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Captives provide buffer in volatile times: Experts

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Captive insurers are playing a strategic role in helping their organizations reduce volatility and create capacity while navigating the hard market and the pandemic, experts say.

Courtney Claflin, executive director – captive programs at the University of California, said the university went through its “worst renewal ever” during this time period.

However, it was able to leverage its captive to shield itself from the full effects of the hard market.

“We absorbed at the captive level all rate increases and internally absorbed financial responsibility for all lines of coverage being excluded by the London and Bermuda markets,” Mr. Claflin said.

Mr. Claflin was speaking at a session Wednesday of the Risk & Insurance Management Society Inc.’s 2021 online conference. The session was moderated by Daniel Towle, president of the Captive Insurance Companies Association.

The convergence of the hard market and COVID-19 has created a lot of volatility, said Heather McClure, chief risk officer, OU Health at the University of Oklahoma.

“What’s great about having a captive is that it reduces that volatility,” Ms. McClure said. In the hardening market, a captive offers “the flexibility to put lines of coverage into it,” either via quota shares or deductibles.

In the state of Oklahoma weather, such as tornadoes and the recent winter storm, is “a big deal” for property, she said.

With the property market hardening, OU Health was looking at its renewal and how its captive could work alongside its property program, Ms. McClure said.

“Are there wind/hail deductibles we can buy down? Does it make sense to put certain coverages in the captive because in the commercial market it’s just too hard?” she said.

For a captive, these are good problems to have, she said. “It’s what you were built for, what you were programmed for. We knew another hard market was coming for quite some time, and that we can create capacity and lower cost,” Ms. McClure said.

Another feature of captive insurers is the ability to invest any money held in surplus and reserves to return it to the parent organization and finance operations.

The University of California’s captive paid claims for COVID-19. “We have a $6 million insurance policy for loss of income due to disruption in international students’ study abroad. That got paid,” Mr. Claflin said.

Whether it’s providing security, allocating money back to benefit the university, absorbing rate increases or providing new lines of cover that lack reinsurance support for exclusions, the captive is “here to support where the university is hurting,” Mr. Claflin said.

Ms. McClure said that when COVID-19 hit, the immediate question was “what’s the captive going to be used for?”

The beauty of the captive philosophy and structure was the ability to be nimble during this time and make decisions about what needed to be done, she said.

“When the system was hemorrhaging money because of COVID — the federal dollars had not come in yet — there was a serious financial need to keep the system afloat. … We needed to save money,” she said.

For a period, OU Health closed down for elective surgeries, which gave the captive an opportunity to analyze how it could rebate premium to physician groups in the hospital due to the reduced risk to non-COVID-19 patients.

“We were able to return $1.5 million immediately to the organization,” Ms. McClure said.

The OU Health captive also worked with regulators in Vermont, where its captive is domiciled, to find a way to provide insurance for locum physicians when Oklahoma saw a surge in COVID-19-positive patients, while “being mindful it was not going to sell insurance to third parties as a practice,” she said.

OU Health is still insuring physicians working in COVID-19 ICUs that “we need to provide services in real time to patients,” she said.

Companies owning captives are increasingly using the vehicles to cover third-party risks, according to reports.