2017 Will Be A Major Tipping Point In The Insurance Industry

This week, CIC Services attended the World Captive Forum (WCF) in Boca Raton, Florida.  One of the large focal points of the conference was the impending change facing the insurance industry, fueled by the “Sharing Economy” and “extreme risks” like cyber, flood and terrorism.  In this shifting landscape, captive insurance companies (CICs) are expected to proliferate as they can provide more efficient risk-transfer structures for their parent companies.  Emerging risks are expected to outpace the commercial insurance industry’s ability to effectively develop and price policies.  Furthermore, insurance regulators will also be challenged by the tremendous changes that lie ahead.

The key note speaker at the WCF was Michael Ian Coles, Chairman and CEO of Cedent, a global investment firm specialized in bringing technology-driven change to the insurance industry.  Michael’s talk provided a broad view of changes facing the insurance industry, including:

1. The “Sharing Economy” is expected to grow considerably (Consider that AirBNB, AliBaba and Uber are the largest corporations in their respective industries yet they own little real property or carry no inventory)
2. The “Sharing Economy” is projected to produce annual insurance premiums of $300 billion in the next 20 years
3. New technologies will have an impact on underwriting and claims management (including for example the use of drones and satellite imagery)
4. Liability will shift (for example, KPMG predicts auto insurance premiums will drop 40% by 2040 but significantly more risk will fall on manufacturers)
5. Block Chain technologies (like BitCoin) may play a role in claims administration and auditing.

Coles noted that global insurer, Lloyd’s, declared 2017 as the great tipping point in the insurance industry, when man made risks will outweigh natural disasters.    According to Cole, “the insurance industry has essentially done things a certain way for 300 years.”  The industry isn’t fully prepared for man-made exposures to outweigh natural disasters.  Michael noted that threats like cyber-attack, political instability, terror, product liability and supply chain interruption are difficult to address.  For example, he pointed out that cyber insurance makes up only 2% of insurance premiums paid but accounts for far more than 2% of risk businesses face.   The insurance industry is going to have to enter a new era of insurance product development that operates at a much faster pace.

Mr. Cole noted that it is very difficult for sharing economy companies to get insurance and reinsurance.  This will open up a large door for “alternative capital market players can pick up the new risks.”  We are seeing this more and more as a mid-market captive manager.  Start-up companies, particularly those with innovative new technologies or business models, struggle to obtain commercial insurance.

According to the WCF key note speaker, captive insurance companies will take on larger and larger roles in the future, “because they are nimble, have no legacy systems, fall under less regulation and can be operated creatively…they have nothing holding them back…so they will have a first mover advantage in the new sharing economy.”   We could not agree more.

What Is A Captive Insurance Company?

Simply put, a captive insurance company is a real insurance company.  It is a C corporation and is licensed and domiciled like any large insurance company.  Captives also have their own reserves, policies, policyholders, and claims.  “Captive” often has a bad connotation.  A better word might be “tethered.”  A captive is an insurance company that is tethered to one or more related companies.  It is often owned by the parent company, the business owner(s) or other related parties.  Owning a captive insurance company is a sophisticated way to self-insure, and it provides access to reinsurance via a risk distribution pool or the reinsurance market.   Some benefits of owning a captive include:

1. Improved risk management
2. Better cost control
3. Better business model
4. Access to insurance that is not available or exorbitant on the commercial market
5. Access to reinsurance
6. Ability to reserve for future losses
7. Ability to accumulate significant wealth
8. Favorable tax treatment