A blockchain-based ecosystem made up of captive managers, reinsurers and captive domicile regulators will shape the digital future of the captive industry, according to a panel at the Vermont Captive Insurance Association’s (VCIA) virtual conference.
Speaking at the ‘Digital transformation and opportunities: what the captive market will look like in 2025’ panel, Courtney Claflin, executive director of captive programmes at the University of California, identified the three key challenges currently facing the industry which a digital future will help to mitigate.
Claflin stated that current challenges include capacity, in terms of achieving the appropriate amount of limit from reinsurance markets to adequately support exposures; terms and conditions to support exposures; and reducing back-end costs in order to support new captive initiatives and provide rate stabilisation to the parent company.
Karen Hsi, manager of captive programmes at Fiat Lux Risk and Insurance Company, explained that blockchain technology can help with these challenges, for example, by generating capacity from traditional insurance markets to reduce the burden of administrative costs.
James Donald, cyber advisor at AXIS Capital, affirmed the three main challenges of capacity, terms and cost can be translated in a parametric insurance environment to knowledge, trust and price.
He explained: “The reason why capacity is limited revolves around a lack of knowledge. People are reluctant to insure things where they do not have a decent historical data set.”
However, there has since been what Donald described as a “phenomenal growth” in the amount of data that is created each day and made available on the internet through alternative data sources.
In 2016, there was on average 44 billion gigabytes of data produced per day, which has since increased exponentially and is projected to reach 463 billion gigabytes per day in 2025.
In the digital future, a combination of big data and artificial intelligence (AI) will provide new datasets that allow captive owners and managers to create indices that can be used on a blockchain platform to solve capacity issues in captive structures.
In addition, Donald noted that blockchain could help create a mechanism to balance real world damage with model indices to eliminate basis risk in captives, therefore increasing trust and forming a profit centre for the parent company.
Marcus Schmalbach, CEO of RYSKEX, added that AI can be used to link supply and demand to replace traditional underwriting in risk trading platforms. In the example of the Vermont captive domicile, it can regulate the business model as part of the blockchain-based network in a chain of compensation and premium between a captive insurance company, risk trading platform, and investors.
Schmalbach highlighted the Vermont catastrophe index has been developed with machine learning, which is updated daily by an independent institution and cannot be manipulated by market participants. The index is able to inform captive owners and managers on the dangers of a global disaster based on selected risks, such as terrorism, natural disasters and cyber attacks.
It was also discussed that the digital future will have a positive impact on the claims solution process, which is currently cost-intensive and somewhat inefficient, as the insured must assess the damage then submit and review the claim for the adjuster to validate. By implementing blockchain and similar technology, a third party can verify the intensity of a catastrophic event, then administer a fully digital claim settlement payout within a maximum time of 48 hours.
Claflin noted that the University of California has already introduced parametric coverage in a few of its programmes. He commented: “We will continue to explore parametrics as that portion of our industry matures. It is a great advantage to us when certain setup circumstances present themselves, as it ensures that payment is immediate.”
He continued that they are currently waiting for more opportunities in other areas, particularly concerning property holdings and potential earthquakes.
Hsi added: “There are a lot of faculty staff and student alumni programmes that we are looking at to grow the third party through our captive cells. During the COVID-19 pandemic, we have been working on multiple campuses on the differences in conditions policies, since many study-abroad programmes have been cancelled.”
The panel concluded by affirming that the next steps towards a digital future will be setting up a working group of captive managers and owners, service providers, reinsurers, capital market participants, and regulators of the captive domicile to work towards the goal of “delivering a blueprint for the parametric risk trading of tomorrow”.