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27 November 2024Analysis

Open finance/ILS convergence: sounds like captive business to me

Greg Lang, founder of the Reinsurance and Insurance Network, explains how some ‘new’ topics for captives are actually quite familiar.

Have you ever been to Pompeii? A city buried by volcanic ash but remarkably preserved. During my tour, the guide pointed out how little society has changed in the last 2000 years, from reflectors embedded into the roads to fresco painting on the walls that look like the Renaissance art of da Vinci and Raphel. Turns out the masters used these old frescoes as inspiration almost 1,500 years later. 

There was even a tile mosaic in the entryway of a wealthy merchant’s home with a “beware of the dog” sign—I guess they had lawyers back then too. They also had taxes, lots of taxes. Even urine from the public toilets was sold and taxed. Some things never change.

Old ideas are often presented as new. I feel that way reading about current topics such as open finance and insurance-linked securities (ILS) convergence. Captives have been bringing unique parties together for more than 100 years—Lufthansa Group’s Delvag captive celebrated its centenary on August 12 this year. 

“Captives have been covering cyber risk and funding for hard-to-place property for a long time now. The ILS market is catching up.”

Open finance 

Open finance is planning to revolutionise financial services, blurring the lines between banking, insurance and payment systems. Open finance is the ability to access personal financial data in order to build more personalised experiences for consumers and increase innovation. 

The term may sound new but using financial data to underwrite insurance has been around for a while. Credit-based insurance scores were introduced by the Fair Isaac Corporation (FICO) in the 1990s. FICO estimates that approximately 95 percent of auto insurers and 85 percent of homeowners insurers use credit scores in states where it is legal. California, Hawaii, Maryland, Michigan, and Massachusetts continue to either ban or significantly limit the use of credit history in determining insurance rates. 

Credit scores assess a customer’s risk profile, to determine the likelihood of future claims and help price policies. Individuals who properly manage their finances are more likely to manage insurance risks appropriately, by driving safely or maintaining their home.

Elon Musk, who helped create the payment system PayPal, has discussed the concept of open finance since 2000. He changed his company name from Twitter to X to highlight his continued vision of making a one-stop financial platform a reality for X users.  

ILS’s annual conference 

The ILS Bermuda Convergence conference is an annual event since 2020 bringing together key players in insurance and ILS for networking and education. Insurance converging with private equity is another example of the open finance concept.  

This year’s meeting added a twist: the keynote speaker was a climate scientist and oceanographer who offered insight into the intersection between climate, ocean science and risk management. A second speaker presented his work on deep sea sensors. The data being collected could help insurers better understand oceans and hurricanes.  

It sounds like captives to me

It was another record year for ILS in 2024. Investors found an almost unlimited appetite from insurers, reinsurers, corporations and governments—buyers looking for alternatives to traditional markets. For the first time, ILS covered cyber risk. Investors benefited from geographical diversity and a wider array of risk types such as commercial and special risks. 

We often read that it was also another record year for captives. Geographical diversity, wider array of risk types: sound familiar? No-one knows how big the captive insurance market is, as most captive financial information is not publicly available. It’s so secret, no-one even knows how many captives there are, let alone how much premium flows through them. There are estimates based on public data such as new formations, but the published numbers don’t include rent-a-captive cells. 

Most captive owners prefer to keep financials private—I agree with that. Meeting domicile reporting requirements and the requests of corporate auditors is enough. Something we do know is that captives have been covering cyber risk and funding for hard-to-place property for a long time now. The ILS market is catching up.  

All about the data

Many consumers feel they own or should own their financial data and control who has access to it, but no-one knows who has access to their data or how much data they have. Data is very powerful and in the right hands that information can be used for good but I’m seeing a disturbing trend from select promoters trying to manipulate data and shoehorn risks into captives. 

The numbers often make no sense. They ignore loss development, move money between A and B funds and hide formation and one-time expenses to make their proposals look better. It’s important to protect your data but it’s also important to understand how your own information can be used against you. 

Greg Lang is founder of the Reinsurance and Insurance Network. He can be contacted at: glang@rainllc.com

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