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Technology, more specifically automation, will keep your captives relevant in these uncertain times, says Rachel Lyubovitzy, CEO of software company EverythingBenefits.
Businesses choose to leverage Captives related to insurance for a number of reasons. For many, it’s all about cost containment. For others, it means taking advantage of tax incentives or redefining internal risk management processes not easily accomplished using a more traditional route. In all of these cases however, cost reduction typically remains the key factor driving the choice towards Captives.
While traditional insurance markets had to modernize, and streamline their operations and offerings to stay relevant in the volatile insurance ecosystem, Captives had little incentive to leverage technology and move into the 21st century. With the Captive market softening as we head into uncharted waters, healthcare regulation continues to evolve and it’s clear there will be new challenges ahead.
There is a bright beacon for us on the horizon, though. Technology and automation can replace some core differentiators now being displaced in the current regulatory climate with a more sustainable model that allows Captives to thrive and succeed in the coming years.
Let’s review key areas where automation will become an essential tool to keep Captives an attractive choice for businesses:
Tax advantages on the brink?
Our ever-evolving healthcare legislation could end up shifting the demand for Captives in the future. It’s an important consideration for those who form Captives to take advantage of tax incentives, such as deductions for the parent company for insurance premiums paid, income tax savings, and other enticements. Some have welcomed the promise for fewer and looser regulations, which can potentially make Captives seem more appealing. On the other hand, some have also pointed out that lowering taxes could also lessen the demand for Captives overall, as fewer businesses will feel the necessity to add potential complexity given less advantages.
Congress has also made moves that will impact markets, too. In 2015, the PATH Act changed eligibility requirements for companies seeking to avoid taxing underwriting income under Section 831(b) of the Internal Revenue Code – which specifically refers to Captives. The changes in law came into effect as of January 2017, so this is now a risk that will turn away some potential clients who’d normally consider choosing Captives.
Taxes aside, let’s look at other factors…
A “risky” business…
Captives are attractive to businesses because of the specified risk management that they provide. This however is dependent upon accurate risk reporting and monitoring on behalf of the Captive, which in the insurance world, is still largely done through manual processes and spreadsheets.
What this means to a Captive client is the massive time lag on claims cost recognition. The impact is particularly felt in the self-ensured and health benefits’ Captive markets. When disaster strikes, by the time claims are filed, the employer may be in over their head, and little can be done in the way of moderation or pre-emptive remediation. Employers end up breaking into their stop-loss layer again and again, year after year… putting the entire rationale of self-insurance or utilizing a vehicle like a health benefits’ Captive into question.
To make matters worse, these days, the risks and impact of not automating can spill over into the cybersecurity realm as well. A recent report on industry perceptions of risk by PricewaterhouseCoopers (PwC) identified cyber-risk as the fourth largest risk among surveyed insurers (and first among U.S. and U.K. insurers). Any insurer using multiple data channels must resolve the flow of incoming data from multiple sources they receive to successfully manage their claims information. Utilizing more than one source or platform exposes opportunities for cybercriminals to disrupt operations and potentially steal confidential information that might be more securely protected under a single, automated platform.
Automation facilitates compliance by modernizing and improving security. For Captives, automating can make the difference between enjoying the sunny weather on a calm day or fighting off a tropical hurricane – which, can destroy everything in sight, in minutes.
Along with risk management, there are other areas where Captives need to “get with the times”, one in particular...
The transparency lens
Given that Captives exist to circumnavigate the traditional insurance route and allow companies to take the first steps towards managing their health benefits costs via self-insurance, it makes sense that any steps taken to further exemplify this disintermediation should be adopted. Thus, transparency is key.
Self-insurance is the first step; between 1996 and 2015, the percentage of private-sector establishments offering health benefits’ plans, at least one of which is self-insured, increased from 28.5 percent to 39 percent. Best Practices established at this stage are vital to support successful and sustainable operations in the context of a Captive. As more businesses embark on the Captive model, it is vital to drive accountability and transparency – and what better way to do that than through technology?
As a Captive operator or management company, there are tons of moving pieces which must be tied together – reinsurance, underwriting, plan options, budgeting & costs, etc. Keeping track of these separate components and vendors can take substantial time, and tying them together is a full-time job in and of itself. Encouraging clients to automate at this step is the key to success. Automation tools can save, track, and monitor for changes in data; this provides oversight and the opportunity for planning and better decision-making.
Now that these three areas have been outlined, let’s examine automation a bit more.
Why aren’t Captives automating?
Captives tend not to invest as much in automation tools the way other insurers do because of the impression it’s difficult to address the complexity and customization found in defining the best coverage and managing client expectations. It’s going to become even harder for Captives to compete with traditional insurance options as uncertainty unfolds around potential changes or repeal of the Affordable Care Act. Larger carriers have been able to leverage economies-of-scale, whereas Captives existed on the fringes of the industry as more esoteric way of providing insurance. Captives really never felt the need to automate – until now.
Captives must consider that the typical client of today is not used to waiting for a month to get an update (let alone a week or two). In today’s world, client expectations are higher, and their demands are greater. Too many things can go wrong too quickly – you need to have an upper hand to respond.
Are there any areas where Captives are automating?
It should be noted that Captives are not completely lacking in automation, however. They tend to use automation for their marketing and advertising quite vigorously compared to other insurers; of all investments, Captives plan to out-invest independents in marketing automation (51% vs. 48%). These Captives are leveraging modern techniques to sell their services (which is laudable in the soft market we are in), but if the client ends up struggling in areas such as implementation, then this does not translate into a success story worthy of driving more business.
Captives are stretching to maintain their clout since it is so much harder to spread the word about the value they deliver, mostly due to the complex nature of the Captive model. Because the market is beginning to soften, it is inevitable that Captive operators / managers and other connected entities in the Captive supply chain need to begin evaluating automation.
Should Captives embrace automation?
For some Captives with large internal budgets and technical expertise, designing, developing and implementing one’s own software to automate insurance functions is an approachable proposition. For most others however, that might be more of a challenge. The sheer complexity of creating and maintaining a framework that can encapsulate multiple data flows, provide real-time reporting and analytics, and be flexible enough to adopt to changing internal and external factors (not least one of them being security) is a formidable undertaking that may not always be feasible for smaller captives with limited resources. Sure, a large enough captive may be able support the costs of building their own automated solution, but most others will turn instead to providers who can reduce their operating burden by aligning with the right automation technology solutions.
Successful captive managers of the future who embrace technology will offer this option to their customers to drive improvement around core captive management operations, decision support, and offer the ability to gain better insight into managing or shifting risk away from employers or clients.
If Captives are to survive this ocean of future uncertainty we are all sailing into, then they will need to automate their most essential operational functions. Having a system in place to protect and defend sensitive information is tantamount to success. As the industry adapts and adopts tech solutions in the face of competition from traditional carriers, they should look to automate (and potentially outsource) some of their functions to enhance their value as an alternative option.
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Rachel Lyubovitzy, EverythingBenefits, Employee benefits, Captives, Technology, North America