One element of the human condition is that things capable of great good can often also be instruments of great harm. Consider Spider-Man’s mantra, “with great power comes great responsibility”.

We have incorporated that phenomenon into language. The metaphor of “double-edged swords” describes something that can have both positive and negative consequences. Things that are said to “cut both ways”. A brief scan of the internet (the mother of all double-edged swords) suggests that social media, fame, science, technology, love, knowledge, power, memory, revenge, success and many other things are quoted as being double-edged swords. The captive insurance industry, like so many other things, is also currently dealing with several double-edged swords.

Artificial Intelligence (AI)

Every captive insurance conference in recent memory has had sessions on AI and technology. The National Risk Retention Association (NRRA) annual meeting in 2024 was entirely devoted to AI. How does AI cut both ways? While we are seeing amazing advances in AI applications, nobody seems to agree on what AI is, what it does or whether it is coming for our jobs; double edged indeed.

Point to an aspect of captive insurance and I can show you technology seeking to disrupt it. Marketing? AI is capable of analyzing customer responses to your offerings and increase hit ratios of profitable new insureds. Underwriting? Automated underwriting has been getting more sophisticated for more than 20 years. Actuarial? Machine learning and other predictive analytics are revolutionizing ratemaking. Claims? AI is accurately estimating auto physical damage claims. It is also reviewing evidence and assessing depositions for liability claims. Even auditors are being affected as AI allows testing of all records, rather than just representative samples.

However, one IT CTO recently told me that he expects that the products of 97% of current AI start-ups will never be viable. On the other hand, a review of Insurtech start-up financing reveals many large insurers and reinsurers are investing heavily in AI and related technology for fear of missing out (FOMO). Are you better leading the industry or fast following? Should a captive strive to be the early bird or the second mouse?

Is it Insurance?

The captive insurance industry is leading an era of innovation. Captives are helping companies in new industries such as Uber and DoorDash create a new way to provide traditional coverages. Every industry seems to be facing disruption. Surgeries using Da Vinci robots, AI companions in nursing homes, autonomous vehicles, 3D printed homes and so many more change the way traditional property and casualty insurance coverages are provided, priced and underwritten. Climate change is also fundamentally changing property insurance.

There has also been a proliferation of new property and casualty insurance coverages. Examples include service contracts, extended warranties and contractual guarantees to a wide variety of customers, and parametric insurance with claim payments based on weather events, financial markets and other external factors.

We are also seeing credit enhancement insurance that reduces financing costs by providing coverage if future costs for inputs get too high (e.g., meat or produce for restaurant chains), or if output prices get too low (e.g., wholesale electric prices for solar or wind farms). Much like catastrophe (CAT) bonds turned reinsurance into an investment, these credit enhancement coverages are essentially turning hedges into insurance.

But are all these new, innovative coverages still insurance? One of the largest insurers in the world sells a whole-life insurance product in Brazil that invests half of the premium into traditional investment-grade assets and the other half into lottery tickets. Lottery tickets! Yet it’s incredibly popular.

Many of these innovations push the boundaries of our traditional notions of insurance. Parametric insurance does not require an actual economic loss to the insured. Some of the contractual liability products require a claim to be filed on a specific date, eliminating the transfer of timing risk. Some property insurance and medical stop loss alternatives have so little risk transfer that they choose to use deposit accounting. Risk distribution for many coverage innovations relies heavily on whether there are enough statistically independent risk units. The problem is there is no bright line indicator of how many are enough.

The boundaries of what is and is not insurance are always going to be blurry. However, presuming something is insurance only to have a court or regulator find that it is not can turn into a double-edged sword quite quickly.

Regulatory Optimization

One unique facet of the U.S. industry is that it does not operate under one regulatory framework, but scores of them. Start with 50 states each having its own take on insurance regulation, not to mention the District of Columbia, Puerto Rico and the U.S. Virgin Islands.

Then consider that admitted insurers, non-admitted insurers, excess and surplus (E&S) lines carriers, captive insurance companies and risk retention groups (RRGs) each operate under different regulations within a domicile. Add tribal domiciles and offshore captive insurance options and the variety of available approaches to insurance regulation can be quite dizzying.

Regulation is a double-edged sword; while it protects claimants and policyholders, it can also slow innovation, increase premiums and introduce unnecessary bureaucratic red tape. The key is striking the right balance between ease of doing business and regulatory rigor. Too much red tape, coverage affordability and availability suffer. Too little and the risk of insurance company insolvency increases. Lax regulatory frameworks have also historically attracted bad actors seeking to take advantage of the perceived lack of policing.

What’s changed? Information and speed. The number of captive domiciles has grown dramatically, comparative information on the various domiciles is readily available and insurance companies are more willing than ever to move to a preferable domicile. The number of captives that are willing to “domicile shop” is greater than ever. In addition, organizations are looking to have multiple insurance company types within their organization. We see this in many forms:

• An admitted workers’ compensation insurer forming a cell captive facility for their larger insureds
• An admitted medical professional liability insurer that also controls an RRG
• An E&S company reinsuring risk into their own captive

This multiple channel approach allows an increased level of regulatory flexibility. What regulatory framework provides the maximum flexibility without sacrificing appropriate levels of solvency protection?

Looking Ahead

Looking into my crystal ball, I see two things “more” and “faster.” More data, more innovation, more computing power. Faster analysis, faster innovation, faster succeeding and failing. Only the best sword wielders are willing to use double-edged swords. They are capable of great and horrible things. So, if you are willing, pick up your sword; let’s be on our way to the future.

(published in US Focus by Captive International)