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How to buy insurance for unusual risks

April 24, 2013 by tim in Insurance user manual | Leave a comment

I have recently sat through a series of underwriter presentations, where some of the underwriters said they were pleasantly shocked by the level of disclosure they received.  Somewhat surprised, I asked ‘why pleasantly’?  It seems that the overall level of disclosure they see is getting progressively lower and more formulaic.  They said it made a very pleasant change to feel like they were really connecting with the risk and those managing it.

Well, that all sounds very nice but, so what?  Well, for the kind of insurances I tend to handle - unusual, complex and novel insurances - I believe that the style, form and substance of disclosure provided by a buyer is critical to the success of the placement.  Full and accurate disclosure is critical to any placement of course but there is disclosure, full disclosure and then there is the real thing.  With unusual, complex or novel coverage (UCN coverage from now on) I believe only the real thing will do.

This piece is about what the real thing is and why it is important.  Another time, I will need to reflect on what the underwriters’ shock means for UCN insurance.  From what they said, one could infer either that there is less UCN exposure, which I simply don’t believe or that UCN exposure is less disclosed - however you define that term – and I am not quite sure what I think about that…

First then, some background on UCN coverage.

UCN coverage is what it sounds like:

  • Unusual means that it is rare, so there is not enough to make up a portfolio of it.  This means that, instead of the insurer being able to price for the volatility of the performance of a portfolio, which is the core of what insurers do, they have to price the underlying risk.  This is a much more complicated, expensive and uncertain process.
  • Complex can mean that different perils are covered under the same policy but real complexity occurs when the underlying nature of the risk is maybe dynamic, interconnected in non obvious ways with other perils or otherwise inherently messy – normally because it deals with what we (humans) do or don’t do, as opposed for example, to the effect of bad weather.
  • Novel coverage deals with risk that it is not yet well understood; various forms of cyber risk currently fall into this category.

Second, some background on disclosure.

Disclosure means different things in different places.   The key differences are evident between the US and the UK – where other places tend to adopt one or the other approach.

  • Very crudely, in the US, the prospective insured is required to fully and honestly answer the questions posed of it by the insurer and, if the insurer doesn’t ask, the buyer doesn’t have to reveal.  I repeat, before being bombarded by lawyers, this is crude.  In my continuum above, this is ‘disclosure‘.
  • In the UK on the other hand, the onus is reversed.  The insured is under an obligation to disclose anything that might be material to the insurer’s acceptance or pricing of the risk, whatever the insurer does or doesn’t ask.  Naturally, this is an almost impossible requirement to fulfil, the more so, the more UCN the risk.   This is ‘full disclosure‘.
  • The ‘real thing‘ is the sharing of drains up information about how you understand the exposure, with the colour of what it means for how you are going to (and who is going to) deal with it from soup to nuts.

The ‘real thing’ has three elements.  It involves:

  1. Soup to nuts – it addresses  the entire process of understanding and managing the particular risk, including the full context of the risk;
  2. Drains-up – it is an in depth review; it is not superficial; and
  3. Sharing – both parties share what they know to ensure the residual uncertainty is about the risk, not about the difference between what each of them knows.  This also involves bringing together the personalities who will be dealing with the risk – again on both sides.  This adds the real colour to the process.

Bringing UCN coverage together with disclosure, the thing that is common to all UCN risk is that portfolio management approaches to managing it don’t work very well – or at all.  Modelling, the foundation of portfolio management, has become extremely sophisticated but you need a base of reliable data to start working with a model and you need to be able to make reasonably reliable assumptions to extrapolate from the base with confidence.  Disclosure is one of the key sources of both the raw data and of the material needed to make reasonable assumptions.  NOTE: in an increasingly ‘big data’ world, it is clearly not the only source – and may in future not even be much of a source at all but that is for another post.

I am not saying UCN risk is unmeasurable, far from it; I am saying however that, by its nature, it is not measurable to the same level of confidence that insurers are used to and this can make them extremely uncomfortable.  My contention is that you therefore need to disclose more to try to fill the gap between what they are used to getting with better understood exposures and what you can provide or they already know relating to your particular UCN risk.  In this sense:

  • ‘disclosure’ doesn’t result in better understanding, it really only confirms what an insurer thought they already knew;
  • ‘full disclosure’ adds what the buyer knows about the risk – which may or may not add to what the insurer knows generally or fill in some specific details in an alpha and beta sort of a way; and
  • the ‘real thing’ on the other hand is designed to compliment data by delivering a rich and colourful mental model of the risk.

