Is a captive insurance plan suitable to insure your events against COVID-19?

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More than two years into the pandemic, event cancellation insurance continues to exclude COVID-19 and most communicable diseases, leaving charities feeling vulnerable to pandemic-related disruptions. This week, it was reported that the NCAA had formed an insurance captive to provide liability and event cancellation coverage to directors and officers (D&O).

Other associations may wonder if a captive is something they should consider. To find the answer, we spoke to Melissa A. Hancock, managing director of Strategic Risk Solutions, who has over 20 years of experience managing captives.

Captive bases

If you’re wondering what a captive insurance plan is, Hancock describes it as “a self-insurance vehicle. This is strictly to cover their own risk. The captive is funded by the organization, heavily regulated like other insurers, and pays when claims are made.

Organizations typically turn to captives when the insurance for the risk they seek to cover is either completely unavailable or extremely expensive. “Based on that article, the NCAA couldn’t find that coverage, so they formed a captive insurance company to basically store premium dollars to cover their own insurance risk,” Hancock said.

If an organization is considering forming a captive, it should ask itself three questions:

Is the cover not available in the commercial market or is it very expensive? “Sometimes the commercial market does very well,” Hancock said. (See “Status of event cancellation insurance” sidebar below.)

Do we have the funding available to support the captive? “The captive is going to have to be capitalized,” Hancock said. “This may mean putting money aside to support the captive. Sometimes collateral will need to be provided.

Hancock said captive insurance is tightly regulated because most of the time, you’re basically creating an insurance company that covers your organization’s risks.

“A captive must act like an ordinary insurer in some respects,” she said. “He needs to have adequate premiums to cover what they think their claims are going to be. This should be enough to cover all claims, all expenses, and there is usually a bit of profit left over, but it really depends on what the owner wants to do with their captive.

Although the NCAA used $175 million to fund its captive, Hancock says that amount is high.

“There are lots and lots of captives that have less than $1 million in premiums, and sometimes they only have $200,000 or $300,000 in capital, so it’s a lot smaller than what you see for the NCAA,” Hancock said. “Often the captives aren’t big, but they really do solve a problem for their owner.”

How are we going to establish the captive? Although it is sometimes possible for internal staff to set up and operate a captive, Hancock recommends using a consultant or captive management company as there are many accounting and regulatory requirements involved. In some jurisdictions, professionals with captive expertise are required.

Advantages and disadvantages

Like any other plan, a captive has advantages and disadvantages. On the benefit side, the captive is similar to a wholly owned subsidiary: the assets of the captive are still owned by the association.

“When a business buys insurance from a commercial carrier, they just pay their bills and the money is gone; it’s an expense,” Hancock said. “If the owner of a captive insurance company pays premiums to the captive, he essentially pays them to a subsidiary that is part of the corporate group.”

Hancock said the captive may, under certain circumstances, pay a dividend to its owner. “It’s a way to get additional funds from the captive,” she said. The captive can also be dissolved to return certain assets, but she notes that this is a highly regulated and time-consuming process.

The downside of the process is that the organization can lose money if the claims exceed the premium paid to the captive. “If you put in $1 million and your claims exceed $1 million, additional funding may need to be provided to the captive,” Hancock said. “It can be a challenge.”

(CalypsoArt/iStock/Getty Images Plus)

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