Industry professionals talk to Rebecca Delaney about the implementation of technology solutions in the captive industry, as well as the current state of the global insurtech market and lingering technology constraints
With buzz phrases like “digital transformation” and “catalyst for change” puncturing the insurance industry, it was only a matter of time before fintech deviated into insurtech to create an entire new subsector of the industry.
Transformative technologies such as artificial intelligence (AI), machine learning and distributed ledger technology (DLT) — the most well-known example of which is the blockchain — are garnering increasing attention and investment from insurers. But is interest enough to translate into actual implementation and progress?
An underlying conclusion of the 2022 Big Data and AI Executive Survey by New Vantage Partners is that although investment in data and AI initiatives continues to grow (such as appointing chief data and analytics officers as the roles evolve within a company), achieving data-driven leadership remains a distant target for most organisations.
Essentially, despite the progression of large enterprise data, analytics and AI initiatives, as well as the accelerated take-up of these technologies, the actual implementation of AI into widespread production remains low following initial tentative steps in the captive industry.
Marcus Schmalbach, CEO of RYSKEX, describes the first implementations in the blockchain area as unimpressive and having no real impact on the captive industry. However, he continues that the developments of Web3 and the use of smart contracts “will have a disruptive impact on the industry.”
These promising conditions are demonstrated in the inaugural Global Insurtech Report by Gallagher Re for the first quarter of 2022, which notes that global investment in the insurtech sector throughout 2021 reached a record-high of US$15.8 billion — higher than recorded investment in 2020 and 2019 combined.
In the report, Gallagher Re cites that since 2012, around $41.65 billion has been invested globally into insurtechs across 2,249 deals in 63 countries. 52 per cent of investment deployed in this period went into only 4.4 per cent of all insurtech deals.
The first quarter of 2022 saw just five mega-rounds; Gallagher Re explains that this lower number of mega-rounds, along with higher participation in early-stage investment, is indicative that capital invested is becoming more democratised — essentially, a more equally distributed spread of total capital is being invested.
The report anticipates: “The vast majority of new insurance projects, ventures and businesses will be heavily supported by tech. Technology will be the platform, enabler and product that continues to keep our industry relevant and cost-efficient.”
The plethora of advantages afforded to the insurance industry by DLT and the blockchain are applicable to larger captives. This includes simplified policy amendments, premium transfers, claims reporting, and claims payments.
Dogan Kaleli, CEO and founder of Stere, a one-stop-shop capacity platform for insurance programmes, outlines an example to demonstrate the benefits for captives. He explains: “A multinational corporation that self-insures with a captive could use DLT to make it easier for its stakeholders in different countries to access coverage and pay premiums to the captive.”
In this example, Kaleli notes that since some jurisdictions require locally-issued admitted policies, this presents a potential problem in reconciliation between the captive and fronted local policies.
DLT addresses this issue as when a change is made to a policy, it is immediately reflected throughout the entire blockchain to create a single, consistent source of information.
This is particularly advantageous to group captives, Kaleli outlines, where multiple owners require access to policy terms and claims information, as well as the ability to share data between group members and service providers. He says: “A private blockchain, with the necessary permissions, can provide secure access to consistent data for all captive participants.”
Schmalbach adds that the claims handling process is another key area addressed by DLT and smart contracts. He explains: “The use of smart contracts, paired with parametric solutions, will be the future of enterprise risk protection, a completely new approach defined as “parametric risk transfer” and already passed into law by the State of Vermont.”
This is affirmed by Kaleli, who notes that DLT can accelerate the filing and settlement of claims as smart contracts can automate claims payments when specific triggers are met.
“Automating claims through DLT can eliminate the need for, and expense of, manual claims adjusting processes for many types of straightforward claims,” he says. “Complex claims may still require human expertise and in-person adjusting services, no matter what kind of entity is providing the risk transfer.”
Logging on
So, with the advantages laid out, how can insurtech be practically implemented in the captive industry specifically? Cameron MacArthur, founder and CEO of AI Insurance, notes that captives were historically excluded from conversations around technology because legacy systems were not scalable.