Whether you add what that mental model tells you to your formal model or not, the colour and the personalities are the key.  Data narrows the uncertainty of the number of possible outcomes or the costs therefrom to some extent but with UCN risk, can only go so far.  The result is that a probably higher than truly necessary premium will still be required as far as the insurer is concerned (compared to the genuine risk premium), to deal with the greater uncertainty than they are used to that remains.  Of course, if the certainty remains too great, the coverage won’t happen at all.

The purpose of the colour is to bridge the gap between not enough and enough, by influencing how we make decisions.  We (humans) tend to be naturally biased towards optimism when we make decisions.  The more we think we know about a situation, the more confident/less uncertain we are about it.  As a buyer adding colour to what is already known by the underwriter, you are feeding their optimism bias, giving the underwriter far greater scope to say ‘yes’ to what you are asking for.

In my experience, there are four main benefits to the ‘real thing’ and, subject to the cost of disclosure and the importance of the risk to you, they apply to some extent to any risk or insurance policy:

  1. As already discussed, high levels of colourful disclosure make it more likely that the coverage you want will be available at all; and
  2. As also discussed, the more UCN the risk, the greater the disclosure, the lower the cost of the coverage compared to what is available with lower levels of disclosure.
  3. The quality of the contract is also improved.  I often see that the quality of coverage low disclosers get is not as good as it could be.  High disclosers on the other hand, can get coverage low disclosers can only dream about.  For example, the extent of  in-house claims handling latitude a high discloser can get, can bear no resemblance whatsoever to what most buyers have to contend with.
  4. Probably the biggest benefit however, after availability, price and coverage (what have the Romans ever done for us…?) relates to claims handling.  Now, while it is true that there will be more scope to be creative with situations at the fringes of what is intended to be covered if you have done everything you can to jointly contemplate what should be in the policy, I can’t pretend that illegitimate claims will ever be paid.  That said however, the outcome of any claim – whether against a buyer or subsequently against an insurer (I am a casualty snob; I always think in terms of liability) – is never determined only by the facts of the event giving rise to the claim in the first place.  There is just too much else that goes on, and that can go wrong, for that to be the case.  In my experience, almost the only two things you can be certain about every claim are:
    • that you never know at the beginning of a claim journey everything that you will know about it by the end of the journey.  You can reasonably expect to be surprised and a healthy skepticism about what you think you know at the outset is not necessarily unhelpful; and
    • it is not so much that ‘whatever can go wrong will go wrong’ but that, in addition to the original proximate cause of the claim in the first place, one or more other things are also likely to go wrong (or to have gone wrong) in the chain of events leading to the final disposition of the claim.  It might be before the event (or even have caused it), it might be during the event itself, in the notification of the subsequent claim or sometime during the negotiation with the plaintiff or with the insurer – or any one of a number of other places and times.  The colour of the ‘real thing’ ensures all this ground has been covered when you are writing the policy, not when stuff and fan are coming together.

When a buyer’s uncertainty – the reason they want UCN coverage in the first place – is compounded with the insurer’s uncertainty – whether to accept the UCN risk and what to charge for it – it seems to me to be axiomatic that disclosure needs to be much more than ‘disclosure’ or ‘full disclosure’.  The ‘real thing’ is something shared between buyer and insurer and involves transparency about everything about the risk the insurer is really accepting.

Cybersecurity – 3 reasons insurance as we know it will not be part of the solution

April 9, 2013 by tim in Risk | Leave a comment

I have just read a report issued a few days ago by the Heritage Foundation, discussing the measures the US should implement to develop effective cyber security.

First of all, I should make it clear that I agree with much of the report. For example, as I have said here before, a regulatory approach is absolutely not the way to introduce effective cyber security. A regulatory approach would be too slow and cumbersome to deal with the dynamism of the cyber environment and, if sharing information about cyber threats and their mitigations – which is critical to effective cyber security – is mandated and consequently managed by regulation, the likely unintended consequence is that businesses will share less and more slowly than necessary.

