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Captive Insurance: Headed for "Uberization"?

May 04, 2016

Mike Cagney, the chief executive officer, chairman, and cofounder of SoFi, was interviewed for an April 29, 2016, Wall Street Journal article, which says that the premise behind this new FinTech start-up is to move lending away from brick-and-mortar banks to a smartphone app.

The article's author, Andy Kessler, explains in "The Uberization of Banking" that because SoFi does not accept any deposits, the Federal Deposit Insurance Corp. (FDIC) does not regulate the company. Therefore, it is not bound by the same lending regulations traditional banks must follow regarding discriminatory lending. This allows SoFi to use proprietary algorithms to cherry-pick customers that are better credit risks, the Wall Street Journal article says. In addition, its friction costs are miniscule compared to standard banks, according to Mr. Kessler's article; since the app functions as the bank branch, the company just needs to add additional server power to grow.

So how does this relate to insurance and captives? Last month, we ran an article titled "Captive Insurance Industry Should Pay Attention to FinTech." In that article, we outlined some key takeaways from surveys conducted by PricewaterhouseCoopers.  These included the following.

  • 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.

All of this suggests that the "Uberization" of insurance is coming. Now, many of us will look to resist this idea. Insurance, after all, is a highly regulated business similar in nature to banking. Surely this will prevent new business models from emerging, which could challenge the current status quo. However, we have already highlighted in the previous article some of the new insurance concepts being developed. Entrepreneurs will continue to look for disruptive ideas to disenfranchise the insurance industry. 

When Uber was first launched, the taxicab industry may have scoffed at the idea. As the model has gained traction, customers who like the new options quickly organized and brought pressure to bear against efforts to regulate the company along more traditional lines. Today, a taxicab medallion in New York City has fallen 40 percent in price, according to "New York City's yellow cab crisis," by Chris Isidore, CNN Money, July 22, 2015.

We need to be prepared for the same type of disruption in the insurance industry.

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