Five amazing realities about blockchain and captive insurance
They say the first million is the hardest to make. How about your first billion? Or your first $175 billion? Insurtech revenues were $175 billion in 2016 and are estimated to reach $235 billion by 2021. This leap of investment is largely due to the new possibilities afforded through blockchain technology.
Forget the Bitcoin hype—blockchain is here to stay. The financial services sector is swimming in capital with which to figure out how to implement this new technology. Here are five ways that the captive insurance sector will transform.
The future is now
Blockchain is not the wave of the future—it has already arrived. For example Ryskex, a low-cost tool providing risk-pooling services for specialty risks, provides blockchain risk transfer solutions for captive insurance companies.
Insureds use the Ryskex ecosystem to make an offer for their risk and risk-takers from around the world assume portions of the risk. These premium values are stored on a distributed ledger and then automatically distributed in the event of a claim. Claims are submitted and resolved with a simple click—no third party adjusters are involved (that we know of).
Ryskex is interesting in that it provides captives an opportunity to lay off layers of specialty risks into a blockchain solution. Managers can build Ryskex into any layer of risk and coordinate the company with other reinsurance or excess solutions as part of a larger structure for the captive insurance beneficial owners.
This is an innovative solution providing an interesting compliance tool for US captive owners. Risk distribution is always a problem for 831(b) captives. Ryskex’s ecosystem may provide an opportunity to distribute risk with a properly structure quota share arrangement.
Reinsurance revisited
Everyone loves low-hanging fruit. In the world of blockchain insurance, the lowest-hanging fruit grows in the realm of reinsurance. Standard follow-the-fortune clauses provide that a reinsurer must follow the underwriting fortunes of the captive’s insureds and is bound by the results of the claim.
In most situations, this clause stands as a bar to reinsurers relitigating issues in a case. In the vast majority of cases, these clauses can be reduced to a simple blockchain solution where the reinsurer’s financial contribution is linked to a negotiated settlement or verdict. These payments would be automated through smart contracts without any need for claims handling, adjusting, accounting, or other human participation.
Although this would reduce costs, it would not necessarily eliminate the human touch from these types of agreements. Reinsurers are still entitled to investigation into coverage disputes, allegations of fraud, or any bad faith issues. That said, as long as the case is clean, the smart contract should handle all of the heavy lifting.
Innovation at the edge
The captive insurance industry is the ideal spot for innovation in blockchain insurtech. Simply put, captives are smaller risk-bearing entities with fewer stakeholders to spoil innovation. Too many cooks ruin the broth and too much bureaucracy tends to shuffle innovative solutions into standard fare commodities.
Captives address specialty risks for companies and managers can easily incorporate new technological solutions into captive management. Advanced claims solutions that are too expensive for small captives today will give way to innovative, cheaper solutions tomorrow.
The captive industry struggles to keep up with the breathtaking insurtech affordable to the giants, and blockchain provides the promise of cheaper management solutions. Obvious areas of innovation include advanced fraud detection software, automated risk modelling, and lower claims handling costs.
Regulators gonna regulate
Even the government sees the value in blockchain applications to streamline regulation. Washington DC and Vermont are both implementing blockchain into their records maintenance processes, and Vermont has launched a pilot programme for its captive insurance services. The hope is to incorporate distributed ledger technology—blockchain—to create efficiencies in the record-keeping process.
Theoretically, this should save labour time and free state workers to provide higher quality service to the industry. Given the importance of captive insurance to the Vermont economy, this programme is more than likely to succeed.
Beyond the event horizon
In 1999 nobody envisioned that an online bookstore would morph into a global retail killer. Nobody saw the rise of amateur videos. Some companies still questioned whether they even needed a website.
Blockchain is a brand new technology that is going to radically change the insurance industry more than we can imagine. New forms of insurance will take root in the distributed ledger and will outpace the traditional carriers.
Perhaps the most exciting aspect of the blockchain is the total lack of a need for a regulator. As long as smart contracts are properly programmed, there is no need for a third party to ensure that records are properly stored and claims are paid. All the consumer needs to do is to pay premiums.
Theoretically, everything can take care of itself. Parametric insurance policies and follow-the-fortune reinsurers already see how this can basically automate the claim process. But what about unemployment insurance? Or an alternative to social security?
There is no reason to limit any insurance policy to a state or nation when the internet can give birth to completely new types of supranational insurance policies.
Granted, governments will protest and try to impose fines and penalties. But as we’ve seen from the case of Uber, even the government will give up if technology is sufficiently useful and widely adopted by the people. Blockchain insurance offers a similar promise to transform the industry.
Over time, the blockchain will morph into its own jurisdiction. There will always be a place for standard P&C coverage regulated by the states, but there will also be a place for other coverages that are efficiently regulated by the distributed ledger.
Matthew Queen is chief compliance officer and general counsel at Venture Captive Management. He can be contacted at: mqueen@venturecaptive.com
