Hosting the first fully virtual conference within the captive insurance industry, the Vermont Captive Insurance Association (VCIA) did not fail to deliver the same opportunities around education, information-sharing and networking as their popular annual in-person event in Burlington.
The big talking points of this year’s event included how captives responded to the COVID-19 pandemic and exploring the digital future as well as the importance of mentorship within the industry.
COVID-19 response
Prior to the emergence of the COVID-19 pandemic, the hardening insurance market already produced an increased interest in captive insurance companies, with the companies looking at setting up new captives or expanding their coverage with an existing one.
But the interest surrounding captives has only been heightened since the start of the year, with challenges surrounding commercial coverage being withdrawn for pandemic coverage.
Speaking at the ‘Captives and unforeseen pandemic events’ panel discussion, Steven Bauman, director of global programmes and captive, North America, AXA XL, suggested that captives have had a positive response to the pandemic in terms of the immediate, flexible transition to a work-from-home model.
Also on the panel, Deyna Feng, director of captive programmes at Cummins, explained that captive coverage was a practical demonstration of the advantages of crisis event simulations in parent companies.
However, Bauman suggested that big stress events “inevitably carry some amount of fallout on carriers”.
From a claims perspective, the most significant challenge has been the exponential spike in workers compensation claims from medical providers, according to Clare Bello, senior vice president of VCM, a medical malpractice division of Cannon Cochran Management Services, which has placed stress on the industry as a whole.
In the longer term, Bello expects medical malpractice claims to cause hospitals “to lose tremendous amounts of revenue, on top of their inability to perform elective surgeries which is the cornerstone of revenue for many hospitals”.
However, she also recognised the COVID-19 pandemic has “created the opportunity for innovation in technology”, for example, sole practice clients now use virtual conferencing and board meetings.
Bauman highlighted there is also an inevitably a large amount of property and business interruption playing out in the ‘new normal’.
He said: “There may also be delayed impacts to the supply chain as the true scope of the pandemic expands into other coverage, such as cyber or directors and officers (D&O) liability.”
Feng noted that Cummins has begun to assess which lines of coverage are most impacted in order to provide sufficient coverage for cyber, D&O and workers’ compensation. She noted: “This raises the follow-up question of whether companies should file claims locally or under global policies.”
Also weighing in, Bello said: “There are constantly changing laws in every state to keep up with the technology around how to manage new workers compensation claims, as no-one has managed pandemic workers’ compensation claims before.”
She suggested that the future impact of medical malpractice is likely to involve coverage of professional liability of doctors for telemedicine.
With different state mandates, Bauman said the same issue was seen with cyber insurance. He noted: “Creating a new regulatory infrastructure carries a big risk for captives and insurance companies to not be compliant, which means they must carefully choose their partners.”
Expanding on this, Bello explained that different state mandates on what constitutes a COVID-19 claim and how to file for it creates constantly changing criteria and eliminates the ability to work backwards to ensure the claimant was in an employed function when they contracted the virus.
From a third party administrator perspective, Bello described keeping up with daily changes to be a “phenomenal whirlwind”.
She added: “Some states have extended the statute of limitations on medical malpractice cases, altering how cases are brought before a court over a longer period of time, which could potentially lose evidence quality from witnesses.”
In addition, courts are currently closed; therefore, captives will be significantly impacted financially as claims will be brought to trial together and settlements will be administered in bunches.
Looking to the future, the panel discussed whether the captive industry will continue to see the formation of group captives and risk pools to address exposures during the pandemic. Bauman cited: “It will be difficult, as there is currently so much volatility and captive solutions should be personalised to each individual company to ensure the best possible coverage.”
He added: “There will be a definite lasting impact, so companies should now seize the opportunity to start taking on emerging risks, with captives being an ideal place to start.”
Shaping the digital future of the captive industry
Discussions at the virtual event also focused on how a blockchain-based ecosystem made up of captive managers, reinsurers and captive domicile regulators will shape the digital future of the captive industry.
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.
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 Vermont as a 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 that 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.”
The university is currently waiting for more opportunities in other areas, particularly concerning property holdings and potential earthquakes.
Karen Hsi, manager of captive programmes at Fiat Lux Risk and Insurance Company, 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”.
Importance of mentorship
Although the insurance industry is hiring at record levels, the biggest challenge that companies are facing is to secure new talent, according to and Insurance Industry Employment and Hiring Outlook survey.
While captive insurance takes a smaller portion of that pie, it is still concerning for the industry that such a shortage exists, with a solution as yet to apparate.
With the talent gap still a concern to those in the captive industry, panellists at VCIA discussed why mentorship is now more important than ever.
Daniel Kusaila, tax partner at Crowe, emphasised the role of a mentor is to help consider the options rather than forcing you to stay at a company, stating that “helping someone get to where they need to be in their careers is far more valuable and fulfilling than anything I can think of”.
Meanwhile, Peter Kranz, executive managing director and captive practice leader at Beecher Carlson, suggested that a mentor should not be a person to look to for definite answers, but rather guidance and advice.
He recommended young professionals in the captive insurance industry identify colleagues they trust and respect in a professional sense to approach for guidance.
“A mentor relationship must occur organically with some level of connection rather than being assigned,” he added.
Since mentorship is unique and personal, the dynamic of the mentor and mentee should reflect this, according to Samantha Jones, senior captive analyst at Dynamo Insurance Company, as diversity among colleagues then translates into personalised mentorships.
Expanding on this point, Kusaila noted that young captive professionals should not have one key mentor for all issues, “but rather look to different colleagues and alma mater alumni for purely professional mentorships as well as advice on how to balance work and personal life”.
Thomas Myers, principal of The SyncWave Group, reflected during the forum that as a student he was under the incorrect impression that faculty would be “bothered” by a student wanting advice. However, he indicated that now as a faculty member himself he encourages students to discuss their academic careers.
Myers explained: “The bottom line is that people want to be asked.”
“Humans naturally love to help other people, so if you think enough of someone to ask for their advice, they will give it to you.”
Agreeing with this, Kranz highlighted that mentoring is a two-way street rather than someone further in their career teaching someone younger, as there is value to be gained from both parties.
Myers concluded the forum by describing mentors as a “sustainable relationship” in which information flows both ways.
He said: “Young professionals looking for a captive career should reach out to their alma mater to access a database network of alumni, as well as take advantage of industry functions and professional development gatherings to seek out different
