Industry professionals discuss the implementation of blockchain in the captive industry, as well as the benefits and challenges of such technologies
As the world becomes increasingly interconnected and the demand for the verification and analysis of data grows, it is of heightened importance for companies to embrace these changes and leverage technology to its fullest advantage.
Insurance firms can do so through the implementation of insurtech, which refers to the use of applications, big data and other transformative technologies to automate and streamline processes throughout the insurance industry, for example in policy forming, underwriting, services and claims.
Q1 2021 witnessed an “astronomically high” level of insurtech investment. According to Willis Towers Watson’s quarterly insurtech report, this allowed risk-originating firms to begin going public in Q2 to take advantage of the bullish investment landscape.
In Q2 2021 alone, Willis Towers Watson cites that global insurtech funding reached more than US$4.8 million, which marks a 89 per cent increase from Q1 2021, as well as a year-on-year increase of 210 per cent. Furthermore, in Q1 2021, global insurtech funding reached a total of $7.4 billion, which already exceeds the full year amount of funding for 2020 ($7.1 billion).
The report recognises that financial services-focused tech firms are moving into a position of increasing significance amid the current volatile market conditions, which include the hardening insurance and reinsurance markets, more frequent and severe catastrophe events, evolving climate change-related risks, and the economic impact of the COVID-19 pandemic.
Willis Towers Watson notes that although the changing market conditions and subsequent competition is generally advantageous to insurtechs, most are in fact “just not up to standard to survive a possible decade of stringent and volatile market conditions,” the report says. The report highlights that this is because technology functions as a mechanism to mark success according to commercial metrics; having a mechanism that is ‘blockchain-based’ or ‘powered by artificial intelligence (AI)’ is redundant if it does not facilitate a net positive impact on a company’s risk, capital or operational efficiency.
Blockchain technology is situated on a decentralised open source network that is supported by all network participants and can be accessed anytime, anywhere. Information must be securely managed and verified, which means that transactions have a greater efficiency.
Data and data science are already employed in the insurance sector — risk management is centred around data, while technology cultivates sophisticated tools to collect, combine, model and analyse large amounts of data. Emerging technologies such as machine learning allow for an even more profound insight into risk, pricing risk and new sources of data.
Jody Yee, managing director at Allianz Global Corporate and Specialty, notes that as early as 2016, the insurance industry began to investigate how blockchain could be incorporated into business processes.
Yee notes: “We have not yet experienced the huge take-off originally anticipated, but as the insurance industry moves toward implementing new technology, this may change in the future. Organisations are always looking for ways to make processes more transparent and efficient, and blockchain technology is one of the ways we can achieve that.”
The potential for blockchain in the insurance industry, particularly in the space of captive insurance, is affirmed by Alex Gedge, senior captive consultant at Hylant, who says: “Blockchain is still fairly new to the captive world, so while there has been interest with some captives, or their owners, in using blockchain in some capacity, it is still an area of potential.”
“Blockchain is a catalyst for change in the captive industry. Through the exploration of blockchain, the captive industry is rethinking and reevaluating critical underlying processes such as data sharing between captive service providers and regulators, certificates of insurance, loss payments, policy manuscript creation and policy issuance,” adds Rocco Mancini, vice president, Marsh Captive Solutions.
Mancini identifies efforts within the captive industry to promote rapid adoption of digital technologies, which has encouraged further exploration into blockchain and provided companies with the necessary tools to do so. He explains: “Captive service providers, insurers and regulators are using blockchain to share information more rapidly and securely. They achieve this by using blockchain to establish shared rules and standards for sharing information, which allows for automation that was not otherwise possible.”
Mancini notes that although most of this automation is still in the pilot stage, initial findings and indications are promising. Furthermore, captive insurers that continue to work with these service providers, insurers and regulators will already be effectively positioned to realise the benefits of blockchain technology as its implementation widens in the captive industry.
At present, the implementation of blockchain in the captive and insurance industry is generally concentrated in the administrative environment, according to Marcus Schmalbach, CEO of RYSKEX.
He notes: “The real disruptive innovations have not yet taken hold, but if the Digital Risk Exchange (DREx) bill passes successfully in Vermont in January 2022, it could be a milestone for the industry. A blockchain ecosystem specifically tailored to the needs of captives will represent a game change and lead the captive industry into digitisation.”
As an industry with an existing penchant for innovation, possible areas of development in the relationship between blockchain and captives include robotic process automation, whereby bots will become the norm in both the front- and back-office to automate policy servicing and claims management. Technology and data-driven operations require strategic cybersecurity in order to protect brand data, reduce reputational risk and achieve more efficient regulatory compliance.
The benefits of blockchain
The constant evolution of blockchain provides “almost inexhaustible possibilities” within the captive industry, Schmalbach says. While the technology originated with the Bitcoin protocol in 2009, developments such as Ethereum and non-fungible tokens have expanded capabilities to cover smart contracts and payments.
“Today, the blockchain can already completely map all process steps, from coverage of the risk to payments (which is particularly useful for syndicated contracts) and claims processing, while generating a high level of security and cost efficiency,” Schmalbach explains.
Looking specifically at how captives can gain advantages from blockchain, Gedge adds: “As with adoption of any new technology, understanding fully how it would work, the benefits — and pitfalls — should be stage one. It may drive more benefits for the larger, global captives as there are added complexities to the running of these captives.”
“As such, the key benefits of live, shared data and information transfer could be more immediate. There are multiple parties and partners who are involved in driving the success of a captive, so ensuring live data and one unchallengeable version of it would be valuable for captive owners.”
“Blockchain can also be useful for solving complex and large claims to support quick payments, and again, data transfer.”
In addition, since captives are generally smaller and newer than traditional insurance companies, they are better positioned to adapt to future technological trends and developments.
