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Captive Insurance Industry Should Pay Attention to FinTech

Digital Future
April 22, 2016

Almost 40 years ago, captive insurers began as a new business model that disrupted the traditional commercial insurance markets. Captives, like all companies, have moved from start-ups through the growth phase and have now reached a level of maturity where they are no longer viewed as "alternative" insurance anymore. 

Anyone familiar with business life cycle models will recognize that captives now sit on the cusp of two very different futures. In the first, they face an inevitable decline followed by gradual extinction as newer business models supersede them. In the second, they follow a path of innovation and continual renewal. However, their ability to follow the latter direction requires that they continually investigate and evaluate new ways of providing risk management and mitigation.

The emergence of new "FinTech" businesses deserves our attention. Wikipedia offers the following definition of FinTech.

[Financial Technology or] FinTech refers to new solutions [using technology] which demonstrate an incremental or radical/disruptive innovation development of applications, processes, products or business models in the financial services industry.*

The idea for this article was prompted by an April 14, 2016, article in Financier Worldwide ("US online alternative finance market jumps 200 percent in 12 months confirms new report," by Fraser Tennant) and a recent presentation by PricewaterhouseCoopers (PwC). The Financier Worldwide monograph was derived from a new report from KPMG, the Cambridge Centre for Alternative Finance, and the Polsky Center at the Chicago Booth School of Business titled Breaking New Ground: The Americas Alternative Finance Benchmarking Report.

While this report is focused on the banking industry, it is not too difficult to extrapolate some of the findings and apply them to the insurance industry. Several of the key highlights include the following.

  • Financing for FinTech has exploded from $4.5 billion in 2013 to $36.5 billion in 2015.

  • Of this financing, 99 percent occurred in the United States.

  • Algorithmic technology is increasing the speed of decision making.

  • Transparency is becoming easier to achieve.

  • Platforms are geared to being more customercentric.

  • Data collection and analysis are surging.

This editor also had the recent opportunity to attend a presentation by PwC concerning the "Future of Insurance." PwC has published a number of monographs on this subject.

Several of the key takeaways from the PwC presentation are as follows.

  • Easy access to technology has lowered the barriers to entry, and an increasing number of FinTech players are emerging.

  • Investors are showing interest in "InsurTech" to seize opportunities in a $5 trillion global insurance market.

  • Traditional insurers are becoming involved, participating in 54 deals in the last 2 years.

So, in your next captive board meeting, could you have an intelligent discussion about any of the following new insurance business ideas/models?

  • CoverHound

  • Digital Currency Group

  • Bee

  • PolicyGenius

  • Airphrame

  • Lemonade

As Intel's Andy Grove titled his 1998 book, Only the Paranoid Survive, we as captive owners, managers, and vendors should not take our long-term survival at face value. As always, your thoughts are welcome. Contact us.
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* Wikipedia contributors, "Financial technology," Wikipedia, The Free Encyclopedia (accessed April 22, 2016).

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