That said, I have one major reservation about the report. It advocates for the development of ‘a viable cybersecurity insurance system’, as if this were possible; given the current shape and form of the insurance industry, this is not possible.

This is the abstract from the report:

Cybersecurity is one of the most critical issues the U.S. faces today. The threats are real and the need is pressing. Despite the best intentions of those involved with previous cyber legislative efforts, a regulatory basis simply will not work: It will not improve security and may actually lower it by providing a false level of comfort and tying the private sector down with outdated regulations. Cyberspace’s dynamic nature must be acknowledged and addressed by policies that are equally dynamic. Heritage Foundation national security analysts detail seven measures that the U.S. should implement to protect its assets and interests in the cyber domain.

The 7 measures advocated are:

Enabling information sharing instead of mandating it;
Encouraging the development of a viable cybersecurity liability and insurance system;
Creating a private-sector structure that fosters cyber-supply-chain security ratings;
Defining limited cyber self-defense standards for industry;
Advocating for more private-sector efforts to promote general awareness, education, and training across America;
Reforming science, technology, engineering, and mathematics (STEM) education to create a strong cyber workforce within industry and government; and
Leading responsible international cyber engagement.

As the article I read introducing this report acknowledged, much of the above is ‘mom and apple pie’ stuff – or ‘bleeding obvious’ in English… I am not sure I would have so closely linked the liability and the insurance points if I had written the report but what the report says about the need for a new cyber liability framework is interesting.

To appreciate why insurance cannot cope with cyber risk however, it is important to understand that it is not unwilling to do so. The insurance industry is just incapable of dealing with cyber risk, for reasons relating to its very DNA.

First, utmost good faith, disclosure, indemnity, insurable interest and potentially even fortuity all militate, in different ways, against the design of an effective cyber security insurance product. For example, disclosure requires that everything about a risk be disclosed prior to the inception of the policy; given the dynamism of cyber risk, this is not possible. This in turn means that utmost good faith, which (in theory at least) requires an insurer to disclose whether he can or cannot accept a risk, cannot operate because – who knows if the insurer will be able to accept what the risk (for example in systemic terms) might become?

Second, insurance’s hierarchical structure – in information terms – currently makes information sharing impossible. Information flows only upwards to the insurer, not the other way. Further, information is the key source of competitive advantage between one insurer and another; sharing is simply not an option.

Third, insurance’s capital and pricing structures are almost completely geared to what it has needed of both in the past; future exposure based pricing rarely works for long because of subjective opinions and competitive forces and dynamic pricing has never been effective because of how long it can take to understand the true cost of a risk.

I am also wary that the article discusses the development of cyber security ratings. As a principle, I have been advocating something like these – though for insureds, rather than for the cyber security supply chain – for some time but the events of 2008 make me even more nervous than I was already of placing too much reliance on external rating agencies. It is not just that rating agencies can never be completely right about anything; it is a question of how wrong they can get and what are the forces – lack of independence being the biggest concern – that will lead them to be wrong in potentially multiple different ways. On a separate note, a rating agency approach is also at odds with how insurance currently operates. It is not just that insurers prefer to use their own judgement about risk, not someone else’s. The bigger issue is that, without the provision by the customer to the insurer of information about their risk, the utmost good faith underpinnings of (to some extent) every insurance contract cannot operate.

In my last two posts, I have talked about the possibility of insureds becoming their own intermediary between uncertainty and risk and why I don’t want ‘big data’ insurance. The Heritage Foundation report is therefore extremely unfortunate timing – for me at least – because it forces me to start talking about a risk operating system I have been thinking about but which is not yet completely sorted in my head.

As I currently see the basic foundations however, I am sure, first, that no one solution is going to provide an answer to cyber security. I am not sure if 7 is the right number of initial components or not yet; I’ll get back to you on that. I am sure though, that many more components will be added in time; whatever overarching approach is designed needs to be flexible enough to plug new components in at will.

The second is that a top down approach won’t work either; there are too many different configurations – of firms, networks, needs, regulations, stakeholders, etc., etc., for any top down approach to work. Individual agents therefore need to be able to make their own decisions, in their own interests, about how they manage cyber risk.

