The Insurance Tip-Jar Analogy
Insurance: An industry that most [if not all] people have experience with and an opinion about. Believe me, after 22 years in the insurance industry I’ve heard all the tongue-in-cheek questions at soccer games, cookouts, and birthday parties. I get it. There are problems in the industry. That is why it may be time to rethink what insurance means.
The Decentralized World of the Future that we all envision isn’t just about sexy crypto news stories and tales of riches. It is about having the ability to craft a narrative that is more universal and more equitable. I’m building Nimble for just this reason.
You see, I’ve experienced the power of insurance. A business able to rebuild after a terrible fire. A family able to pay for injuries caused by an accident. I’ve also seen the inefficiencies in the process, the challenges in understanding how it works the way it does and why. And, to be honest, I don’t think it is fair to use the “good” stories as a catch-all response to the challenges in the insurance industry. Let’s, instead rethink insurance.
For those of you that might be skeptical of the decentralized, web3.0, crypto world, let’s keep this re-envisioning in the terms of fiat [paper money] that flows throughout insurance now. Let’s start with a journey through the insurance process:
Premiums: You know this part well. You pay money to the insurance carrier and they provide you with a promise to pay your claim based on the terms of the policy. In my experience, the most common complaint is “I pay the same premium [or more] year after year and I’ve never had a claim. Why?”.
Traditional Insurance Response: “The premium you pay is based on the info we have for all insurance policies and the odds of a claim happening. It is also used to cover the high costs of running an insurance company and the time and cost to run the processes.”
I’m not going to disagree with that statement. It is true. That is how the process is built and when a claim is paid, most insureds see the power over this process. But, let’s look at these from a Decentralized Point of View:
Premiums Based on Data: In a Decentralized World access to data is in real-time. Models can learn and evolve and provide regular updates. Beyond that companies and users can share data and ask for input on data. What does this high-speed access to data mean for your premiums?
High Costs and Operations Expenses: In a Web3.0 world these inefficiencies can be drastically driven down. Imagine a community working together to support the underwriting process, data gathering process, and being able to do so in a matter of seconds. What does this mean for the costs traditionally attributed to insurance?
Annual Premiums Based on Historic Data: Now, we’ve found a faster way to handle data and we’ve found a more efficient way to manage the operations. So, we can build on this model to create real methods of rating based on projections and predictive modeling. And, worth stating — all controlled by the same community of people participating in the insurance process as well. So, all parties are aligned.
Rethinking the Premium Process — The Tip Jar
Take a minute. Think about how you pay your premium now. Think about getting your renewal information and bill to pay. Now think of a tip car at a coffee shop. Imagine dropping money into that tip jar. Then the next person does. And the next. We are all contributing to the “pool” of money that will go to the employees and have an understanding that it will be divided fairly between them.
Here is how the process might look like in a Decentralized Insurance World [again using “regular” money, buckets, pails, and other physical world items to illustrate]:
You decide to take out a policy. You check out your options and decide to contribute to Risk Profile A.
You walk up to the big Tip Jar of money for Risk Profile A and drop in your $200 cash. You are given a “promise to pay” in a short form way; readable and understandable.
Whenever you want, you can reach out to The Wizard of Risk Profile A and ask her, “What’s happening with that big bucket of money?”. She tells you whatever you want to know. Total amount in the bucket. Total number of claims.
A portion of that money is moved over to a Red Pail. That Red Pail is taken to Investment Bucket 1. After some time, that Investment Bucket returns the original money to Red Pail plus an additional 10%.
The Red Pail is brought back over to the Risk Profile A Tip Jar and it is dumped in. The result, the Tip Jar now has more money than it did at the beginning of the year to divide between everyone.
Now imagine everyone else who dropped money in the Tip Jar had a great, safe, happy and healthy year. There were no claims. So, that bucket of money set up to pay claims is even bigger than it was before.
You walk up at the end of the year ready to drop more money in the Tip Jar. The wizard looks at you, smiles, and says, “Thanks, but we still have all this money here and it is still enough to pay your claims. You can contribute more if you’d like, but you don’t need to”.
As you walk away, you are handed a $20 bill. Your portion of the 10% return that was provided from the investments into the Tip Jar.
This is obviously a childish, super simple and borderline insulting way to describe the process and how we can re-imagine the process for the Decentralized future. Forgive me for the over simplification. But, this is the power of decentralization.
Rethinking Other Processes — Actuarial Royalties?
The same re-imaging can be applied to the underwriting process, the actuarial process, and the claims process. More on this to follow. A little teaser for those actuaries out there:
Imagine: Risk Pool ABC is looking for some actuarial modeling to see if they can be even more profitable. You come in and are given access to the anonymous data [non subjective!] from the Risk Pool. You create a totally kick-ass actuarial model. Of course, you are paid for this work — and you deserve it. But what else do you deserve:
*To be attributed to that work forever. So, you are given proof of that work. That proof is tied to that actuarial table for the rest of time.
*That work can be shared with other Risk Pools and Insurance companies and you are compensated for that as well. Why? The proof of your contribution is built into the actuarial model. Etched. Unchangeable. You deserve that undying and irrefutable praise.
*When anyone else uses or adds to your work, you are paid for that as well.
That’s what we all have to do. There is a real way to build an insurance system that benefits everyone. Not to toss the insurance carriers aside — but to include them in the process as well. All while including the other participants and insureds to create opportunities that never existed before. To create fair payment system and equity in an insurance system that has gotten away from itself.
I’ll leave you with a few other things to consider as you reimagine insurance and what it means in the near future:
What is a policy term? And how small can they be? A 20 minute policy? A 30 second policy?
What is minimum premium anyway? If we can pay people in fractions of a penny now, does that impact “minimum premium”?
Do I need to be fully indemnified? Were the odds ever in my favor that I would be fully indemnified?
What’s the deal with deductibles?
Things are changing. Blockchain, decentralization, Web3.0, crypto — whatever you want to call it — creates some amazing models that we may not have even envisioned yet.
Would love to hear what you come up with when you rethink insurance.
Mar 28, 2022