While COVID-19 has been wreaking havoc across the globe, destabilizing the economy and altering daily life, parts of the United States have also been ravaged by natural disasters, with tropical storms and hurricanes along the Gulf Coast and record-setting wildfires across the West Coast. At the same time, fraud and cyberattacks are on the rise as malicious actors continue to exploit pandemic vulnerabilities. Given these complex conditions, companies need to gain a better understanding of how COVID-19 has impacted their risk outlook and the resulting claims environment. Then, they must develop strategies for financial recovery and prepare for the rest of 2020 and beyond.
The past few years of significant loss events have contributed to a hardening insurance market. As companies went through renewals into 2019 and 2020, it was challenging to balance the increase in premiums with changes in terms, such as increasing deductibles and lowering limits. Now, looking back at the first wave of COVID-19, many companies found that they unwittingly overstated their business interruption values during renewal, paying for risk transfer for which there is now no need because the pandemic already impacted business. In this atypical insurance and business climate, risk professionals should look beyond filing claims as usual and explore the following strategies to add value to the organization and boost the bottom line:
Premium refund requests. In certain instances, insurance carriers are willing to consider premium refunds as the risk profile that was underwritten has changed. Organizations that have been successful in clawing back overpayment on premium for the 2020/2021 year have assessed the originally reported business interruption values and supplemented that submission with revised forecasts that account for the impacts from COVID-19.
For insurers to provide no relief on premium and also not have to pay the business interruption claim that was underwritten is a classic example of having your cake and eating it too. Realizing this, certain auto insurers have already provided policyholders with premium refunds because of the significant decline in road travel. In May, the California Department of Insurance ordered insurers to return partial premiums to consumers and businesses. On the claims front, the Illinois Department of Insurance even instructed insurers operating in the state that they should pay claims as if the impacts of COVID-19 did not exist.
Insurance claim valuations. While lower claim valuations have been difficult for companies impacted by events in 2020 to accept, there are complications related to COVID-19 that should be considered. For example, many insurance deductibles call for named storms or flood perils to be valued at a certain percentage of the property damage and time element values insured. Many of these clauses state the deductible should be at 2% or 5% of the time element values to be earned from the date of loss over the next 12 months as if the policyholder had not been impacted by the peril. In those instances, the impact from COVID-19 should be taken into account to estimate the business income value that would have been earned over the next 12 months, thus lowering the deductible.
A captive opportunity. Following the 2017 tax reforms, net operating losses (NOLs) generated in tax years beginning in 2018 and later could not be carried back and could only offset up to 80% of taxable income in carryover years. Title II of the Coronavirus Aid, Relief and Economic Security (CARES) Act, passed in response to the COVID-19 crisis, permits organizations to carry back NOLs from the 2018, 2019 and 2020 tax years to the previous five tax years (beginning with the earliest year first) and suspends the 80% of taxable income limitation through the 2020 tax year. The NOL carryback can result in an immediate refund of taxes paid in prior years. For example, a corporate NOL from 2020 can be carried back to offset income from 2015, which may have been subject to a 35% tax rate, rather than carried over to 2021 when income is subject to a 21% tax rate. This could result in significant refunds due to the losses incurred in 2020.
So, how can a risk professional take advantage of this opportunity? If your organization expects to generate NOLs in the current tax year and was a taxpayer in prior years, there may be an opportunity to help influence that NOL by using an insurance captive. If the organization is carrying reserves on the balance sheet from claims that could be run through a captive insurance program, they could be expensed in 2020 and used to offset taxes paid at the 35% rate going back five years. This is a limited-time opportunity as it only applies to tax years beginning after December 31, 2017, and before January 1, 2021, so it must be evaluated and completed by the end of 2020.
Evaluating and streamlining the business continuity plan. As the insurance market is raising premiums and eliminating unprofitable lines of insurance, many companies are reassessing what else they can do to mitigate the risks they can no longer insure. The answer is often an increased focus on their crisis management and business continuity programs. However, managing a crisis or restoring essential services and operations in this environment is a complex challenge most organizations have not faced yet. Most crisis response and business recovery teams have not managed a response virtually. Thus, the trend of digitizing business continuity operational plans has accelerated.
The days of pulling the plan off the shelf are gone. Now, organizations are putting their plans online and training their people to understand how to execute in a virtual world. Companies are reassessing their legacy continuity plans and updating them for the new operating environment. For example, organizations that rely on a call center in a central location often have external vendors that can be used when call volume exceeds capacity. During a period of interruption at the call center, these costs go up significantly. Now, with a virtual workforce, the plans can be updated to maximize efficiency and take advantage of the geographic dispersion of the workforce. Reducing the use of third-party vendors can generate cost savings, but the real estate savings can also be evaluated if the virtual workforce can be managed appropriately.
There are opportunities for risk managers to bring value in uncertain times, but they take hard work, perseverance and creative thinking. As the Greek philosopher Heraclitus said, “Change is the only constant in life.” Not even he could have envisioned the events of 2020, but addressing the above considerations may be helpful as we collectively navigate the challenges ahead.