Cloud key in helping captive insurers stay afloat

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Disruption may be the latest watchword in the insurance industry, but its impact isn’t just being felt within the personal or commercial lines’ property and casualty space. Worldwide, captive insurers have experienced tremendous growth in numbers over the past four years – but they also are dealing with digitalization’s effects.

Group and cell captives, themselves born within disruptive economic conditions, are successful alternatives to traditional insurance, usually established to avoid rising premiums or fill gaps in coverage not available from their traditional insurer. Whether born out of times of economic chaos, or formed to create it, they have grown to become effective and resilient risk management tools for their participants. Indeed, as a strategic management tool, use of captives has increased from 18 percent in 2013 to 37 percent in 2017, according to Aon’s Global Risk Management Survey results, which recently garnered data from 1,843 organizations.

Interest in establishing new group and cell captives is on the rise, according to Marsh’s 2017 Captive Landscape Report, which tracked data from more than 1,100 such organizations. Aon concurs, noting that the pipeline for new group and protected cell captive formations forecast for the next five years is more than healthy.

The growing interest in captive formations is obviously related to solving business unit needs or creating new revenue streams, notes Marsh. From a vertical market perspective, much of this growth is related to the disruption in the healthcare space, and new group captives are employers setting up employee stop-loss risk pools to underwrite their employee benefits and healthcare requirements. The top four industries that own captives are healthcare, energy, beverage and conglomerates, notes Aon, which added that workers’ compensation, auto liability and professional liability ranked among the top industries in North America.

The overall growth in the captive market is not without its challenges. “Group captives in many ways are like traditional insurance companies, so are faced with the same big monkeys in the room: low investment returns and a prolonged soft market,” says David Provost, Deputy Commissioner, Captive Insurance for the Vermont Department of Financial Regulations. Vermont is the largest captive domicile in the U.S.

A study from the Captive Insurance Companies Association names other challenges, such as a lack of resources, lack of management support, ongoing use of capital, upfront costs of new programs, and lack of knowledge about other, new ways to use their captive as obstacles for growth. Technology is a leading issue, says Jim Leftwich, CEO and Founder of CHSI Technologies, which provides software for these organizations.

“The resources required have dependencies on of the type of captive and the line of coverage,” notes Leftwich. “But the changing common core of today’s modern captive centers around the evolving technology being employed by more and more captives.”

With cloud-based technologies, captives can operate on a smaller financial footprint, while increasing efficiencies of operation, he adds.

“You no longer need a large group of people to administer to captives,” Leftwich says. “Those captives that are still relying on spreadsheets or legacy systems are at an obvious disadvantage in terms of overall cost and ability to scale their business. Employing new technologies and cloud-based systems relates to improved transparency with regulators, faster, cheaper operations and the ability to support new programs, transact business and communicate effectively with stakeholders.”

Marc LaPointe, president of self-directed insurance trust Freedomcare Benefits, acknowledges that there are a lot of captives that still use spreadsheets and off-the-shelf packages in an attempt to make the technology fit to what they believe their members require.

“The reality is that the insurance industry is behind other industries when it comes to creating IT platforms to support group captive arrangements, and slow to understand that the only way to grow is to be open to change in terms of how and where modern technologies like cloud and artificial intelligence can minimize costs and maximize returns,” he says.

Along with being able to create efficiencies and manage costs, group and cell captives alike need to employ technologies that will enable continuity and transparency in order to deal with the complexities around these types of risk transfer mechanisms, Leftwich adds.

“It’s critical to be able to inform members, deliver accurate reports, automate services and, from a regulatory requirements perspective, be prepared at all times for requests for information. Technology will be the thing that will sharpen the pencil, and support the continuity of operation at a time of turnover of knowledge-based staff,” he says.

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