He explains: “Systems used to cost upwards of $1 million, which is completely out of the realm of possibility for a captive insurer.
With the advent of cloud, opportunities to automate and scale claims, underwriting, policy issuance and money management are all now available at a lower cost to captives and risk retention groups.”
“With the improved accessibility of technology, MacArthur observes captives focusing their technology investment on automating the underwriting and application processes: “The practical examples here are about scaling your existing team. If you can automate some of the simple applications, and just flag and escalate ones that require review, you can scale your existing underwriting team to handle an order of magnitude more applications.”
Kaleli adds: “Captives are increasingly investing in data and analytics, not only to better manage the risks they assume for their owners, but also because reinsurers and other capacity providers are requiring it to commit capital.”
He notes that as digital technologies continue to evolve, there is a general adoption in the insurance industry to better identify and analyse risks — and captives are certainly part of this trend.
“Writing third-party risks can be an attractive way for captives to generate surplus, diversify their underwriting portfolios, and increase profits. Using blockchain, apps and other technologies can enable captives to write third-party business more easily and profitably,” Kaleli says.
Schmalbach adds that he expects a second wave of insurtechs particularly focused on the use of oracles and smart contracts, noting that there already exists collaboration between captives and insurtechs in early stages.
Time to reboot
With a gradual uptake of technology solutions in the captive industry, Schmalbach highlights the importance of having a legitimate motivation behind implementation in the first place.
He explains: “The previous blockchain solutions were not creative enough to be considered must-haves. It is not worthwhile to implement a blockchain as an end in itself; accordingly, the boom will be triggered as soon as smart contracts are able to help cover hard-to-place and hard-to-cover risks, which is now technologically possible.”
Although these technology constraints are beginning to be eroded, challenges about administrative complexity remain for implementation in the insurance industry. MacArthur outlines finance and money management as the most significant challenges.
He says: “There are incredible technology solutions available when it comes to invoicing and payment, but they are not effective if your team is still handling physical cheques. Consumers and businesses buying insurance are ready to make the switch, but if captives want to move into the future, they will need to get more comfortable setting boundaries and offering payment by automated clearing houses.”
This is affirmed by Kaleli, who notes that many insurance organisations still processing investments of older technology and systems do not have the flexibility to integrate new tools and technologies.
“As smaller risk-bearing organisations, most captives do not have the resources of large primary insurers and reinsurers, so captives look to technologies that can provide cost-effective ways to improve risk management within existing resources,” he says.
“But that often comes with two additional challenges: finding owner financial support for additional technology projects; and technology providers that may view captives as too small for solutions designed to serve larger insurance entities.”
Radical changes to established industry processes will inevitably cause disruption — although smaller captives currently lack the resources to ensure their technology and systems are the most up-to-date, the future landscape of insurtech in the captive industry appears optimistic that technology solutions will become more accessible.
Schmalbach adds that the range of important issues and risks where the traditional market is currently struggling — climate change, cyber, pandemic, energy crisis, ESG — will fuel the future of insurtechs.
He says: “Many insurtech solutions were not designed for the captive market — this will change now. Solutions for these risks, coupled with technologies of the future like blockchain and AI, can be the potential of a decacorn valuation for traditional providers, but also insurtechs.”
Continuing this encouraging sentiment, Kaleli adds: “??We are excited to see continuing growth in insurtech companies and opportunities for them to serve captives. Over the next 18 months, Stere believes we will see many more opportunities to connect more captives with capacity providers that have a shared interest in using analytics and other tools.”
Increased captive ownership over their data and information in the future is highlighted by MacArthur, as he notes that the array of vendors in the process will have to adapt to work closer together on the same system.
“Unification of data in one single source of truth is a core component to success for any company trying to innovate. Because of this, we are focusing a lot of our roadmap on how to add value to anyone in the ecosystem, whether it is the investment manager, claims manager, managing general agent, or captive manager,” he concludes.
