CIC Services
With the US Government’s longest ever shutdown still fresh in the minds of many Americans, could captives offer a solution to cover an estimated loss of more than $10 million per hour?
When the US federal government shutdown finally came to an end after 35 days on 25 January 2019, it marked the end of the longest shutdown in US history. Caused by on-running disagreements between president Donald Trump and Congress over budgets, the shutdown saw federal agencies cease all operations and left hundreds of thousands of workers without pay.
We spoke to Nate Reznicek, director of operations of CIC Services, who says that captives have a key role to play in covering these types of risks and explains that a government shutdown doesn’t have to be catastrophic to cause a ripple effect of loss.
What is government shutdown insurance?
Generally speaking, ‘government shutdown’ insurance would protect an insured from adverse action from a regulatory body (such as state, local, or federal government) that causes business interruption resulting in a loss of income or extra expense.
For the government shutdown that we just experienced, thousands of employers experienced a total stoppage of work as it relates to government contract. A lack of access to job sites, the issuance of ‘stop work’ orders, the inability to process licensing reviews/approval, can all result in a potential business crushing loss. Government shutdown doesn’t have to be catastrophic (Standard & Poor’s estimates that the 2013 shutdown cost the US economy $24 billion) to cause a ripple effect of loss. You don’t have to look far to find the examples of losses during the most recent shutdown: The Small Business Administration stopped processing loans–stifling the opening of new business and expansion of current business; the federal E-verify system shut was inaccessible–hindering the vetting and hiring process of new employees; the Internal Revenue Service shutdown stopped the issuance of new Federal Employer Identification Numbers–halting the opening of new bank accounts and formation of new businesses. The ultimate impact of the most recent shutdown may not yet be known for years.
What role can captives play?
Business owners continue to do their best to and account for and mitigate future loss, most often through a set-aside of funds.
Although better than nothing, this method is not as efficient as it is when achieved through an insurance transaction for a number of reasons. A business owner might have miscalculated the amount necessary and not have set aside enough reserves, may have underestimated the frequency of a loss event, and could experience tax erosion of their hard-earned loss funds. As with many other types of cover, captives are the ideal vehicle for the formal transfer of risk that the commercial market isn’t willing or able to address quickly.
What sort of captive structures is this coverage usually put through?
Due to the complexities and inner workings of group captives (mainly the comfort and adaptability of fronting and reinsurance carriers) these coverages are typically direct written by single-parent captives. Although certainly possible, the writing of manuscript policies can over complicate, confuse and increase the expense load of a group arrangement.
What sort of companies do you see taking out this sort of coverage currently and in the future?
Currently, we have a lot of contracting companies as clients, providing services in anything from janitorial services, to maintenance and repair services, and transportation divisions. Businesses that need or rely upon government contracts for service/product or require access to regulated worksites are strongly encouraged to consider adding this coverage to cover this risk. For some businesses the significance of a potential loss related to this coverage is great enough that they should consider forming a captive specifically for protecting against these events.
Why is captive insurance so well suited to this type of coverage?
Captives continue to be the arguably the largest driving force of innovation in the insurance marketplace. The synergy created between the shared ownership of captive and insureds allows for unparalleled flexibility in coverage. Captives are able and encouraged to draft coverage that mirrors the exposures of the underlying insureds. Cover that is drafted appropriately can also eliminate gaps and exclusions that may exist in coverage obtained through the guaranteed cost market. Unlike in the commercial market, this approach can remove the ‘square peg round hole’ struggle that currently exists when evaluating commercial cover.
Do you expect to see a rise in companies taking out this sort of coverage with the extended government shutdown we have seen in 2019?
Certainly. Following the implementation and evolution of other commercial coverage (such as reputational damages and cyber liability) the commercial market will eventually be able to respond. If recent history is any indication we would expect to eventually see some modifications to commercial coverage forms to allow for endorsements, and eventually new policy forms, to close this gap on a guaranteed cost basis.
Captives will continue to have numerous advantages over the commercial market (including retention of underwriting profit, claims control and policy innovation) so we would expect this line of cover to expand amongst captives as well.
