Captives

Welcome to Risky Business Commercial Insurance with Butler Byers. This is Paul Martin, the business commentator on CKOM. Joining me today, Colin Rooke, the Commercial Risk Reduction Specialist with Butler Byers. Colin, for the last few months, I guess, we’ve been bringing in experts to provide us with some insight on specific areas, whether it’s for cyber or any of that sort of stuff. But today it’s just going to be you and I have a conversation. And it, I guess, is that conversation we’re all having right now.

Welcome to the second wave. COVID is really the conversation point. And you’re seeing across the country, different provinces, implementing different levels of restrictions. They seem to be changing on an ongoing basis. How does someone in the insurance business view all of this? Are you getting calls, or are your clients talking to you about, “Hey, what does this mean for me?”

Yeah, we are. I would say that the biggest change with increased numbers, the second wave, and either threats or actual action taking place around more closures or stricter restrictions, the idea of business interruption has resurfaced. We done a couple of shows early on talking about sort of what’s wrong with the insurance industry, and why don’t I have coverage for pandemic? And we’ve covered off why you wouldn’t normally see pandemic coverage on a business interruption policy.

And now that we’re into the second wave, I think there are some businesses that were fairly sheltered earlier on, less of an impact as, let’s say, a restaurant or anyone in the hospitality industry may have seen. And now with, I would say COVID looming, I don’t think people are feeling like this is going away anytime soon.

So business interruption is, it’s surfacing again. It’s a question that we’re being asked. “Why wasn’t this offered? Why can’t I buy it? Why wasn’t it included my policy? Why do I buy it? Why do I buy insurance?” And I just want to share, I’ve done some digging, and I want to share some of the numbers. It’s pretty alarming, and it just kind of, I believe, sort of proves the point a little better as to why, not only is it not offered, it’s not going to be offered. So to give you some sort of global stats for… And we’re not the end of 2020 yet. So if we’re talking from beginning of March to end of November, the global losses, BI losses, that would be attributed to the pandemic are more than $4 trillion. However-

Well, that’s globally. And that’s business interruption, right?

That’s right. Yeah. Globally. So you’d say that the dollars that would be attributed or could have been covered, let’s say, by business interruption had it been, had pandemic coverage, or had it not been excluded on the policy. By comparison though, global annual premiums for 2020 are about 1.6 trillion.

That’s for all forms of insurance?

All forms. And of that, $30 billion of that 1.6 trillion, 30 billion globally, would have gone towards the payment towards a business interruption policy. So when you think about what would get collected on an annual basis versus what would have been paid out had, in the wording of the policy, pandemic had not been excluded, we’re talking you would take 150 years worth of premium, at the $30 billion mark, roughly, to just cover those losses.

And that’s not even a full year’s worth, your saying. It’s like nine months.

That’s right. We’re just dipping our toes in because if you think about it, we’ve talked about incurred, but not reported claims. We don’t even know the magnitude of what’s out there. And as a policy holder, in most cases, you would have two years to report that. So we’re just really dipping our toe into the water currently as to the magnitude of would-be business interruption claims.

So Colin, can I extrapolate from those numbers that you’re telling me? And by the way, they’re quite stark. When you think that, based on what traditional business interruption premiums are, so 150 years’ worth of premium just to cover the first nine months of the pandemic. I mean, it’s… Should I extrapolate from that, that pandemic insurance isn’t offered now and it ain’t going to be offered in the future?

Yeah. And oddly enough, there is an insurer that had been offering pandemic insurance and it was derived from, I believe, the Ebola outbreak. So at the time, it wasn’t available. But they said we’re a niche market and we’re going to offer it. And now that has all but ceased because they’re thinking, geez, the uptake now would be extreme. And there’s just… We just couldn’t collect enough premium to insure the globe.

So they found out the hard way, huh?