Third, to be able to make those decisions, they will need access to reliable information; information sharing is self-evidently critical to the process and reliable rules safeguarding this process need be developed.

Fourth, it is all very well having good information but you need to be able to do something practical and effective with it. Access to trusted advice and effective implementation processes will be needed to effectively support the decisions made.

And if information sharing is going to mean anything, effective implementation needs to be verified and ongoing monitoring implemented. Without this, the information shared might be meaningless.

Finally, with the best will in the world, cyber security will never be complete. The volatility of those costs needs to be addressed by something that, in principle, will bear close resemblance to the purpose of insurance, if not its current processes. For one thing, it will need to be entirely embedded into the overall process.

The purpose of the operating system will therefore be to provide individuals and firms with access to all the different resources that might be necessary to manage cyber risk – both those already known and those yet to be discovered – and to establish rules governing the uses thereof.

In this regard, I don’t think The Heritage Foundation and I are thinking along very different lines. For me though, a risk operating system is the glue that holds everything else together. More thoughts on it to follow in due course.

3 reasons I don’t want big data insurance

April 2, 2013 by tim in Insurance 2.0 | Leave a comment

I was recently talking to a good friend of mine, who pointed out that a lot of what I have been talking about here is encapsulated in the simple idea that new technology means a whole load of clever new stuff can now be done.

As far as that statement goes, he was absolutely right but, in seeking to further clarify what he thought I have been talking about, he went on to describe a ‘big data’ centric view of what all this clever new stuff could be, as far as insurance is concerned. He specifically described how insurers will be able to segment risk into ever-finer categories and sub-categories, so allowing them more effectively to exclude the risks they prefer not to accept and to price more accurately the risks they are happy to accept.

<p>His comments made me realise that I haven’t explained clearly enough the specific type of clever new stuff I am thinking about. So, to try to clarify, there seem to me to be diverging paths ahead of us.

In the ‘big data’ scenario, insurers will develop ever-more detailed information about us that they will use to segment the market into ever-finer and more accurately priced gradations. The information will be algorithm developed, will be spookily accurate about us but will forever remain the property of the insurer; it won’t be shared with us and so it won’t be available to us to let us use it to manage our uncertainty. {See this post to see what I mean by ‘managing uncertainty’.}

In this scenario, big data will increasingly be seen as something that is done or used against us, even if we tacitly accept the trade-off between the information gathering by the insurer and the products this allows them to provide to us.

In the ‘network scenario’ on the other hand, I will consciously share my information with a utility of my choice, that is designed to help me make sense of my current uncertainty and to give me access to the resources to help me reduce it. I will be able to choose the connections I want to make to develop improvement information and processes; the utility will also provide the platform from which I can implement the improvements. I will not only own my information in the formal legal sense but I will also own the improvement process and the resulting improvements.

In this scenario, I will also be able to use the information about the quantity and quality of my risk (not uncertainty anymore) to contract with insurers also accessible via the platform for a volatility management service that will be unrecognisable from current insurance. Apart from anything else, the likelihood and cost of my losses will be lower and I will be able to demonstrate full disclosure; these are the three main components of every pure premium calculation. By ‘pure’, I mean the cost of the risk to the insurer, without their own costs added.

The key difference between the 2 scenarios is that, in the first, risk management is directed by the insurer in their interest; in the second, I direct risk management in my interest. Scenario 2 won’t be for everyone but scenario 2 is my choice, for 3 reasons.

The first is simply that I will own my own information. Information known about me, accurate or not, dictates how everyone behaves towards me. In a bar, if someone thinks I am an arsehole, that is their prerogative. Of course, that hardly ever happens… But, if an insurer were to have the wrong information about me, which can happen in all sorts of ways and for all sorts of reasons, I might desperately need to correct the information – assuming I can even discover they have erroneous information. If it is their information, I may struggle to get them even to disclose it, much less change it.

The second is that scenario 1 is too financially based. There is nothing wrong with a financial perspective; it is just not enough perspective when talking about managing either uncertainty or risk. From a financial perspective, my insurer will be asked to pay my losses, whatever my losses happen to be. They will naturally seek to use risk selection and pricing tools to coerce me to behave in ways that reduce the likelihood of their having to pay claims. They won’t however, develop or share information about how I might behave outside their preferred behaviours but remain an acceptable risk.

