Is a Captive Insurance Plan Right for Insuring Your Events Against COVID-19?
Since the start of the COVID-19 pandemic, it has been impossible to obtain event cancellation insurance that includes communicable disease coverage. To address the issue for its March Madness tournament, the NCAA created an insurance captive. If you’re wondering if this is something your association should consider, an insurance expert offers advice.
More than two years after the onset of the pandemic, event cancellation insurance continues to exclude COVID-19 and most communicable diseases, leaving associations feeling vulnerable to pandemic-related disruptions. This week, it was reported that the NCAA formed an insurance captive to provide directors’ and officers’ (D&O) liability and event cancellation coverage.
Other associations may be wondering if a captive is something they should consider. To find the answer, we spoke to Melissa A. Hancock, a managing director at Strategic Risk Solutions, who has more than 20 years of experience managing captives.
If you’re wondering what a captive insurance plan is, Hancock describes it as “a self-insurance vehicle. It’s strictly in order to cover their own risks.” The captive is funded by the organization, heavily regulated like other insurers, and pays out when claims are made.
Organizations typically look to captives when insurance for the risk they’re looking to cover is completely unavailable or extremely expensive. “Based on that article, the NCAA couldn’t find this coverage, so they formed a captive insurance company to essentially store some premium dollars for covering their own insurance risk,” Hancock said.
If an organization is thinking about forming a captive, it should ask three questions:
Is coverage unavailable on the commercial market, or is it very expensive? “Sometimes, the commercial market does just fine,” Hancock said. (See “The State of Event Cancellation Insurance“ sidebar below.)
Do we have the funding available to support the captive? “The captive is going to need to be capitalized,” Hancock said. “That can mean putting money aside to support the captive. Sometimes collateral will need to be provided.”
Hancock said captive insurance is strictly regulated because, most times, you’re essentially creating an insurance company that covers the risks of your organization.
“A captive has to act like a regular insurer in certain ways,” she said. “It has to have adequate premiums to cover what they think their claims are going to be. It should be enough to cover all the claims, all the expenses, and usually there is a little bit left over as profit, 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 on the high side.
“There are lots and lots of captives that have less than a million dollars in premiums, and sometimes they only have $200,000 or $300,000 in capital, so that’s much smaller than what you’re seeing for the NCAA,” Hancock said. “Many times, captives are not large, but they really solve a problem for their owner.”
How are we going to establish the captive? While it is sometimes possible to have in-house staff create and operate a captive, Hancock recommends hiring a consultant or captive management company because there are many accounting and regulatory requirements involved. In some jurisdictions, professionals with captive expertise are required.
Pros and Cons
Like any other plan, a captive comes with positives and negatives. On the pro side, the captive is similar to a wholly-owned subsidiary: the captive assets are still owned by the association.
“When a company buys insurance from a commercial carrier, it just pays its bills and the money is gone; it’s an expense,” Hancock said. “If the owner of a captive insurance company pays premiums into the captive, it’s basically paying it into a subsidiary that is part of the corporate group.”
Hancock said the captive can, in certain circumstances, pay a dividend back to its owner. “That’s one way to get extra funds out of the captive,” she said. The captive can also be dissolved to return some assets, but she notes that is a highly regulated and lengthy process.
The con of the process is that the organization can lose money if claims exceed the premium paid to the captive. “If you pay a million dollars into it and your claims are over a million dollars, additional funding may need to be contributed to the captive,” Hancock said. “That can be a challenge.”
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