Captive Insurance Companies and the Rise of InsurTech

Earlier this month, I penned an article titled "Assessing the Human Element in Board Culture." In the last section of that article, I talked about confirmation bias and stated, "For the captive industry, this can be a dangerous trap. We have now reached middle age, and I think most of us would argue the industry as a whole is now secure. This is a prime example of confirmation bias: the inability to acknowledge that there could be something that disrupts our entire business model." A case in point of this is the continuing expansion of InsurTech and its potential impact on captives.

The recent announcement by Hippo ("Home Insurance Agency Hippo To Go Public in $5B SPAC," by Sohini Podder, Insurance Journal, March 4, 2021) that it intended to go public through the merger with a special purpose acquisition company (SPAC) led me to revisit the InsurTech space. SPACs, or so-called blank check companies, have been around since the early 1990s but have recently enjoyed a resurgence as a way to take private ventures public. SPACs are nothing more than shell companies, similar to licensed shell insurers, which raise funds through an initial public offering (IPO) to take a private company public. SPACs are currently raising funds even though they don't have a target company in mind for the IPO. They represent another form of disruption to financial services, similar to InsurTech.

Why should captives take notice? The following is from an introductory letter from Neal Baumann, global leader, insurance, Deloitte Global, at the beginning of A Catalyst for Change: How FinTech Has Sparked a Revolution in Insurance, a 2018 Deloitte Global white paper: "Frictionless sales and service. Simpler, more transparent products. Greater choice and flexibility. A more scalable operating model. The customer-centric culture, disruptor of so many other industries, has arrived for insurance. At the vanguard? InsurTech, which is showing customers the 'art of the possible' now. Already, hundreds of companies have appeared on the global insurance scene. They're using technology to remove friction and transform the customer experience…. Many more companies like these are on the way. By and large, InsurTechs are nimble and adaptive businesses. They have digital-first, cost-efficient structures, and in some instances have tapped into a zeitgeist of younger customers rejecting bigger corporates."

Traditional insurers, and I include captive insurance companies within this definition, have always assumed that regulatory and capital barriers would present a rather formidable blockage to entry for the InsurTech crowd. However, in Opportunities Await: How InsurTech Is Reshaping Insurance, a June 2016 PwC report, a relationship management director/senior vice president for a large UK insurer, who had remarkable clairvoyance, is quoted as saying, "However, the marriage of FinTech capabilities with a backer that brings in capital, regulatory fit, and a recognized brand would be transformational for the sector." While SPACs existed, no one had thought about using them to make this theory a reality. No longer, as Hippo has proved.

As a captive insurance company board member or manager, ask yourself these questions: How well do my board and management team understand the InsurTech space? Can you name some of the major players in this space and what they are doing? For example, of particular interest to captives may be the start-up Next Insurance. Here is the synopsis included in "The Future of Insurance FinTech 50 2020," by Ashlea Ebeling, Forbes, February 12, 2020: "Mobile-first insurance carrier, which started as an agency, specializes in small business lines—general liability, professional liability, commercial auto, and worker's compensation—sold in packages tailored to specific businesses (e.g. personal trainer, contractor, restaurant). Sells in all states except New York and is a licensed carrier in 26 of them; Funding: $381 million from Munich Re, TLV Ventures, Ribbit Capital, and others; latest valuation of more than $1 billion; Bona fides: Serves 79,000 small businesses; gross written premiums, as of August, running at a $77 million annual rate"

Its annual premium alone rivals that of many captive insurers. And it is operating in a space where many captives also make their home.

I think the most direct threat from companies such as Next is to group captives. However, I think single-parent captives should also at least be wary of what insurers such as this are doing. Remember, part of the reason captive insurance companies were and still are formed is to underwrite the specific risks of a corporation with better coverage and potentially at a lower overall cost. The InsurTech crowd is starting to call into question whether captives still enjoy these advantages.

Assume for a second that by using artificial intelligence an InsurTech start-up could capture all the inherent risks within your company, price them accordingly, and structure a program that is competitive with your captive both from a risk management and cost perspective. Are you absolutely sure your senior management team would continue to view the captive as the best option?

Personally, I don't think we are there yet. But, with the rapid increases in technology that continue to occur, I also don't think we are too far away. Now is the time to begin to understand this new opportunity/threat. Note, I believe InsurTech represents both for captives. The trick will be in being able to harness this technology to benefit your captive before it becomes a competitor.

As always, we encourage your feedback and commentary. Please feel free to email John Foehl directly at [email protected].