Innovation and the fintech frontier

09-03-2017

Innovation and the fintech frontier

Grant Gibbons, Bermuda’s Economic Development Minister

From captives to sidecars, Bermuda has long been at the forefront of innovation. Now, it is well positioned again to lead from the front and become a global innovator in fintech and regtech, says Grant Gibbons, Bermuda’s Economic Development Minister.

Ever since an Ohio engineer named Fred Reiss dreamed up the first Bermuda captive insurance company back in 1962, innovation has been our Island’s distinctive hallmark. Reiss’s captive concept made Bermuda the centre of choice for Fortune 500 companies to better manage their own risks and a catalyst for subsequent waves of insurance business.

Attracting insurance market trailblazers, a collaborative culture, plus billions of investment dollars, this brand of creative thinking forged our reputation as the ‘world’s risk capital’.

Property catastrophe companies, excess liability carriers, insurance-linked securities (ILS) and catbonds—over half a century, the Bermuda market has evolved to become synonymous with pioneering ways to do business. Now, ‘insurtech’, ‘regtech’ and ‘fintech’ are set to become the latest iteration of this trait.

Bermuda’s long-respected international business community, particularly its globally renowned reinsurance market that ranks with London and New York in capacity and capital, provides fertile territory for innovation. The ingredients are all here in a tightly networked and easily navigable ecosystem: a highly-developed corporate infrastructure, an agile regulatory system, and a talent pool adept in advisory expertise—but also, and most promisingly, a significant user base of customers for fintech innovators. Hundreds of actuaries, underwriters, claims analysts, IT and computer science specialists, bankers, auditors, lawyers, and regulators all collaborate within the square mile of the City of Hamilton.

Disruption on the way
Financial technology—fintech—is not a new phenomenon. It has existed since the internet changed work flows in the commercial world. Its most recent incarnation, however, offers the full range of next-generation technologies to the financial markets—artificial intelligence, telematics, big-data analytics, cloud computing, and distributed ledger technologies (DLT, also known as blockchain)—that enhance the way business is transacted.

By its very nature, the application of these powerful technologies will be disruptive, competing with traditional companies, intermediaries, and methods, and finding faster, more cost-effective ways to do things—whether that be selling a house, settling a trade, or confirming a multibillion-dollar reinsurance contract.

“With one of the world’s most respected regulatory systems for financial services, the Island could play an extremely influential and active role as a regulatory sandbox.”

Fintech began as back-end technology supporting an established industry, but the newfound ability to transform the world of financial services has allowed it to emerge as a powerful sector in its own right. And that’s where incredible opportunity lies for Bermuda.

Insurtech, especially, represents a new frontier for our market. Traditionally, many re/insurance companies have not been swift to adopt new technologies, yet increasingly the sector is becoming aware that such technology will radically transform not only the way they do business, but also who their competitors will be. ILS have been the latest disruptor of the market and this fast-developing asset class could help lead the charge for new operating methods.

Several innovative fintech enterprises are currently brewing in our marketplace. One of the most promising goes by the name Bermuda 4.0, a recent brain trust that is fast morphing into a new business incubator and accelerator. Its name refers to the promise powerful new technologies bring in heralding the ‘fourth industrial revolution’.

Assisted by the Bermuda Business Development Agency (BDA), Bermuda 4.0 brings together IT and communications specialists, legal and accounting minds, insurance industry technologists and members of the Bermuda Monetary Authority (BMA). The group has built market strategy, plans to incorporate soon as a company, and is encouraging industry of all types to participate, either as investors, advisors or mentors.

The idea, according to BDA consultant Stafford Lowe, who has helped drive the think tank’s momentum, is to foster collaborative innovation and, importantly, provide an on-ramp for entrepreneurs currently plying their trade in other locations to access what Bermuda has to offer.

As one of his Bermuda 4.0 colleagues, a risk analyst, pointed out at a recent meeting, technology is often developed as a solution looking for a problem to solve. If Bermuda 4.0 can offer a mechanism by which progressive companies put forward problems in search of innovative solutions, it could provide a win-win—for firms striving to evolve, and for innovators who hope to develop the solutions they need.

As Lowe puts it, Bermuda represents ‘an incredible market of sophisticated customers just waiting to be tapped into’.

Local focus
If we can find new ways to network our jurisdiction, not only to benefit the way we transact business with each other, but also to provide a hook for innovators to capitalise on the wealth of potential corporate clients headquartered here, it could make the Island a truly groundbreaking technology hub that is easily accessible from New York, Toronto and London.

We have the entrepreneurial energy to do so. Case in point is Trunomi, a company that is gaining traction in the all-important know your customer (KYC) space. Since Bermudian CEO Stuart Lacey created the startup in 2014 with offices in Hamilton, London, New York and Silicon Valley, Trunomi has won numerous awards and been recognised as an industry ‘game-changer’. It has developed a consent-management platform that allows companies to request, store and share customer information in compliance with privacy laws and global regulatory standards.

So-called regtech is a fast-developing sector that Bermuda should be looking to develop. With one of the world’s most respected regulatory systems for financial services, the Island could play an extremely influential and active role as a regulatory sandbox. Singapore and Hong Kong are already doing so, attracting startup companies that want to test their fintech solutions against current regulatory checks and balances.

A lot of the new technology being developed challenges the rapidly-changing financial services framework, and for very good reason. Why does anyone care about fintech? For two main reasons: first, it is a way to access new markets, evolve distribution and create new business that has not been possible before.

On the flipside, it offers ways to collapse cost and create a much more efficient way of transacting business. Regulators are key to how quickly innovation can be adopted and are aware of the challenge to keep their expertise at the cutting edge.

Blockchain is a brand new mechanism for shaking up the status quo and it, too, could find fertile ground for growth in Bermuda. Last fall, representatives from the BMA and 10 major reinsurance companies took part in a brainstorming session led by global consortium R3. The workshop, held at BDA offices, brought together technology, underwriting and regulatory experts to explore ways that shared ledgers and shared business processes could fundamentally change their businesses—and give Bermuda a leading role in this rapidly-evolving digital economy.

The technology presents a great opportunity to improve operating efficiency and transparency across the insurance sector, and R3 operates by harnessing a collaborative effort to develop these shared ledger systems. Blockchain was originally built as a trading protocol for crypto-currencies such as bitcoin, but the technology is starting to be adopted across the global financial services ecosystem, buoyed by the possibility of developing ‘smart contracts’ to automate costly and inefficient business processes.

Numerous companies in our international business sector, notably many of the global reinsurers, are looking at DLT and its applications. R3 and other rival initiatives have already realised the opportunity to involve Bermuda companies in their collaborative networks and we are excited about their increasing involvement with the Island.

There is a balance to be sought—the application of powerful technology will change the nature of jobs available to Bermudians—but finding our own niche with fintech could provide much-needed diversity to Bermuda’s economy. Not only could it strengthen our existing international business market by fuelling its global competitive edge, but digital entities could also generate a whole incubator-style industry, providing a variety of new products and operations.

What is clear, as exciting initiatives take root the world over, is that fintech is here to stay. The choice we face is to lead from the front, or risk playing catch-up. Bermuda is in a unique position at this point to connect the dots and take a leading global role as an innovator in this emerging field—one that surely represents a logical evolution for a market so well known for its pioneering prowess.

Grant Gibbons, Insight, Bermuda, Captives, ILS, Technology

Bermuda Re