This will partly be because they will rightly not see it as any of their business to tell me how to behave. The obvious irony of course, is that is precisely the effect they will have; in seeking to reduce their costs, they will also reduce my options. More important to them, in the highly competitive insurance business, the quality of your data is your greatest source of competitive advantage; you just don’t give that stuff away.

Taking the broader perspective of scenario 2, I expect to be able to choose how I behave in the knowledge that there are different potential outcomes – positive and negative – that can arise from my choice of behaviour. There will then be all kinds of options to choose from – or not – at my choice. So, I might choose to improve the chance of a positive outcome. On the other hand, other issues beyond the specific choice of behaviour might mean it is more important ‘for now’ to reduce the chance of a negative outcome. I may also be able to hedge the negative outcomes by acting in advance of the losses I can’t prevent, to make sure both their effects and costs are kept as low as possible.

The point is that risk management is not just about money but insurance is.

The third reason, however, is the most important, dealing as it does with what I see as the real digital divide. I understand that corporations will try to influence my behaviour when it comes to trying to convince me to buy their car, gadget, shoes or whatever (3 of my particular weaknesses…). But at the heart of this overall process is risk management – how I optimize the positive and minimize the negative effects of my behaviours, choices and activities. I don’t want to sound overly apocalyptic but it is the very essence of my ‘me-ness’ that I have the free will to make decisions about how I behave for good or ill. I don’t want an insurance company making those kinds of decisions for me.

Social media in the workplace – ho, hum…

May 2, 2012 by tim in Observation | Leave a comment

In my day job, I am an insurance broker – one who specialises in dealing with new and unusual exposures.  I am also an insurance broker who happens to be interested in matters technological and social.  I therefore keep being asked to comment, write about or develop insurance products for ‘social media in the workplace’ – or related terms.

I try to explain 2 main things about the difficulties in dealing with these requests:

  1. First, too many people (including most of those asking me) still think social media in the workplace means people up-dating their Facebook profiles, usually with sensitive or confidential information, when they should be up-dating spread sheets – or whatever.  This McKinsey article makes it clear that this is far, far too limited a view of the subject.  To paraphrase, (thanks to Media Influencer) “social media negates the consumer paradigm.  Clear enough?  You can’t understand social media without understanding that it turns ‘consumers’ into producers, creators and distributors.”
  2. Second, there seem to be, at best, mixed results when it comes to firms actually implementing social media in workplaces, as this report (by Charlene Li at Altimeter but spotted at Pretzel Logic) suggests.  Paraphrasing again: ” …when you benchmark the technology category of social business software (that includes employee, customer and partner engagement) against say CRM, or BI or ERP, its even more striking how nascent the sector is compared to its predecessors.”

I haven’t posted anything recently because I have been trying to think through precisely these issues – concerning the difference between the present and future states of social media in the workplace.

I have also been thinking about what social – in the McKinsey sense discussed in the report above – means for a people/data driven intermediary business like mine, what insurance products might look like if insurance consumers become producers, creators and distributors and where I position myself as all of this unfolds.

I haven’t come to any firm conclusions yet but now I have found these bookends to my thinking, I plan to spend more time commenting as I think about these issues over the coming weeks.

 

(Another) Top insurance executive misses the point shock…

January 20, 2012 by tim in Observation | Leave a comment

Update 9/2/12:  Joe Plumeri (Martin Sullivan’s boss – see below) makes the same 300 year old speech but (naturally) more colourfully at InsiderScope…  ”The golden age of insurance is upon us” – apparently…

I have just read a report (subscription required) in The Insider (an excellent London market based insurance magazine @InsuranceInside) about a speech Martin Sullivan gave two days ago to an Insurance Institute of London meeting at Lloyd’s.  Though Sullivan is currently Deputy Chairman of Willis, he is better known as the former head of AIG.

Now, because I wasn’t at the speech, I may be about to be very unfair to The Insider or to Martin Sullivan because either;

  1. the report was dreadfully incomplete or
  2. the speech was dreadfully incomplete.

