Captives, Traditional Insurers Will Evolve with Risks, Technology

With emerging risks and new technologies, the captive insurance and broader insurance industries were already experiencing significant pressure to change before the COVID-19 pandemic. Now, the impact of the pandemic promises to accelerate many of those changes.

"A lot of that was occurring pre-COVID, but now with COVID it's really very strongly brought that impact on us," said Peter H. Foley, CEO at LILCHA Holdings. "It's impacted our daily working lives."

Speaking as part of a panel discussion titled "Innovation and Emerging Risk Spotlight: Captives in 2050" at the Vermont Captive Insurance Association 2020 Virtual Conference, Mr. Foley cited two particular areas where the COVID-19 pandemic is driving change for traditional market insurers and captive insurance companies.

One is the shift in workplace locations as more employees are working remotely, with many of those likely to continue doing so after the pandemic eases. The shift raises a number of questions, Mr. Foley said, including how businesses manage remote staff and what sort of new exposures might arise as a result of a large number of employees working remotely. For example, he asked, "When does workers compensation coverage become effective, when does it not?

"The other question we hear about constantly is the insurance coverage question," Mr. Foley said. The pandemic and business shutdowns that resulted to try to control it have raised a host of questions around business interruption policy interpretations, as well as questions about how much COVID-19 exposure will ultimately be covered in the liability marketplace and how much will be paid out in medical benefits.

What shape the answers to those questions take remains to be seen.

"I look at 2020 as a year of unpredictable change," Mr. Foley said. While the year started strong for the insurance industry, he said, "The perfect storm really came crashing down on us in March 2020." Now, he said, people are left wondering: "What does the new normal look like, whatever that might mean?"

Ultimately, where insurance goes in the next 30 years will largely be driven by regulatory change, social change, and some trial and error in understanding risk, said another panelist, Edward S. Koral, managing director at BDO USA LLP.

Mr. Koral noted that much of the way today's insurance market is organized is shaped by how we've recognized emerging risks over the years. As new risks were identified and understood, insurance markets addressed them.

Among the examples Mr. Koral cited were fire insurance in the 1600s, the creation of the Lloyd's market in the 1680s, personal accident coverages in the late 1800s, automobile coverage in 1897, homeowners insurance in the 1950s, directors and officers coverage in the 1960s, employment practices coverages in the late 1980s and early 1990s, and cyber insurance in the late 1990s and early 2000s.

Going forward, cyber insurance, for example, is "likely to expand in complexity," Mr. Koral said. As property losses and automobile losses are tied to cyber events and privacy concerns continue to grow, he said, "Those coverage areas are going to expand and get more complex.

"We're going to have autonomous vehicles," Mr. Koral noted. "You're going to be getting robotic deliveries.

"How does this change automobile liability?" he asked, noting that there will be cyber issues around cars getting hacked and privacy issues associated with data collected by "black boxes" in vehicles. In addition, the level of technology will likely increase the cost of repairing autonomous vehicles after accidents.

Remote working raises new issues around property insurance coverage, Mr. Koral said, as homes are workplaces. "Business interruption takes on a new meaning if it's also your house that's your place of doing business," he said. The insurance industry will need to find new ways to carve up time and space to determine who's responsible for buying insurance and who will be taking the risk.

The changing nature of employment and the rise of the "gig economy" is another emerging risk that will reshape insurance as states start to redefine what constitutes "employment," something California has already done with its Assembly Bill 5.

"If you think that California is the only state that does this, you're probably wrong," Mr. Koral said. "I think other states will start to redefine employment." For insurers, the issues related to the gig economy will be particularly acute concerning health issues or accidents, he said. "The insurance definitions of that have all changed and will continue to change over the next decade."

Regarding where captive insurance companies might fit in the face of emerging risks and a changing insurance environment, Mr. Koral said captives might be particularly useful when it comes to innovative new businesses.

With such businesses, there's often a chicken-and-egg problem, he said, with insurance companies saying they'd be happy to provide the business insurance once the business has some history, while the business says it can't operate without insurance. "This is where captives really fit in," Mr. Koral said.

Mr. Foley said the COVID-19 pandemic has prompted increased interest in captives and alternative risk transfer (ART). "We have been seeing a growing interest in the development of alternative risk structures," he said. With "the day of reckoning of COVID, a lot of businesses have decided they need to be able to exert more control over protecting their assets."

As risks and insurance evolve, data and technology will be critical to making the necessary changes, Mr. Foley said.

"I look at technology, I call it the keys to the kingdom," he said. "I really believe what we have today are tools for the future, tools that can be integrated with the alternative risk market."

Looking at the role of the ART market between now and 2050, Mr. Foley noted that ART now has a history of being at the forefront of insurance innovation.

Addressing the needs of the coming decades will require a balance between innovation and regulatory oversight as new coverage concepts emerge. "I think we need to continue to push and ensure we have the receptiveness to new concepts," Mr. Foley said.

Laurie R. Solomon, founder and president of ELT Risk Solutions LLC, moderated the session.