Digital transformation the key to expanding reinsurance capacity: VCIA 2020


Digital transformation the key to expanding reinsurance capacity: VCIA 2020

Re/insurers can address capacity issues and improve their relationships with clients by embracing digital transformation and the potential of new technology such as blockchain and artificial intelligence. 

That was the view of panelists speaking at the Vermont Captive Insurance Association’s (VCIA) 2020 conference, in a session titled Digital Transformation and Opportunities: What the Captive Market Will Look Like in 2025. 

Karen Hsi, programme manager for captive programmes at Fiat Lux Risk and Insurance Company, the University of California, discussed the challenges of being a reinsurance buyer. 

The University of California has annual revenues of $36 billion, and is exposed to “every possible risk imaginable”, she said, with employees based on every continent and every large body of water in the world. It has five DC-based captives that between them write a range of coverages for their parents, and for third party insurers. 

Courtney Claflin, executive director for captive programmes at the University of California, highlighted the University’s issues around securing sufficient capacity in the reinsurance markets. 

“Our risk profile does us no favours,” he said, emphasising the size of its insurance portfolio and the range of risks it manages. “There are not a lot of reinsurance companies that want to deal with this much, and this diversity of risks.” 

Finding the right balance between securing capacity and maintaining compliance in terms of its own capital reserves, and managing the ever-changing terms and conditions associated with its reinsurance arrangements, adds to this challenge, Claflin said. 

John Donald, a cyber adviser at AXIS Capital, argued that blockchain technology can help the re/insurance industry resolve some of the challenges around capacity, helping re/insurers secure better historical data which will give them greater confidence and allow them to offer more capacity. There is a growing amount of data to be found on the internet that re/insurers can gather for themselves, which can be used to develop a new generation of insurance products, he said. 

He argued parametric products in particular can help to restore trust between re/insurers and their clients, by offering greater transparency and speeding up claims payments. 

Marcus Schmalbach, chief executive officer at RYSKEX, agreed, noting that parametric products can initiate payments to clients within seconds in theory, though he admitted it is probably more realistic to expect payments to be made within 48 hours. 

Parametric products can also be offered more cheaply than traditional insurance products by cutting out unnecessary parts of the process, such as claims processing departments and potentially even brokers, said Donald. He estimated parametric products could be offered 45 percent cheaper than their equivalent traditional products. 

Most importantly, by tapping into the much larger capital markets pool of investors, parametric products can alleviate issues around reinsurance capacity, he added. 

Schmalbach said: “Parametric products are very easy for capital markets players such as ILS funds and hedge funds to understand. Artificial intelligence can also help match supply and demand and replace the traditional underwriting function.”

Vermont Captive Insurance Association, VCIA, Karen Hsi, Courtney Claflin, John Donald, AXIS Capital, University of California, Marcus Schmalbach, RYSKEX

Captive International