Insurance Landscape 2025—What's in It for Captive Insurance?

Accenture has published a monograph titled Insurance Revenue Landscape 2025: Innovate for Resilience. The fifth slide of the deck is eye catching because of the numbers involved; it states as follows: "We expect $1.2 trillion of the $1.4 trillion in expected growth to come in existing products, which may give the false impression that staying the course is a viable plan. But insurers can no longer rely on familiar products, channels, and historic retention rates to drive profitability long-term. Rising costs, volatile markets, and increasing consumer demand for digital services show no sign of abating. Almost half a trillion dollars ($480 billion) of the $7.5 trillion in GWP expected in 5 years, or approximately 7 percent, would be heavily impacted by innovation, including $200 billion in new risks, product offerings and services."

These are truly significant sums of money, and so the question arises: What's in it for captive insurers?

Accenture (report is available for download with registration at the Accenture website) posits that the $200 billion figure will be divided into two parts: $160 billion in new product development and $40 billion of value-added services to support both existing and new products. They see this growth occurring in technology-enabled health and wellness, auto, and home products. Given that most captive insurance companies are focused on corporate risk mitigation, we can eliminate anything consumer based such as home products and private auto.

However, captives have always played a fairly substantial role in workers compensation and commercial auto, so the first two growth areas seem viable. We touched on workers compensation and how artificial intelligence is having an impact in a 2019 article titled "Musings on the State of Workers Compensation." At the time, we were cautiously optimistic about the trends that were beginning to develop. Two years later, we find nothing that causes us to change our minds.

This is reinforced by an article from The Hartford, "Workers' Compensation Trends in 2021," which begins, "As businesses continue to adopt a 'digital first' approach, it will have an impact on workers' compensation. From safer work environments to the increased use of telehealth, workers' comp rates and policies will likely shift in the coming years." A key point for captives, though, is whether they are progressing rapidly enough in building out a digital architecture to play in this environment. If your captive writes workers compensation, do you have an artificial intelligence approach in place, either through a technology provider or via relationships with your reinsurance partner?

While workers compensation has been trending positively, the same cannot be said for commercial auto insurance. This snippet comes from a January 29, 2021, blog post by Hausmann|Johnson Insurance: "For the past decade, the commercial auto space has been challenging and largely unprofitable for insurance carriers. In fact, according to a recent report from A.M. Best, the commercial auto insurance segment's underwriting losses reached $4 billion in 2019—the worst loss the industry has seen in 10 years." And while price increases are starting to offset this adverse development, 2021 looks to be another challenging year.

While your captive insurance company may have no choice but to underwrite commercial auto, can technology and specifically telematics help offset some of the negative trends? These include driver shortages and an increase in inexperienced drivers, the return of more vehicles to the road after the pandemic, increased claims costs from jury awards, vehicle repairs and medical costs, and deteriorating infrastructure. As with workers compensation, the payoff seems to be based on the adoption of technology. Where does your captive fit within this universe?

As we thought about the ascertain from Accenture of $160 billion in new product development, we recalled a piece we had read from Allianz back last year, "How Data, Technology, and Captives Can Help Manage Emerging Risks," by Guglielmo Maggini, April 24, 2020. This paragraph stood out: "Today, the value of a growing number of companies is primarily determined by intangible assets: patents, intellectual property, customer data, IT and software, networks and supply chain, brand image or reputation. In 1975, only 17 percent of the value in the S&P 500 market represented intangible assets, according to an analysis of Ocean Tomo. In 2015, that figure grew to 84 percent, or around $20 trillion of value. Former Lloyd's CEO Inga Beale puts it in a nutshell: 'Today, companies' valuable assets are more in the cloud than in the warehouse.'"

In the United States, this is especially true as our economy has moved from being traditionally manufacturing based to service based. The problem this poses for captives is twofold, first how to properly value the intangible asset(s) and then how to adequately design an insurance product to mitigate the risk. And, for any new product this holds true, especially trying to understand how to properly price the risk being offset.

As captive insurance companies begin to explore these new risks, either because their owners have need of the policy, or simply because it may offer the captive a competitive advantage, owners must make informed decisions. Captives need guidance from the actuarial field as they maneuver in this environment. But, as we made clear recently, it's also critically important that your captive board be actuarially sound.

The insurance world is undergoing substantial change, probably more so than at any point in its history. For captives, this can be a double-edged sword. We have always been known as innovators, and though we are now comfortably middle-aged, nothing has changed. But innovation also comes with risk, and captives have fewer capital reserves than their commercial brethren. Therefore, in order to take advantage of this new world, we need to be smart in what risk we choose to underwrite and how we decide to price it.