February 02, 2021

Captive Insurance and the Pandemic

4 min read

R. Wesley Sierk, III ; Managing Director, Risk Management Advisors

2020 has been one of the most challenging years in recent memory. Businesses and those that couldn’t fail to survive were forced to adapt. Organizations with a good captive insurance structure managed to adjust to the new business environment. However, all captive insurance managers will tell you that 2020 was a challenging year for the insurance industry. The pandemic played a major role, but it wasn’t the only reason for hardship. Let’s take a look at how 2020 affected private insurance solutions.

2020 Insurance Industry Challenges

There were several challenges and issues that plagued the insurance industry during 2020. Here are all the challenges that the industry had to overcome last year.

Increase In Claims

In 2020, the number of insurance claims dramatically increased. Not only did the number of claims increase, but the number of payouts also went up by quite a significant margin. The insurance industry already had a trend of social inflation, which led to insurance companies paying significantly more to plaintiffs.

Increase In Insurance Premiums

Even before the pandemic's onset, new risks were emerging worldwide. Most actuarial partners and captive insurance partners discuss how insurance premiums have consistently increased since the fourth quarter of 2017. The pandemic's onset has significantly exacerbated this increase.

Pandemic Business Impact Analysis

The business interruptions were one of the most significant impacts of the global pandemic. Most organizations have business interruption insurance, but the primary issue was that traditional business interruption insurance didn’t offer organizations coverage for the pandemic. Additionally, a significant impact was event cancellation. Businesses all over the world had planned for events in 2020. However, the onset of the pandemic led to almost every major business event being canceled.

The pandemic was unforeseen and many didn’t expect lockdown measures to be as severe as they were. As a result, most organizations did not have pandemic insurance. One of the only events that did was Wimbledon, and they didn’t have to undergo significant losses. The impact didn’t stop there, a lot of businesses had to lay off workers and many companies just shut down completely. Another challenge was a massive interruption in the supply chain. As a result, they had to come up with new ways to create their product.

While some managed to cope, others suffered a significant loss in their customer base. In addition to all of the above, businesses suffered from an inventory loss. There were both cases; some companies had too much inventory while others were suffering from a lack of inventory.

Captive Insurance Solutions

Captive insurance companies can help businesses during the pandemic by providing them with uniquely designed enterprise risk solutions. By improving enterprise risk management, businesses give themselves a better chance of survival. Let’s take a more in-depth look at how captive insurance companies can help businesses during the pandemic.

Provide liquidity

One of the most crucial contributing factors to any business's survival is liquidity. Without enough cash flow, a business won’t be able to operate. Many businesses have been moving funds to their own captive insurance companies for this very purpose. These businesses then went to their captive insurance companies during the pandemic to access funds during challenging times.

Protect Human Capital

Human capital is arguably just as significant as an organization remaining liquid. Captive insurance companies allow organizations to shift their group medical insurance to their expenses. They also offer other features like indemnification protection and keep the organizations’ workforce as safe as possible.

Protect against supply chain interruptions

One of the most significant constraints of the pandemic was that many businesses had to tackle supply chain interruptions. Captives can help protect businesses by providing them with the extra funds they need to get the necessary materials for their products.

Future Outlook

The captive insurance structure is something that helped multiple organizations navigate the severe impact of the pandemic. 2021 promises to be a good year for the industry as more businesses move towards captive insurance as an enterprise risk management solution.

Is a captive insurance company the right fit for your business?

Take the assessment to find out:

https://www.riskmgmtadvisors.com/captive-insurance-fit-assessment

The contents of this article are for general informational purposes only and Risk Strategies Company makes no representation or warranty of any kind, express or implied, regarding the accuracy or completeness of any information contained herein. Any recommendations contained herein are intended to provide insight based on currently available information for consideration and should be vetted against applicable legal and business needs before application to a specific client.

R. Wesley Sierk, III ; Managing Director, Risk Management Advisors

Wesley Sierk is a recognized authority in the realm of captive insurance company design and management. As Managing Director and Lead Strategist for Risk Management Advisors, Inc., he possesses an unmatched track record that spans nearly 30 years, with a focus on empowering profitable, closely held businesses. Wesley's expertise isn't just limited to consultation; he's profoundly adept at strategic implementation. He has partnered with leading homebuilders, real estate developers, manufacturing enterprises, and professionals in sports and entertainment, providing them with unparalleled insights and solutions. A hallmark of Wesley's career has been his unwavering commitment to his education. He holds esteemed designations like the Chartered Financial Consultant (ChFC) and Chartered Life Underwriter, both awarded by the American College since 1996. Further amplifying his credentials is the CRIS (Construction Risk and Insurance Specialist) recognition, secured in 2006. Notably, he's among the rare individuals globally to have earned the Associate in Captive Insurance (ACI) designation, a testament to his profound understanding of the subject. Beyond his direct work with clients, Wesley takes immense pride in working hand-in-hand with other professionals, including CPAs, Attorneys, and Financial Advisors. This collaborative approach ensures thorough due diligence and optimal plan design implementation. An accomplished author, Wesley has penned critical works like Taken Captive: The Secret to Capturing Your Piece of America's Multi-Billion Dollar Insurance Industry and You Can Make It, But Can You Keep It?. The latter serves as a guiding light for the affluent, teaching them strategies to preserve their hard-earned assets. In the realm of speaking engagements, Wesley is a coveted name. Whether it's insurance industry gatherings or legal and accounting symposiums, he's regularly called upon to demystify the intricate dance between traditional insurance markets and the potential of captive insurance entities. Under Wesley's leadership, Risk Management Advisors remains a beacon of innovation, committed to elevating clients' financial well-being and mitigating risks in an ever-evolving landscape. He is married to Leslie and has two 'not so young' children. Their son is attending the University of Tennessee studying entrepreneurship and risk management. While their daughter finishes up her high school years. They love to travel, golf, cook and hike with their two huge dogs.