The evolution of AI in captive insurance

The past year has brought key developments in the use of artificial intelligence in captive insurance. Captive International looks at the benefits—and the challenges.

In the past few years, artificial intelligence (AI) has made waves across various industries, offering new tools and capabilities that have transformed traditional practices. In captive insurance, the rise of AI has generated significant interest.

“By analysing patterns and anomalies in data, AI-driven systems are better equipped to detect fraudulent claims.” Marcus Schmalbach

While some experts caution against the overhyping of AI’s capabilities, others are optimistic about its potential to revolutionise risk management, underwriting, and operational efficiencies. However, the nuances of AI adoption in the captive insurance industry are complex, and there remain questions about the long-term implications.

Over the last year, AI technologies have made noticeable strides in the realm of captive insurance. According to Marcus Schmalbach, the chief executive of RYSKEX, one of the most significant advancements has been in enhanced risk modelling. AI algorithms, driven by machine learning, have become increasingly sophisticated, allowing for more precise risk assessments and predictions.

“AI-driven models offer predictions that far surpass traditional underwriting methods,” Schmalbach noted, highlighting AI’s capability to process vast datasets and provide insights that are more accurate and timely than ever before.

AI is proving to be highly effective in automating and improving claims processing. By analysing patterns and anomalies in data, AI-driven systems are better equipped to detect fraudulent claims, leading to reduced losses and enhanced claims management processes. This is particularly beneficial for captive insurers, as they can streamline operations, save costs, and focus their resources on more value-added tasks.

Matthew Queen, attorney and owner of The Queen Firm, observes the evolution of AI in captive insurance with a more measured perspective. Queen remarked that AI is not yet capable of replacing the complex functions at the core of captive insurance—such as underwriting, claims management, and actuarial science—which he describes as the “bedrock” of the industry. He believes that while AI tools have certainly improved risk forecasting and research automation, they have not yet reached a level of sophistication that threatens to disrupt these crucial areas.

“AI currently excels at automating repetitive tasks and assisting professionals in the captive insurance sector with routine activities. However, when it comes to more nuanced tasks such as deliberating what data to use for ratemaking, or issuing underwriting credits, AI remains largely supplementary, rather than a replacement for human expertise,” he said.

“AI tools offer deeper insights into risk than ever before.” Matthew Queen

Addressing misinformation

One area that has sparked concern in the industry is the potential for AI to eliminate jobs. Queen and Schmalbach both disagree with this notion. Queen asserts that much of the panic around AI-induced job losses is due to bad information and misunderstanding. “AI is mostly just a buzzword for machine learning,” Queen said, emphasising that while machine learning is a powerful tool, it does not pose an imminent threat to employment in captive insurance.

Many areas of the industry, particularly those requiring human judgement, are simply too complex for AI to take over. Instead, AI can free up professionals’ time by automating mundane tasks, allowing them to focus on higher-value activities.

Schmalbach echoed this sentiment. “While AI does automate certain tasks, it is more likely to augment human capabilities, allowing employees to focus on higher-value activities rather than replacing jobs entirely,” he said. The rise of AI-as-a-service platforms has made AI more accessible and affordable for firms which, Schmalbach argues, will help demystify the technology and dispel fears surrounding its adoption.

Benefits of AI for firms with captives

The integration of AI into captive insurance has already demonstrated several key advantages, particularly in risk management, operational efficiency, and customer satisfaction. For firms with captives, AI offers the ability to analyse vast datasets and identify emerging risks with greater accuracy.

“Wielded by a qualified data engineer or data scientist, AI tools offer deeper insights into risk than ever before,” Queen explained. He emphasised that the use of AI in root cause analysis and risk forecasting opens the door to a “golden age” for captive insurance professionals, providing them with better tools to enhance decision-making.

In terms of operational efficiency, AI can automate routine tasks such as data entry, claims processing, and reporting, leading to time and cost-savings. Schmalbach added that AI-driven analytics improve underwriting, pricing, and risk transfer processes. These improvements can lead to better financial outcomes for captive insurance firms, as they are able to make more informed decisions backed by data-driven insights.

One particularly promising application of AI is in personalised insurance solutions. Schmalbach noted that AI can tailor coverage to meet the unique needs of captives, which enhances customer satisfaction and leads to higher retention rates. AI’s ability to streamline operations, reduce costs, and provide more customised offerings can significantly improve the competitiveness of captive insurers in the marketplace.

Downsides and challenges

Despite the many advantages, the adoption of AI in captive insurance is not without challenges. One of the primary concerns is data privacy, as AI systems rely on the processing of large amounts of data to function effectively. Ensuring robust data protection measures is essential to prevent data breaches and maintain client trust.

“Data privacy is a significant concern,” Schmalbach acknowledged, and it will be vital for firms to implement stringent safeguards to mitigate this risk.

Another downside is the potential over-reliance on technology. While AI offers automation and efficiency, Schmalbach warns that firms must strike a balance between human oversight and automation. If the technology failed or were compromised, the consequences could be severe. As such, it is important to maintain a human element in decision-making and ensure that AI systems are regularly monitored and updated to prevent errors.

Queen pointed out that while automation is beneficial, the most complex and judgement-based tasks in captive insurance will remain out of reach of AI for the foreseeable future. This reality limits the full potential of AI in the industry, although it underscores the importance of human expertise in areas such as claims management and underwriting.

Ethical and regulatory considerations

Beyond the technical challenges, firms must consider the ethical implications of AI adoption. Schmalbach stressed the importance of adhering to ethical standards when using AI, particularly in terms of transparency, accountability, and fairness. “AI systems can be made more equitable than human decision-making processes,” he argued, but this requires proper oversight and design. Firms must be vigilant about avoiding bias in their AI systems and ensure that AI-generated decisions are explainable and fair.

The regulatory landscape surrounding AI is also evolving, and captive insurance firms will need to stay informed to ensure compliance. Queen noted that improvements in one area of insurance may not necessarily translate to others. For example, advances in AI for catastrophic weather modelling may not have much bearing on general or professional liability insurance. As such, regulatory compliance must be tailored to the specific areas in which AI is applied.

In the words of Queen, the key takeaway is that AI is “a net benefit for captive professionals” when wielded by qualified individuals. As the technology matures, the captive insurance industry stands to benefit from deeper insights and more sophisticated tools—ushering in a new era of innovation and efficiency.

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