2020: Don’t Let the Door Hit You on the Way Out!

Season’s Greetings and Happy Holidays to all our VCIA family! I think we all will be glad to see the backside of 2020 and look forward to happier times in 2021. It was tough on all of us, and tragic for many, as we climb out of the grips of the pandemic. With the advent of the vaccines there is lightness on the horizon… even as we head into our shortest days.

2020 was not all bad, however. The captive industry continues to see exponential growth in numbers of licenses and interest around the country and around the world. Vermont has licensed more that 35 captives (not including many, many cells) already, and there is a stack of them waiting to get out of the gate on January 1st.

This is the time of year to look back on things to be grateful for as well. Now, more than ever, family and friends are so important to our wellbeing. I am also extremely grateful for working in such a wonderful and collaborative industry – it truly feels like family as well. My thanks to Dave Provost, Sandy Bigglestone, and their team at Vermont’s Department of Financial Regulation for their continued steadfast regulation; to Brittany Nevins, who so quickly and successfully slipped into Ian Davis’ shoes fighting to keep Vermont as the premier captive insurance domicile. Their good work flows beyond the borders of Vermont, positively impacting the captive industry overall.

Thank you to VCIA’s Board of Directors for all their support and guidance over the past year to the association, especially during these challenging times. I want to especially thank Jan Klodowski of Agrisurance Inc. as our chair until October and the captive attorney extraordinaire, Stephanie Mapes of Paul Frank + Collins, as out new chair since then.  Many thanks to our new vice chair Andrew Baillie of AES Global Insurance Company, independent consultant Donna Blair, Lawrence Cook of Sedgwick, Dennis Silvia of Cedar Consulting, Anne Marie Towle of Hylant, Derick White of SRS, Tracy Hassett of EdHealth and Jason Palmer of Willis Towers Watson.  And a fond farewell and heartfelt thanks to former board chair Wilda Seymour who has recently stepped off the board. All have provided their amazing talents and time to the association.

We continue our strong focus on events and on legislative and regulatory issues on behalf of our members. Many thanks to Jim McIntyre, and his partner Chrys Lemon, in Washington and Jamie Feehan in Vermont for their wonderful service to VCIA.   And my great thanks to the VCIA staff! Without their hard work, smarts and enthusiasm, we would not be able to accomplish any of the wonderful things we do for our members.  Thank you to Diane Leach, Elizabeth Halpern, Peggy Companion, Janice Valgoi, Dave Rapuano and Megan Precourt!

Most of all, thank you for all your support and see you next year!

Rich Smith
VCIA President

Black Swans for Thanksgiving

I, for one, am glad its Thanksgiving next week. First, I love the feast! Family and friends (well, er, no friends this year) gather for dinner and conversation – no gifts, no chocolates, no decorations. Just like me: boring but predictable. Second, like everybody I could use a break from the craziness that is 2020, and Thanksgiving does allow one the opportunity to take a reality “time out” at least for a day.

But as my mind drifted to turkey, another bird edged its way into my brain. The proverbial black swan that is at the top of mind for many of us in the insurance community. An article yesterday in the London Times by Alex Wright highlights how many in our world are working to create insurance solutions for things that historically have been labeled uninsurable, like the pandemic.

As Alex outlined in his article, traditionally, companies have mitigated against risk by taking out an insurance policy. Underwriters would spend hours poring over reams of historical data to determine the likelihood of the risk occurring before giving a quote.  But black swans don’t fit this mode well, as by definition they defy historical data – at least in the linear manner we usually think of.

The burgeoning world of artificial intelligence (AI) and machine-learning is looking to change that. The key benefit of AI in insurance is that it can quickly process large data sets and identify significant trends that mere mortals are unable to do.

Dr. Marcus Schmalbach created the VUCA (volatility, uncertainty, complexity and ambiguity) World Risk Index, a parametric index that uses machine-learning to gather data from a range of trusted and verifiable sources, many of which aren’t considered in traditional underwriting. That data is then rigorously analyzed alongside information the technology has gathered from previous experiences to look for patterns and links between events and determine the likelihood of a major event occurring. Among the areas his group has successfully modelled is business interruption loss in the event of a pandemic based on the data they crunched.

Climate change, natural disasters, political and trade conflicts, all could be better priced in the insurance world with new AI applications. AI can also reduce paperwork and the time taken to receive a quote or claim. Using parametrics, AI can also establish if an event has happened, thereby triggering payouts and avoiding any disputes.  Captives are well poised to take advantage of such innovation.

While nobody can predict the future with 100% accuracy, AI will allow insurers to detect anomalies that will help anticipate future events, like pandemics, and maybe better prepare us for the black swans. Perhaps roast black swan instead of turkey….

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

Friday the 13th – It’s Your Lucky Day

All of us in the captive industry, and throughout the broader risk management industry, are very rational thinkers who rely on science to determine the course of action we take in life, right?  A recent report published on November 10, 2020 in Captive International reminded me of how human behavior, with all its biases and superstitions, is a very difficult element in any kind of modelling.

The report, titled Viruses, Contagion and Tail-risk: Modeling Cyber Risk In The Age Of Pandemics, aims to better understand what modelers looking at pandemics and cyber risk can learn from each other.  The report highlights the lack of data from both types of viruses in trying to determine useful models for risk management. However, what caught my eye was this statement: “Although pandemics originate from pathogens, it is the individual and societal reactions to them that are hardest to model…”

I have always been fascinated by behavior economics as it tries to tackle our human foibles in a way that can be interpreted by economists to better understand how our world works. Even very intelligent, seemingly rational individuals are swayed by their internal biases. Science and economics are getting much better at “adjusting” for these very human traits and captive insurance will no doubt benefit as the industry sharpens risk modelling in everything from workers comp to liability. But just in case, hold on to that lucky talisman for now.

On another note, I want to wish Kevin Heffernan of Artex bon voyage as he announced he will be retiring in March 2021. Kevin has been with Artex for many years in a number of leadership roles and for the past 14 months has led captive operations across the US as executive vice president. Kevin was the first finance chair for VCIA at the start of my tenure over ten years ago and he did an excellent job of guiding the committee as well as providing me solid  advice on a wide range of topics Thank you, Kevin, and good luck!

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President