Coronavirus and captives...the new future of insurance?
In 2014, the State of Ohio had the foresight to pass a captive insurance bill (H.B. 117). While captive insurance companies were allowed to operate in Ohio, captive domestics were prohibited in the Buckeye State. At the time, the bill was intended to provide insurers and private businesses with options for their insuring needs. Now, that action seems prescient as more businesses are faced with losses that might be excluded by their business coverage. Business interruption from a pandemic and property damage from civil unrest is often excluded in commercial policies. Going forward, captive insurance may be a way for companies and insurers to cover those losses not contemplated or covered by traditional policies.
Captive insurance is described as “essentially a form of self-insurance whereby the insurer is owned wholly by the insured” by the Ohio Department of Insurance.1 Captive can take many forms including pure, protected cell and special purpose. Pure and protected cell captive insurance companies are usually utilized by private non-insurance businesses. Special purpose captives, alternatively, are usually used by insurance companies to securitize certain risks. Captive insurance companies are authorized to offer the following lines of business in Ohio:
- Commercial auto liability
- Commercial auto physical damage
- Commercial multiple-peril
- Inland marine
- Medical malpractice
- Ocean marine
- Additional lines at the director’s discretion
- Excess only workers comp coverage
For businesses facing a lack of coverage for losses from business interruption caused by the COVID-19 pandemic and physical damage from civil unrest, a captive insurance company can provide some peace of mind. Specifically, the Ohio Department of Insurance lists the following attributes creating real value for businesses:
- Direct access to the reinsurance market
- Improved cash flow
- Increased control over loss programs and claims handling
- Potential to affordably insure new and/or previously uninsurable risks
- Premium stability
- Tailored coverage, deductibles, limits and rates
- Tax benefits
- Underwriting gains and investment income2
Currently, some captive policies cover business interruption for pandemics and some do not. Some may have coverage for civil unrest, while others will not. Regardless, going forward, captives will be able to accurately underwrite and possibly even make coverage more affordable by pricing for the risk. Closely tailored policies can realize those benefits. Captive insurance parent companies can also realize tax and economic benefits with the use of captives.
To form a domestic captive in Ohio, companies have clear direction from the Ohio Department of Insurance. The department has even created The Office of Captive Insurance to help direct the formation of such entities. The office outlines the steps to form a captive on its website. Companies need to pick a captive manager to assist in the process and incorporate the entity with the Ohio Secretary of State. The company then needs to meet with the department and submit a completed application. Captive insurers can start writing business as soon as the license is issued.
Importantly, captive insurers may provide a new way for companies to cover unexpected and new risks in an unpredictable and new world.