Well, in speaking about finding out the hard way, we’ve talked at length about the challenges of the hard market that we are in today, and what gets us there. Most think that it actually is COVID-19 related. It’s not. It’s claims. However, you take markets like Northbridge Insurance, for example. They did have a small limit for various programs that they offered primarily around sort of senior citizens, residents, or other care facilities of that nature. The limit, I believe, was between 20 and 25,000. I’m not sure if you could purchase more.

But the reason why I’m sharing that is, just in that coverage alone in Canada, Northbridge has paid out about 25 and a half million dollars as what would we would almost call, and in fact, I wouldn’t say “almost call”. As a broker, we’d almost call a “throw in” because going back two years, it’s not even something you’d highlight in the coverage section that, by the way, there’s this token amount in the event there’s a pandemic. You certainly wouldn’t sell the policy on the nature of that. Now you would. But the losses are extreme, and that’s just a base amount. That’s, again, something that you wouldn’t even have gone over.

I’m assuming that there is a gap in knowledge, though. We’re talking about this for a reason, because business people are phoning you up and saying, “I need this kind of coverage.” They don’t realize it’s not available. Did a lot of people get caught by surprise, or sort of blindsided, thinking I must be covered, and they’re not?

Yes, absolutely. When you think of… When you’re talking about policy and coverages, and you say you have purchased what’s called “business interruption insurance”, and you give a high level explanation. You say this would cover you against insured perils that would cause you to cease operations for a period of at least 24 hours or 48 hours. It would help you recover fixed costs, payroll expenses, potentially profit, et cetera, et cetera. And the insured says, “Okay. I’m insured against things that would arise that would halt operations.” But there’s that one line that gets overlooked, “insured peril”.

It’s only available if the cause of loss is something that’s in the policy wording. And unfortunately, when you hear “forced closure”, that’s an interruption in business, absolutely. And it’s easy to say, and of course… The policies and the business owners world, it’s ours to say, “I’ve got an interruption in operations. I’m going to simply put in a claim and we will recoup these lost funds.” Of course we have to remind that on every policy, there is exclusions that will limit the amount payable. And again, for the reasons cited before, on you just couldn’t collect enough premium. Pandemic is one of those.

And, if you think about it, even if it was widely available, most wouldn’t have bought it all. Almost everyone wouldn’t have bought it. If I said, “A pandemic is basically a virus spreading out of control impacting the globe, and for that reason, the pandemic line of coverage alone might be 30 times what your overall policy premium is. Do you want this?” It’s an easy sell now if it was available. But prior to this, you wouldn’t have given it a second thought. It’s, “No. Don’t want it.”

Yeah. At first, it’s not available. But even if it were hypothetically, it would be astronomically expensive is what you’re saying.

Exactly.

Colin, we’ve got to take a break and we’ll pick this up in just a minute.

You’re listening to Colin Rooke, the Commercial Risk Reduction Specialist with Butler Byers. This is Risky Business, back after this break.

Welcome back to Risky Business Commercial Insurance with Butler Byers. Paul Martin here and joining me Colin Rooke, the Commercial Risk Reduction Specialist with Butler Byers Insurance.

Colin, before the break we were talking about sort of that knowledge gap, I guess we could say. Business owners incorrectly thought the business interruption would cover a pandemic. It doesn’t. And that’s probably triggering some anger and likely lawsuits and all of that kind of stuff, too. Right?

It is. There’s a lot of different companies that are trying to look for gaps in the wording, or other interpretations of the definition of pandemic, certainly on the special events side of things, for example. If you think about it, globally, how many special events were canceled? And no coverage for pandemic on any policy that I’ve seen. And then just regular operations, whether you’re in the hospitality sector, or really anything, there are attempts to say… Well, one, we have a lot of clients putting in claims that even though we’re saying these will be denied, there’s a feeling that if there’s any sort of class action or intervention, I want to be first on the list of who gets paid. So there is that school of thought. And then certainly again, taking it upon yourself to say I’m going to take legal action and try and fight for the interpretation of the wording. You certainly hear about those in the media.

