Opportunities
Technology opens new niches in the captive insurance market
Technology and the internet of things are opening up areas of potential opportunities in areas both old and new. Captive International investigates.
Technology and the internet of things are opening up areas of potential opportunities in areas both old and new. Captive International investigates.
“IoT is absolutely not a silver bullet, but it provides data that looks across those three lenses of operations, risk and ESG.” Hélène Stanway, SENSE Consortium
“These solutions are fundamental and ultimately, they help improve the employee engagement aspect that employers are looking for.” Paul Lewis, Maxis GBN
The captive insurance market is no stranger to the concept of new niches opening up for it. If you could view a cross-section of the market, you’d be able to identify some fascinating areas that captives were set up to cover.
New niches tend to be driven by two things: actual demand and perceived need. Sometimes a captive is set up to deal with a very real need for insurance. And sometimes captive owners are encouraged by new developments to think about new needs.
The latter is always interesting, as there are times when predicted opportunities or threats don’t emerge, or perhaps develop in a way that not everyone expected. One possible reason for the latter is the fact that technology is moving at what appears to be an accelerating pace, driving changes to our daily lives that no-one could have foreseen.
One such area is the development of the internet of things (IoT). The number of household and other devices that contain a sensor or a link to the internet is increasing on an exponential basis as technology expands in all directions. Cars have sensors informing the driver of tyre pressures, refrigerators can report on if you have enough milk, shipping containers can monitor internal temperatures—and it’s accelerating.
As a result, Hélène Stanway, president of SENSE Consortium, told Captive International, the adoption of IoT by captives is where the cutting edge is. To give some context, Stanway has been working in IoT for well over five years across commercial property and marine and the deployment of IoT devices and real-time data for risk mitigation and prevention.
There are many different types of IoT devices, Stanway explains, each measuring an aspect of a physical asset, for example, heat, water leaks, water pressure, vibration, indoor air quality, presence of ammonia, the health of the building itself. These are typically to monitor the condition of an asset or an element of an asset.
“We know from the work I’ve done that the business case for IoT devices is very strong from risk prevention and mitigation perspectives,” she says.
“If you have devices on your physical assets, the assets and their condition can be monitored 24/7. When the data deviates from the norm, for example with a drop or rise in temperature, the data can provide alerts that something may be about to go wrong, so you can fix it before it becomes a loss or a much bigger loss.”
Slow realisations and take-up
However, Stanway says, despite these advantages in the traditional insurance landscape, the adoption of IoT devices for the benefits of risk management has been disappointingly slow. Based on research undertaken by SENSE Consortium, there are 21 different reasons for this lack of adoption at pace, or “blockers” as Stanway calls them.
Examples would be: How does an insurance company get closer in the relationship with the broker and the insured? Who owns the data? How to underwrite based on real-time data?
Stanway pointed out that in today’s insurance market, and based on research talking to commercial property owners, premiums are increasing—as are retentions. Organisations are having to hold more capital on their balance sheets as a result and retain more risk. So why is that important from a captive insurance perspective?
“We know that captives are becoming more prevalent, and one reason is that they enable better risk management control by the organisation of their own risk,” she says.
“My hypothesis is: could captives steal a march on the traditional insurance organisations by deploying IoT, thereby getting the benefits of real-time data and a shift towards earlier and more informed risk mitigation, and decreasing both attritional losses and near-misses? This is supported by the way the captives market and the captives themselves are established and their common purpose.”
Stanway thinks the captive insurance market needs to start looking hard at the IoT. She points out that adoption of what the IoT can offer—managing risk in a more proactive way—can allow captives to de-risk further and manage their risk portfolios or their total cost of risk far more effectively.
What is stopping captives adopting IoT technology? Stanway told Captive International that she has not seen captives and the IoT involved in conversations anywhere, or read of any associations between the two. That’s not to say that conversations within the industry are not happening, but she personally hasn’t seen it so far. She suspects that the issue is simply one of education.
“The connection should be apparent, because IoT sensors are becoming more prevalent. The way certain IoT devices are adopted, or installed, is becoming much simpler and the cost barrier that was there is reducing,” she says.