Can someone please tell me which is true?

Here’s what I mean.

According to the report, Sullivan’s speech seems to have been celebrating the 350th (or so) anniversary of the ‘there are lots of scary new risks out there and we need to be innovative about designing new products for them’ speech.  Since new risks have always emerged, Sullivan seems to have inserted some nearly interesting if entirely predictable comments about volcanos, tsunamis, reputations, cyber, patents and IP, and supply chain risk into the blanks of the ‘scary new risk’ speech template.

Templates are very useful but when they get out of date, as this one has, they can be extremely dangerous.  The problem with the ‘scary new risks’ speech template is that the first half of its thesis (that there are lots of scary new risks) is unarguable – in the way the bleeding obvious is always unarguable.  This lulls listeners into accepting what sounds like a perfectly plausible second half of the thesis; that innovative new products are the natural response to new risks.  Except that they aren’t any more.

Innovation is something individual firms choose to do, sometimes for tactical, sometimes for strategic reasons and most innovation is incremental.  Even at a specific level therefore, Sullivan’s prescription for dealing with the new risks is flawed.  For example, incremental approaches won’t deal with the dynamism of some of the new risks, other new risks are networked so individual firms can’t hope to deal with them on their own and most of the new risks are to some extent the result of a new environment, where tools also from the new environment are necessary to deal with them – but I’ll come back to those points another day.

My point is that innovation is a logical response only in an unthinking ‘if new this, then new that’ sort of a way but its ‘straight on’ logic puts me in mind of the the kind of tumbleweed moment Wile E. Coyote has when he realises he has run off a cliff.  The logic appears perfect, yet is completely flawed because of the turn not taken.

The turn not taken?  This is where the prescription is more fundamentally flawed.

We are living in arguably the most exciting times since Gutenberg developed a workable printing press.  The means to generate, produce, add to, filter and disseminate information now exist in the hands of anyone with an Internet connection.  As a result, industries – particularly information industries like insurance – are being fundamentally re-shaped.  Some completely new industries and companies have started to emerge; think social media, Google and Facebook.  Some old industries have resorted to fighting tooth and nail to try to save themselves; think old media and SOPA.  And former titans of the old world are disappearing; 131 year old Eastman Kodak has just filed for Chapter 11 bankruptcy protection.

Information industries are being re-shaped because the value chains by which information based products and services are produced or distributed (or both) have changed beyond all recognition – many disappearing altogether.  The firms and industries that survive will be those able to adapt to the new information value chains, not those that just innovate better products.  Innovation is not nearly enough.  Kodak, for example, is in desperate trouble not because it was deficient in innovative capacity.  Its patent assets are its most valuable (only?) asset.  It was a deficiency of adaptive capacity that turned Kodak from the company that once had such an exciting future, it was a catalyst for Warren and Brandeis to write “The Right to Privacy“, into what now looks, waddles and quacks very much like a patent troll.  How the mighty are fallen…

Adaptation is something firms across an industry have to do in the face of a fundamentally new environment.  Unlike innovation, failure to adapt means certain death.  What has this got to do with the insurance industry?  I don’t know if you think data (the raw material of information and its yet more refined cousin ‘knowledge’) is ‘one of’ or ‘the’ core ingredient in insurance but it is one or the other.  Which if the two you think it is, is however unimportant because the extent of the change to information value chains is so significant.  Insurance is used to commanding and controlling data but data is now, and will increasingly become, user generated, networked and so open to direct customer analysis.

The insurance industry’s future won’t therefore be shaped by how well or not we develop innovative new products to flog to customers already disgruntled by our out-dated processes and approaches.  It will be determined by how well and how quickly we adapt to how our customers are already starting to develop their own risk knowledge, to share it freely among themselves and where differentiation will be determined by customers gradually learning how to apply their newly developed knowledge in their own interests.  It will also be determined by how well we meet customer demands for products they design, based on their expert and/or crowd-sourced analysis of the risk.  It is almost rude to mention this last challenge – last in this incomplete list that is – that customers will also be able to generate more, richer and dynamic information, more cheaply than insurers.

