44 NOVEMBER / DECEMBER 2020 PSP SHOWCASE Captive Insurance Relief When commercial insurance excludes pandemics COVID-19 presents significant challenges for U.S. businesses across every industry, and community banks have had to respond to some unique circumstances. As we focus on moving toward recovery, nearly everyone agrees that some changes to operating environments will be permanent, and this is the “new normal.” When community banks adjust to these changes, it will be critical for banks to evaluate their insurance and risk management programs to ensure they can respond in the future. Community banks have incurred significant expenses in responding to COVID-19, and almost every major commercial insurer is asserting that losses related to the pandemic are excluded under their policy language. Public health experts indicate that the vaccine for COVID-19 may not be widely available until mid-2021, and that future pandemics are inevitable. All companies must have a plan to address the future challenges and consider a more holistic and comprehensive insurance program that identifies and addresses risks that commercial insurers will not. This is where a captive comes in. A captive is a legally licensed, limited-purpose, property and casualty insurance company owned by the bank holding company, which can provide customized policies for the bank (and any affiliated subsidiaries) where the bank’s commercial policies have limits and exclusions. The captive does not replace a bank’s commercial insurance program. It wraps around the commercial insurance, covering commercial deductible layers, providing some excess coverage, and filling in gaps and exclusions. The current crisis demonstrated the significant financial benefit a captive can provide to a bank. How Can a Captive Benefit a Bank in the Current Environment? Pandemic insurance coverage. Nearly all commercial property policies exclude coverage for a pandemic. The captive has comprehensive business interruption coverage that is providing its banks with needed relief, covering expenses such as: • A portion of expenses related to the purchase or lease of computers and equipment for employees to work from home; • Expenses related to deep clean branches or facilities that have had exposure to COVID-19; • Costs associated with installing plexiglass barriers for tellers in bank branches; • Expenses associated with the purchase of personal protective equipment (PPE) to keep employees and customers safe through the pandemic. Increasing commercial insurance rates. At a time when community banks are worried about the potential impact of a serious recession on their institutions, they are hearing from their commercial insurance brokers that they can expect up to 30% increases in D&O coverage and an average 12% increase for their financial institution bond. A captive insurance company has always been an excellent tool for companies to help manage the hardening commercial insurance market. Banks can evaluate higher commercial deductibles to offset these increased commercial premiums. They can then self-insure these larger deductibles through their captives. Increased potential for cyber and crime losses. The remote, work-from-home environment has presented significant challenges for community banks and their commercial customer base. Banks are concerned about the increased risk related to cybercrimes. Travis Holdman SVP/National Sales DirectorFinancial Services KeyState Captive Management LLC tholdman@key-state.com The KeyState Companies is a Diamond Associate Member of the Indiana Bankers Association. KeyState Captive Management LLC is an IBA Preferred Service Provider. Joshua Miller CEO The KeyState Companies jmiller@key-state.com
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