losses that exceed coverage limits, it may become more economical to self-insure some of your excess risk above current policy levels.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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