FinTech and Captive Insurance Revisited

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September 17, 2018 |

Businessman holding tablet emitting a blue hologram of earth with security icons

In April 2016, we ran an article titled "Captive Insurance Industry Should Pay Attention to FinTech" where we suggested 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 captives to continually investigate and evaluate new ways of providing risk management and mitigation.

The Bermuda Monetary Authority (BMA) recently announced that it hired Moad Fahmi, CFA, FIA, as senior adviser, supervision (financial technology). Jeremy Cox, BMA CEO, said, "The Authority continues to recognize the growing importance of disruptive technological innovation in the global financial services industry and remains committed to providing a regulatory environment in Bermuda that strikes the right balance between economic growth and financial stability."

We have reached out to BMA and hope to provide an interview with Mr. Fahmi in a later news story.

We are also awaiting further comment from District of Columbia Department of Insurance, Securities and Banking Associate Commissioner and Acting Deputy Commissioner for Market Operations, Risk Finance Bureau Dana Sheppard, on its experiment with blockchain technology (see "Blockchain Technology—Can Captive Insurance Companies Be a Test Bed" and "Blockchain: Accessing Its Value"). Because blockchain uses distributed ledgers, which theoretically eliminate the need to verify transactions through third-party verification, it has exciting applications for insurance. Note we use the word "theoretically" above. 

At a recent audit committee discussion, one of the Big Four certified public accounting firms commented it was actively building a model to audit blockchain transactions. While blockchain may be able to automate any number of insurance functions and eliminate the need for middlemen, the need to be able to audit these exchanges remains.

For captive board members and risk managers looking to understand how captives benefit from the adoption of blockchain, please refer to "A Blockchain Prototype for the Captive Insurance Market."

In cooperation with Ernst & Young, Ginetta, and Citi Treasury and Trade Solutions, Allianz Global Corporate & Specialty successfully implemented a blockchain prototype for a global captive insurance program. The technology aims to increase efficiency in the captive organization's international insurance transactions by accelerating and simplifying functionalities. Simplified processes include cash payments; real-time access of tracked information; and an intuitive, convenient user interface.

At the 2018 Vermont Captive Insurance Association conference, Havell Rodrigues, CEO of the blockchain technology firm Adjoint Inc., in a session titled "Blockchain & Distributed Ledger Technology: Scenarios for Captives", spoke about three ways blockchain can benefit captives.

  1. Blockchain can be used to streamline workflow processes by moving data between systems and vendors,
  2. Blockchain can be used to automate regulatory filings, and
  3. Blockchain can be used to reduce costs by eliminating manual work.

And while blockchain is quietly reshaping the backroom operations side of insurance there is also the customer-focused front end that is also undergoing change. A November 2017 Clearbridge Mobile article by Britt Armour, "How FinTech is Transforming the Insurance Industry," said, "Mobile devices have become a core element of our everyday lifestyle and have evoked a great deal of disruption in every area of business, including the financial service industry. Customer demands have significantly shifted as the digital revolution is transforming the way we access financial products and services." In many instances, our phones are replacing our computers.

For readers looking for a broad perspective of the impact of technology on the insurance industry, McKinsey published a white paper titled "Digital Disruption in Insurance: Cutting through the Noise."

The preface reads in part, "Resistance to what lies ahead is futile. Insurance has been relatively slow to feel the digital effect owing to regulation, large in-force books, and the fact that newcomers seldom have the capital needed to take insurance risk onto their balance sheets. But the industry is not impregnable. Companies that fail to adapt will weaken under pressure exerted by those that use digital technology to slash costs and get better returns on investment."

As we survey the changes occurring in the captive insurance market, in regard to FinTech, we are cautiously optimistic. Like our brethren in the primary and reinsurance markets, there will be winners and losers. The winners are those that are staying abreast of what new technologies offer and embracing these new business models. In looking at your own captive, where are you in this regard?

September 17, 2018