A captive insurer can position itself to best integrate blockchain into its operations by first and foremost recognising that it is a long-term process. As discussed in Willis Towers Watson’s report, Schmalbach reiterates that using blockchain purely to be perceived as a smart thought-leader
is counterproductive.
“Even worse than not looking at blockchain technology and the variety of solution options is simply setting up a blockchain solution by force that does not actually make sense. Such pseudo-use cases are the worst thing that can happen to the industry, as word gets out that blockchain does not actually have any added value, and the technology and innovation falls years behind,” he explains.
Instead, Schmalbach advises the following process: “First, captive managers should ask themselves what their problems are — these could be costs, capacity bottlenecks, changing risk landscape, lack of employees, and so on.”
“In the next step, a captive manager should then consider how they can solve these problems and in what form the blockchain can help. However, blockchain is best when it serves as a platform for an ecosystem, like DREx in Vermont. It is then up to the captive domicile to understand the problems of its captive managers and support them with the necessary technology and regulatory adjustments.”
The idea that blockchain should not be implemented for novelty purposes is echoed by Yee, who elaborates: “Captive insurers need to understand that this is not something you are going to be able to change overnight. An insurer will need to assess its pain points and weigh how blockchain can be implemented.”
Yee notes that some organisations have already begun their approach by completing proof of concepts in order to better understand the practicalities of the new potential process. Elsewhere, the Distributed Ledger Governance Association (DLGA) was formed as a working group in Vermont to deliver blockchain solutions to companies and service providers in the state’s financial, insurance and captive industries.
DLGA is organised to allow members to demonstrate and accelerate commercialisation of their distributed ledger technology (DLT), as well as collaborate with the government, industry and other stakeholders in Vermont to help propel DLT innovation and economic growth.
In addition, members of the DLGA working group benefit from the development of a blockchain-based ecosystem. This connects captive managers, insurers, owners, blockchain developers and other service providers, and a peer-to-peer risk trading platform for traditional and emerging risks. Meanwhile, innovative solutions include parametric solutions for hard-to-place risks such as cyber, climate change, reputation and terrorism.
A claims process based on similar parametric triggers was also provided by the working group, alongside a standardised risk exchange based on blockchain and driven by the AI that links demand (captives) and supply (third-party captives, insurers, reinsurers and insurance-linked securities funds).
Challenges
As with the implementation of any technology, there are potential challenges in executing blockchain within the captive industry. Radical changes to established industry processes will cause disruption to some extent, and may require the most up-to-date technology and IT support platforms, which may be a difficulty for smaller captive structures, even with the support of service providers.
These smaller captives may also struggle with the high administrative and regulatory costs associated with the implementation of blockchain, therefore only making the technology accessible to larger multinational enterprises with captives rather than creating a broad industry precedent.
In terms of these challenges to the wider captive industry, blockchain does not currently have sufficient solution concepts for existence-threatening risks. In addition, there is a significant lack of capacity for insurable and emerging risks.
Schmalbach identifies vested interests as a significant challenge. He says: “Many people in the captive environment are doing very well and see no reason to innovate — why should they? My personal advice is that if you are happy with how everything is going and see no reason to change the status, then do not alter anything.”
The latest cutting-edge technology is generally associated with the younger generation; however, the captive industry has a historical talent crisis. Yee notes that “the captive insurance industry is not known for being an early adopter of new technologies. At the same time, the legal and regulatory environments are not always keeping pace with the rapid advancement around blockchain technology”.
Without a pool of the next generation to spearhead more advanced implementation of blockchain, how will the captive industry keep up with the ever-evolving process of digitalisation?
Mancini suggests that for the solution to fully realise the potential of blockchain, “active collaboration” among multiple parties is required. He elaborates: “Achieving this level of collaboration can be challenging during times of uncertainty, as we are experiencing today with COVID-19 and the transitioning insurance market. However, these events also led to the rapid adoption of digital technologies, which may be a boon for blockchain in the near future.”
An evolving landscape
Looking at this near future, the development of new technology will depend on what issue it aims to address in the captive industry, such as talent acquisition, information sharing, value chain inefficiencies or a wider changing risk landscape.
Discussing development priorities over the next 12 months, Hylant’s Gedge says: “Ensuring the captive is the right structure for companies should be the top priority for owners; technology is evolving quickly and risk profiles are too.”
“Captives globally have had to deal with a number of legislative changes, including Brexit and IFRS 17, while board meetings and submissions in some domiciles have moved online after the past 18 months. These changes have taken up a lot of time and board discussions, so as the technology continues to evolve and captives respond to global shifts, it will likely become more accessible for insurers,” Gedge predicts.
Mancini affirms the impact the pandemic has had on the captive industry: “Over the past two years, the captive industry experienced a rapid adoption of multiple digital technologies to address COVID-19 and transitioning market conditions. Over the next 12 months, understanding how these technologies may facilitate the adoption of additional digital technologies, such as blockchain, will be a high priority for the captive industry.”
He continues: “Those that are already exploring blockchain will leverage the rapid adoption of digital technologies to enhance existing concepts and pilots. Others in the captive industry that have yet to explore blockchain may now have the necessary digital tools to begin exploring the technology — I anticipate that the captive industry will see a growing interest in distributed ledger technology and blockchain.”
Schmalbach underlines the importance of having an organisation or jurisdiction in the industry make the first move — in this case, the DREx ecosystem in Vermont. As a collaborator on the network, Schmalbach expects to be able to present the first real-use cases and pilot projects by mid 2022.
“These will definitely kick-start the market as other domiciles will follow suit with other collaboration partners. This will have an immense impact.”
“I anticipate that 2022 will be the year when the symbiosis of parametric and blockchain reaches its interim peak,” he concludes.
