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As innovation seeps into the captive industry, digital transformation within the market is set to be tremendous over the next five years
Innovation is becoming increasingly important to the long-term success of all insurers, and according to an A.M. Best report, captives are no exception to this. Having well-structured innovation allows companies to develop sustainable competitive advantages and better respond to external challenges such as low investment yields, stagnant growth, and deteriorating expense ratios.
Rocco Mancini, vice president of Marsh Captive Solutions, states that innovation is critical to the success of insurers, reinsurers, and captive insurers alike.
Mancini suggests that the captive industry will play an incredibly important role in bringing innovation to the broader insurance sector.
Mancini explains: “The captive insurance industry offers a controlled and nimble environment to pilot innovations for technologies, such as blockchain, that will have implications for the insurance sector as a whole.”
Captives were created to provide insurance solutions not readily available in the open market, to develop flexible risk coverage and to improve the risk management and loss prevention capabilities of their parent groups.
With captive insurance being an innovation itself, Richard Smith, president of the Vermont Captive Insurance Association (VCIA), explains that over the last 40 years, captives have continued to innovate to meet the ever-evolving needs of the risk and insurance world.
“Innovations like the creation of cell structures have made it possible for small- to mid-sized enterprises take advantage of the cost savings and risk management that captives can bring,” Smith adds.
The appropriate use of emerging technology will be another step in the ways in which captives can remain in the vanguard of insurance, according to Smith.
Because a captive’s insureds are its owners, it affords them the ability to match new technologies to the particular circumstances of their organisation and risks.
Although large insurance companies will be crucial in the adoption of broad technological solutions, Smith notes that captives can tailor some of these advances in a way that allows each one to be a mini-laboratory for the whole industry.
He says: “One of the strengths of the captive insurance industry is the willingness of captive owners — and even service providers — to share ideas and successes that is difficult in the traditional sphere.”
While the digital revolution is still slowly seeping into the insurance and captive industry, Helga Viegas, director of digital and innovation of MAXIS Global Benefits Network (GBN), believes that more change will happen in the next few years.
Viegas highlights that the main challenges facing insurers is to become more than just a risk carrier.
“Insurers must become partners in the prevention and management of risks, using data analytics and technology to help customers/insureds make better decisions,” she explains.
The new domain
Although growth has been slow, one of the most notable trends in the captive insurance industry is the increase in the number of captive service providers and captive owners investing in technology for captives.
Recent events, including the COVID-19 pandemic and the transitioning market, led to rapid adoption of technology within the captive industry and significantly accelerated this trend.
Over the past year alone, Mancini says the captive insurance industry has directly seen how impactful digital transformation can be.
He explains: “Investments in technology, prior to and during 2020, allowed the captive insurance industry to overcome the challenges presented by COVID-19 and to meet the significant increase in demand for captive insurance solutions in a transitioning market. This incredible feat was largely made possible by technologies that enabled remote work, created operational time and economic savings, and improved communication amongst captive owners, service providers, and regulators,” Mancini adds.
In the future, he suggests that digital transformation will not only create more operational time and economic savings but also will enable new kinds of captive programmes that would otherwise be infeasible.
As firms continue to invest in digital technology, it will increase the ability to efficiently develop and maintain client data across multiple geographies and parties with less human intervention, resulting in fewer errors.
Smith explains that information, including client data, can be linked directly to administrative processes and policy contracts.
“Various tasks which are currently performed by service providers can be mapped in-house in the medium term by using the blockchain or artificial intelligence (AI). The result is a shorter, more efficient, and faster value stream or chain, than the prevailing one. This in turn provides an associated reduction of administrative costs and optimisation of the work steps,” Smith notes.
Blockchains can be used anywhere information needs to be securely managed and verified.
The technologies are based on a decentralised open-source network that is driven by all network participants. This results in greater efficiency due to consistently verified and unambiguous transactions.
Smith explains: “The captive industry is particularly well positioned to explore the potential benefits and risks of blockchain technology applications because they are legally allowed to buy and sell risks and to settle damages independently.”
He suggests that the future of the captive landscape could be characterised by parametric solution concepts and ‘overnight’ claims settlement.
At the same time, Smith says the traditional capital market could much more important, as it is thousands of times larger than the reinsurance market and, in terms of digitisation, much further ahead than traditional insurance.
“With blockchain technology, the margin call will replace the traditional claim adjustment, the claim adjuster could be replaced, hundred-page contracts could be replaced by a one-page ‘smart contract’,” he adds.
Viegas suggests that technologies such as blockchain can help some of the challenges facing in the captive re/insurance industry.
For example, one of the main challenges in the employee benefits (EB) captive and reinsurance industry is collecting and processing large amounts of accounting and claims data.
Viegas explains: “The data collected must be cleansed and mapped to become useful and insightful for risk management and oversight. Technologies that help with automating these processes, making them faster and more accurate, have a huge impact on efficiency and effectiveness of captive and reinsurance operations.”
Command-F: the future
As new technologies continue to develop and grow, such as Amazon’s smart shop, Amazon Fresh, which opened its first branch in the UK. It’s no surprise that digital transformation shows no sign of slowing down anytime soon and that’s no different within the captive industry.
Smith suggests that the impact of the digital transformation of the captive market in the next five years is going to be tremendous.
Although its hard to say what technologies that emerge will be successful, Smith describes the captive industry as a “terrific petri dish to help incubate some of these technologies and solutions as it has always provided a place to test new concepts – some of which will survive and some which will not. Even the London marketplace, traditionally known as a risk-averse marketplace, is looking at a digital transformation. Costs will go down, efficiencies will be gained, and the speed of every aspect of the insurance process will accelerate. It’s a brave new world,” Smith adds.
Smith isn’t the only one predicting growth, Mancini says the digital transformation of the captive market will continue to rapidly progress over the next five years and many of the changes will be incredibly subtle.
Mancini explains that it is easy to overlook the implications of seemingly small, slight changes such as incorporating e-signatures into an existing process.
“Subtle changes like this are a core component of achieving digital transformation and help make sure that the captive insurance industry will have the necessary tools to thrive in the face of unprecedented demand,” he states.
Digital transformation in the captive industry over the next five years will also enable captive programmes that were not feasible in the past.
“Small, mid-sized, and large companies are all facing tough renewals and gaps in their insurance programmes. Creating operational time and economic savings with technology will be critical to make sure that captives are a feasible option to address tough renewals and gaps in insurance programmes for as many companies as possible in the near future,” Mancini concludes.