Yeah. But there’s the saying, one I’m very fond of, “A crisis is a terrible thing to waste.” So here we are in a crisis, and commercially there’s no getting around it. It is a crisis. I’m assuming that there are some novel thought processes going on. People are very creative and they look for answers and ways to, how do I cope with this crisis? And I’m assuming your industry’s no different. What are some of the quick thinkers talking about these days?

One thing that’s coming up more often, and I want to caution against, it is the idea of insurance captives. So one, if you own your own insurance company, in theory, you could, and I’d probably argue you would, have a line of coverage for pandemic. And two, we are in this hard market, in the worst timing possible for business owners. However, premiums are going up through the roof. And so the captive insurance idea is being thrown around. There’s other agencies that are discussing captives that really have never brought that forward. There’s a lot of webinars. There’s a lot of talk. In theory, and again, we’ve talked about the insurance captive idea, in theory, it is a good idea. But it’s not for everyone. In fact, it’s not for most. It’s for very few.

And to say, “Hey, if you had your own insurance captive, and if you did, you could put the pandemic insurance in there and you would be laughing all the way to the bank right now” is wrong. Because if the whole insurance industry can’t support the potential BI claims, your captive wouldn’t either. You are the one collateralizing this captive. You’re putting the fronting money up and you’re holding it in reserve. And yes, you are buying re-insurance. But if the re-insurer won’t offer that line of coverage either, you’re still in the same boat. So if you say, “Okay. Well, I can’t reinsure it, but I’m going to set some money aside.” It wouldn’t have been enough.

And as an aside, just to sort of move away from business interruption, there’s a lot of talk about property coverages moving inside of an insurance captive. Right? Your building rate has doubled. Your contents rate has tripled. Property premiums are shooting through the roof, but there’s a reason for that. It’s claims. And we got there somehow. People are putting in claims. People are incurring losses. So to take a paint brush and say, all these people should have their own insurance company. Well, you’d find yourself with the same issue that the insurance industry is right now.

The most important component when considering insurance captive is your risk management strategy and your stance on risk, and your understanding of risk. And so, you can’t be part of the problem and think that a captive is a solution. You have to be the diamond in the rough. You have to have complete understanding of your responsibility around risk management and say, “I want to break away from the crowd. The crowd is costing me money. I’m not costing them money.” So to use this sort of a `paint brush approach, to say, “you should all look into it”, it wouldn’t help anybody.

In theory, if you own your own insurance company, the whole point of that exercise is to not pay out claims, right? You don’t build it to figure out a way to get a better way to get paid, because it doesn’t work that way.

Exactly. And honestly, the formula is very, very simple as to whether or not you are a captive candidate. You look at the past 10 years. What have you paid in premiums? What have they paid you in claims? And then subtract about 40% for expenses, year over year, to run your own insurance company. And you look at the numbers and you say, “Would I have won that bet? Did I pay more than was paid back to me after expenses?” If it’s “yes, by a landslide”, start the conversation right now. If it’s close, don’t do it. And if you came out ahead, don’t even consider it until you have an iron clad risk management strategy in place. Risk is a primary focus inside the organization. You understand your exposures and you have a plan to mitigate those, eliminate them entirely.

Colin, we’ve got just under a minute left and so I’m going to ask you one quick question to kind of wrap this up, as it maybe puts a bow on our conversation today. The hard market that we’re in, is it a result of the COVID pandemic?

No. It’s terrible timing, but has nothing to do with COVID. It has everything to do with claims incurred in 18 and 19, and being paid out in 20, and now into 21.

So that would have been things like hurricanes, wildfires, pick a topic.

Exactly. Water losses, fire losses, nuclear liability claims. Exactly. That horrible timing, but not related.

Colin, very interesting. Thank you for your insights, as always. You’re always keeping us at the leading edge of thinking in your industry, and I think that’s really the point of the program here. So thanks for that.

You’ve been listening to Colin Rooke, the Commercial Risk Reduction Specialist with Butler Byers. And this is Paul Martin. Thanks for joining us. Risky Business comes back next week.