At the risk of repeating myself – as anyone who has been kind enough to listen to me or read this blog before will know – I expect the application of social/collaborative technology to better connect the networks that currently operate too distinctly across risk, risk owner and risk management systems will be our key adaptation challenge but I also acknowledge the challenge may come from another direction.

In an earlier post, I wondered if the insurance industry would learn from the mistakes of the old media industry.  One of their mistakes was not to realise what was coming; another was to respond inappropriately when ‘it’ arrived.

The insurance industry doesn’t have the excuse of not knowing what’s coming and yet if we maintain the ‘straight on’ strategy the report suggests Sullivan called for two days ago, we will innovate ourselves off a cliff.

So, who was I unfair to?

Cluetrain and the future of insurance

September 29, 2011 by tim in Insurance, Social technology | Leave a comment

This is an interesting article from ‘Confused of Calcutta‘, describing the lost promise of the Cluetrain Manifesto.  Maybe I should say delayed…

It describes how the hopes that Cluetrain engendered in believers like Confused of Calcutta (JP Rangaswami) and me of increasingly open conversations between companies and their customers – using the new technologies that 10 years ago began to enable such conversations – weren’t initially realised.

Instead of openness, companies ran from the new conversations and retreated into themselves.  They built technological barriers (firewalls) around themselves to/and so (delete as you see fit) cut themselves off from their customers.  Their customers on the other hand, excited at the prospect of more and better conversations, swallow-dived (with tuck) into the fora that enabled them – social networks – and talked to each other.

Over the ten years since social networks began to transform how we (customers and consumers) communicate, some companies have been extraordinarily successful adopters of the entirely new business processes and models that the conversational enterprise demands; Zappos (as described in Delivering Happiness) is my favourite example.  Most firms however, and even entire industries – insurance is obviously my particular bug bear – have have been spectacularly luke warm on the whole subject.

At the end of the article, JP suggests that what we are seeing now is companies beginning to visit the places (social networks) where their customers already are and how they are beginning to enter the conversations.

I agree with JP that this is an interesting development – and not before time – but for me the really interesting developments will start when we see more companies changing their processes and business models to take account of what they hear in those conversations.  If you join a conversation and enough people in that conversation tell you the same thing, you won’t be able to stay in the conversation unless or until you take on board what is being said.  For companies, I think this will mean more process and model change than many realise.

For an insurance example, consider this; risk and pricing knowledge – that which is most heavily guarded behind insurance company firewalls – is likely in the future to be generated faster, more accurately and in more actionable form in social networks than by insurance companies operating alone.  This will have fundamental implications for insurers used to a business model that is founded on exploiting their ‘better’ risk and pricing knowledge.

Can you understand ‘social’ if you haven’t read The Cluetrain Manifesto?

September 23, 2011 by tim in Observation | Leave a comment

Of course, you can understand what ‘social’ means if you haven’t read The Cluetrain Manifesto but social makes a whole load more sense if you have.

So, what is the Cluetrain Manifesto?  Here is its introduction:

A powerful global conversation has begun. Through the Internet, people are discovering and inventing new ways to share relevant knowledge with blinding speed. As a direct result, markets are getting smarter—and getting smarter faster than most companies. 

These markets are conversations. Their members communicate in language that is natural, open, honest, direct, funny and often shocking. Whether explaining or complaining, joking or serious, the human voice is unmistakably genuine. It can’t be faked.roadkillMost corporations, on the other hand, only know how to talk in the soothing, humorless monotone of the mission statement, marketing brochure, and your-call-is-important-to-us busy signal. Same old tone, same old lies. No wonder networked markets have no respect for companies unable or unwilling to speak as they do.

But learning to speak in a human voice is not some trick, nor will corporations convince us they are human with lip service about “listening to customers.” They will only sound human when they empower real human beings to speak on their behalf.

While many such people already work for companies today, most companies ignore their ability to deliver genuine knowledge, opting instead to crank out sterile happytalk that insults the intelligence of markets literally too smart to buy it.

However, employees are getting hyperlinked even as markets are. Companies need to listen carefully to both. Mostly, they need to get out of the way so intranetworked employees can converse directly with internetworked markets.

Corporate firewalls have kept smart employees in and smart markets out. It’s going to cause real pain to tear those walls down. But the result will be a new kind of conversation. And it will be the most exciting conversation business has ever engaged in. 

