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Captives are investigating the use and deployment of blockchain technology along with the wider insurance industry, seeking ease of administration, efficiencies and enhanced security, but it remains a nascent concept for the sector, experts say.
Insurers, regulators and others are looking at the emerging technology, known generically as distributed ledger technology, in some cases devoting enhanced resources to their efforts.
“The practical application of blockchain technology into insurance operations has been a hot topic for the last couple of years,” said Michael Pieciak, commissioner of the Vermont Department of Financial Regulation in Montpelier, which regulates banks, securities, traditional insurance and captive insurers. His department, together with the office of the Vermont secretary of state, in January launched a pilot program for the use of blockchain that will use the state’s robust captives industry to evaluate distributed ledger technology.
Allianz Global Corporate & Specialty SE in late 2017 created a blockchain prototype for a global captive insurance program focusing on professional indemnity and property insurance for a customer with a captive insurance program.
“In one of our current exploratory projects, we are investigating the use of digital tokens to facilitate and accelerate money transfers as part of captive management,” Munich-based Fernanda Navarro, head of global innovation, AGCS, said in an email. “The idea is to make automated end-to-end payments to significantly increase the speed, efficiency, and reliability of premium handling and claims payments for captive programs.”
“Based on the results of this and some other proofs of concept, we are currently investigating where blockchain is adding the most value,” she said. “For each area we explore, we are identifying whether it’s a game-changer, a nice-to-have, or simply some overengineering.”
“It’s not a surprise that insurance organizations, including captives, are inspecting a variety of digital technologies including blockchain and digital ledger technology to try to improve the operational efficiency of their organization,” said Patrick Schmid, vice president of The Institutes RiskBlock Alliance, based in Malvern, Pennsylvania.
RiskBlock members have expressed an interest in a captives use case, and it is something the alliance may examine further as it develops more applications for the technology, Mr. Schmid added.
Blockchain could be useful in addressing some of the main challenges of running a captive, experts say.
“The primary disadvantages people talk about with owning a captive are the operating costs and the time commitments” involved, said Rocco F. Mancini, consultant for captive solutions at Marsh USA Inc. in Norwalk, Connecticut. “Blockchain is a technology with the potential to mitigate some of those disadvantages.”
“Particularly with large multinationals’ captives, there are multiple service providers and multiple interested parties, with fronting companies, multiple insurers and reinsurers, brokers, claims teams, actuaries, auditors, captive managers and ultimately the captive owner,” said Alexandra Gedge, London-based business development and captives executive for JLT Insurance Management Ltd. “Sharing information more effectively can reduce time and administration and speed up claims payments; particularly where there is a lot of regulation around captives, this can be invaluable for the captive owner to operate their main business as usual.”
“I could see the potential use of this in the group captive context, where a single captive structure is engaging with 30, 40 or more entities which have common retentions or common reinsurance programs,” said San Francisco-based Ward Ching, a managing director in Aon PLC’s captives insurance management division who also consults on alternative risk transfer.
“There may be opportunities for more efficient claims handling and processing and claims automation” as well as reinsurance transactions, Mr. Mancini said.
But the use of blockchain in captives is still developing, said Mr. Ching.
“I think we are at the early stages and people are trying to figure out ‘How do we make this work? Does it have a value in terms of speed, accuracy and security, and how do we compare that against the systems we already have. What are the costs and benefits?’” he said.
Should Vermont’s program yield such advantages or others, use of the technology could be expanded, Mr. Pieciak said.
“As we actually implement the pilot program, and we do see there’s opportunity for efficiency and ease of administration, we can also take this small pilot program to something larger,” such as the traditional insurance market, he said. “This is an opportunity to better understand the technology and its ability to be scaled up in government and in the private sector.” “There’s potential operational improvement for the regulatory community or state government as well as from leveraging this technology,” Mr. Schmid said.
Blockchain could also reduce friction in the regulatory process itself, experts say.
“Where captives may operate in tightly regulated locations, a shared ledger can really assist with fulfilling regulatory requirements by reducing time on administration with smoother transfer of information,” Ms. Gedge said.
“A solid blockchain-enabled solution makes the process of managing an insurance program more efficient and more transparent,” Zurich-based Damian von Doderer, head of business intelligence and senior account manager, alternative risk transfer for Allianz, said in an email. “It becomes much easier to monitor compliant execution, implement new rules, and access large volumes of nicely-organized portfolio data to investigate the relevance or magnitude of a given regulatory topic or impact of a planned regulatory change.”
Captives may be exposed to or become involved with blockchain as a result of parent company activities, experts say.
The largest user of captives in Vermont is the health care sector, according to Mr. Pieciak. “Certainly, there’s a lot of discussion about digitizing records,” and maintaining confidentiality through the use of blockchain, he said.
“I could also see this in industry verticals like health care where there’s a tremendous amount of information that needs to be passed back and forth and needs to be secure,” Mr. Ching said.
Microcaptives continue to come under fire from tax authorities as the IRS aggressively audits captive insurers that take advantage of long-standing rules that allow captive owners to reduce their tax bills.