“The time is right: the technologies and the benefits case have been proven. It’s a natural conversation to say to a captive: ‘if you’ve got physical assets IoT should be in the conversation to help manage your total cost of risk’.
“It is important to get as much information as possible on what data can be used from the IoT. Organisations need to consider, out of the plethora of devices that are out there, what are the ones that are most appropriate for their needs? What is the learning curve of what these devices can do, what they can tell you, how do they impact risk or data?” she explains.
“How do they deal with the plethora of data that comes off these devices? What’s the data that is meaningful from a risk perspective, versus mere noise? And how is that data made useful for insurance or indeed reinsurance?”
Another consideration is how to underwrite based on real-time data, given that the pricing models established over many years don’t necessarily respond when you bring in real-time data.
ESG: the jewel in the crown
The main benefit other than risk management and operations, and something that Stanway calls “the jewel in the crown” of adoption, involves environmental, social and corporate governance (ESG) issues.
“IoT does three things: it helps manage operations, it helps manage risks, and it helps you deliver on ESG reporting. For example, I worked on a case study where the IoT device noted that both heating and cooling of water were coming on at the same time in a structure. Correcting this one thing alone delivered a 10x return on the implementation of the IoT devices,” she says.
Under the ESG banner is maintenance—being able to notice a power fault or a water leak means that you can repair assets sooner, leading to greater asset longevity, part of the ‘E’. And if you don’t need to replace, you can repair.
“Turning to the ‘S’, indoor air quality sensors can help. Having sensors in office buildings, for example, can help people feel safe in the knowledge that their environment doesn’t have, for example, COVID-19, influenza, or carbon monoxide in the air. All of this is part of the ‘G’ of ESG: the data can be reported.
“IoT is absolutely not a silver bullet, but it provides data that looks across those three lenses of operations, risk and ESG. You can see problems as they emerge and happen, and get mitigation far earlier than today—preventing wider more severe incidents as well as any consequent business interruption losses,” Stanway points out.
“It can’t stop a natural catastrophe, so you will always require insurance but for the day to day, attritional losses, these can be significantly reduced by deploying IoT sensors.”
Employee benefits
Embracing IoT sensors can underline the fact that technology can help in many other areas of the captive insurance market—with areas such as employee benefits.
Paul Lewis, chief business development officer at MAXIS GBN, said the key factors driving the employee benefits strategies of multinationals haven’t changed all that much over the last 10 to 20 years. They have been in the minds of employers, trying to advance their employee base, for some time. For Lewis, the main drivers are rising healthcare costs; talent acquisition and retention; changing workforce demographics; and technology.
“Technology is leading to the modernisation of the employee benefits industry, which has not previously been known for its technological advancements in insurance,” he says.
“But times have changed. The COVID-19 pandemic created a shift away from employees working in the traditional workplace to remote and hybrid working and new technologies are coming into play to support this.
“One good example is telemedicine. These platforms had been around for some time, but the utilisation rates were very low before the pandemic. But as COVID-19 hit, and people were stuck at home, the utilisation rates of telemedicine took off.
“It’s here to stay—I used it during COVID, and thought it was efficient, and I continue to use it. And it’s gone beyond telemedicine: we have digital health platforms, mobile apps, personalised benefit portals, wellness monitors, and technological tools such as wearable technology, smartwatches, etc, that are being deployed out to global workforces to support them in many ways,” Lewis adds.
“These solutions are fundamental and ultimately, they help improve the employee engagement aspect that employers are looking for. In terms of being able to provide diverse, equitable and inclusive benefits, and making sure your benefits are valued by every employee, these kinds of technological advances are very important.
“In different markets there will be different trends in terms of increases in medical costs. In the more mature market such as the US, which has more and newer technology, there will be lower trends—it might be around 4 to 6 percent, for example.
“In other markets which are underdeveloped or emerging, or have high general inflation, you’re likely to see double digits, or even upwards of a 20 percent increase in medical costs year over year, which would be a big concern for employers.”
As a result, Lewis says, now is an exciting time to be in the global employee benefits area, and specifically in captives. Times are changing—and captives have to change with them.
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