What follows this introduction are 95 theses, the best well-known of which is probably the first:

1.  Markets are conversations.

Never has a thesis been as abused or as often mis-quoted as this one but when you understand that the sub-heading of Cluetrain is “the end of business as usual”, you begin to get some idea what this book is all about. 

If you haven’t read it, I urge you to do so because much of what it discusses is really only now emerging fully into the mainstream and you will make much better sense of the new mainstream if you have read Cluetrain.

You might wonder why I mention this now – and why I have quoted so extensively from Cluetrain above.  

As I indicated last week, I spoke at an insurance conference this week on network and cyber risks.  I was on a panel on social media, where I argued that the media part of social media was all about technologies and platforms, which are and will always be in a state of constant change.  This change is interesting and important to follow (I watched the fascinating f8 keynote last night for example) but, while I am interested in technologies and platforms as enablers of conversations, it is the conversations themselves – the social part of social media – which I find truly fascinating because it is conversations that are gradually but genuinely changing everything.  

On Wednesday for example, I tried to show that social was changing the nature of insurance’s customers; it is also changing the risks they have and need to transfer.  Beyond that however, I also suggested that the conversation will gradually come to change how customers understand risk, which in turn will have significant implications for how we accept the risks they want to transfer.  

Now, it is not a new experience to be politely told that “I am not sure I completely agree with you”; that wonderfully English and understated way of suggesting I am talking out of my arse.  I think therefore that I coped reasonably well when that was the introduction to a question on Wednesday but what I may have hidden less well was my surprise when, in my reply, I quoted thesis 1. above – and referenced Cluetrain – to a completely universal set of blank stares from the audience.

I accept that Cluetrain is not mainstream reading but I had assumed that, in a room full of insurance people gathered together to discuss social media, at least one person other than me would at least have heard of it and its primary thesis.   
   
Apparently not.  If you have read this far, scroll back up and look at the picture which is part of the Cluetrain introduction.  Need I say more?

Is social media a ‘hot’ insurance topic any more?

September 15, 2011 by tim in Cyber, Network & Information, Insurance, Observation | Leave a comment

For the last few years, there has been standing room only at conference break-out sessions dealing with social media.  I doubt this is the case any more.  

This is fine as long as you don’t have to speak at a conference (C5 Data Risk, Cyber and Network Security Insurance) next Wednesday on the subject of social media insurance exposures, like I do… 

Now I am not saying social media isn’t fascinating, nor that it’s time has past (I don’t think we have reached the end of the beginning yet, never mind the beginning of the end) but I think (and hope) that the hype with which the insurance industry has surrounded social media has subsided to the point where we can look at it objectively.

Like many ‘new things’, our industry was spooked by social media when it first burst on the scene.  Now generally, if something spooks us, it probably spooks our clients too and this is a good thing because spooked clients buy more insurance.  It is just scary to sell coverage for something that spooks us as much as it spooks our clients and so coverage for spooky exposures is a ‘hot’ topic until we realise it wasn’t quite as spooky as we first thought.

And yet…

I think we got spooked about the wrong part of social media.  ’Media’ worried us more than ‘social’, where we were spooked by the new scale and scope that ‘social’ brought to ‘media’ exposures like IP infringement, breach of confidentiality and invasion of privacy for example.   This spooked us because we understand that media exposures are very real exposures and we further assumed that if they were going to exist on a hitherto unimaginable scale, this was a very spooky thing.

The thing is though that media related claims just haven’t materialised and anyway,  customers just don’t seem to be as spooked about this exposure as we thought they would be and so haven’t been buying as much of the coverage as we hoped they would.

What they have been doing though is getting involved with ‘social’ in a big way – a much bigger way than anything we have so far seen in the insurance industry.  For example, ‘social’ has moved way beyond transforming how businesses market their products to fundamentally affect core business processes and models.  

I am not sure our industry has fully grasped the implications of ‘social’.   It is not simply a question of thinking about specific policies for new spooky exposures but how social will gradually come to affect nearly every type of policy we sell.  

‘Social’ will inevitably change (I think fundamentally) how both insurance buyers and sellers understand and transfer risk between them and so that is what I have decided to talk about next Wednesday.  Â