When Traditional Insurance Is Not the Answer

Thom Smith

Executive VP, GJS Re

“Traditional” insurance is ideal for most of the exposures a business faces, whether they purchase commercial liability, property, workers compensation, professional, cyber, directors & officers, or another product. But what options exist if traditional insurance does not fit the exposure?  Or what solutions are available if previously purchased traditional insurance must to be augmented in some manner or the benefits of that insurance have been exhausted and significant financial exposure remains?

Before we explore those questions, it might be helpful to review a few real-life examples to better define the types of exposures we have in mind.

  • A business had a self-funded workers compensation program for 20+ years supported by excess insurance. The letters of credit and the annual reserve increases are consuming significant operational cash flow.
  • A privately-held hospital is purchasing another private hospital, but they don’t want the medical malpractice exposure beyond the Extended Reporting Period (“tail cover”) the target hospital is able to purchase.
  • A business and the union representing its workers have agreed to part company, but only if the employer fully funds the ultimate pension liabilities. The employer is currently able to pay only a portion of the ultimate pension liability.
  • A manufacturer has decided to stop producing a specific product, but the liabilities from that product are ongoing and significant.
  • An auto dealership joined a trust for their workers compensation coverage, but when the economic downturn hit in 2008, other dealership members closed and are unable to pay their share of the ongoing costs and liabilities. The outstanding liabilities fall jointly & severally to the remaining dealerships, who are unable to sell or transfer ownership due to the financial uncertainty.

Each of these examples involves a business for which traditional insurance is not a solution. Yet they find themselves saddled with the burden of accumulating liabilities that consume cash flow and impair their balance sheet.  Generally, businesses in this situation have few choices about how to spend operational profits as those profits are committed to funding long-tail liabilities.

These businesses are not alone in their financial distress, which comes with additional negative consequences such as the owner’s (or shareholders’) inability to sell the company at a fair price, raise capital, or transfer the company in a private transaction to family members.

However, there are other long-tail exposures that can benefit from a non-traditional insurance solution known as Alternative Risk Transfer (ART). Let’s consider pension liabilities, trust liabilities, medical malpractice liabilities, product liability, self-insured programs or captives, and others.  GJS Re has designed ART solutions for each of these long-tail exposures.

ART can relieve a business from the financial impairment caused by long-tail liabilities. The mechanics are fairly simple, but the results are quite powerful.  In the case of a business, an Alternative Risk Transfer solution can “ring-fence” liabilities, achieve accounting certainty, clean up the company’s balance sheet, eliminate the need to fund letters of credit, and more.

There are many types of insurance solutions we can help you design at GJS Re.  We have the expertise and market relationships to affect the transfer of long-tail liabilities, so a business can get back to business.