Have you ever wondered why, when you buy software, you are provided a rather lengthy notice outlining its limited warranties and generally telling you what it will not do? As well, think back to when you bought that insurance policy for its investment purposes to resell it later in the market. You haven’t? Which are you more likely to do, sue an individual human being or sue a faceless conglomerate?
"Commoditization" is a buzzword in the insurance industry: the marketing of insurance as if is a fungible good. Selling on price alone, trying to shape the industry into something that can successfully copy the success of Amazon. Close behind is blockchain, praised for its “open distribution ledger” in the transaction process. With it is its cousin, big data, trying to minimize the human touch and handle the entire insurance process by using data alone in its stead.
There are elements that are likely to get in the way of a smooth run at these efforts by insurers.
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The legal definition of “commodity,” the root word for "commoditization," includes the word “good” – any article of movable or personal property. For the practicing attorney in the U.S., the Uniform Commercial Code (UCC) comes to mind with the talk of goods, specifically Article 2. Under the UCC, "goods" mean all things that are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Article 8) and things in action. "Contract for sale" includes both a present sale of goods and a contract to sell goods at a future time.
A quick note is that the U.S. courts have determined software to be a good/commodity. Explaining to the jury that an insurance policy being downloaded from the internet is not a good while software being downloaded from the internet is a good brings up the possibility that the “commoditized” insurance policy sold by the unaware insurer may find itself subject to a completely different branch of law than it is used to, the UCC and its rules and warranties. The UCC includes the warranty that the “good” (commodity) is fit for an ordinary or the specific purpose that may only be changed by amending it with a written exclusion or modification of the warranty. Now you know the answer to question one above. Software is a good/commodity that provides for the insurer having to give you a notice limiting or excluding the UCC warranty. At the present time, insurers do not provide you notice limiting or amending any UCC warranties, but that may change.
Blockchain may provide a distinct advantage in the transactional process. However, the transactional process in insurance is rather short; there are not various payment networks generally involved. The seller sells, and the buyer buys, and for the most part the transaction is complete. Once the policy is bought, the buyer cannot then resell the commodity/good on the open market; insurance is not commercial paper. Commercial paper is a written instrument or document that manifests the pledge or duty of one person to pay money.
One of the most significant aspects of commercial paper is that it is negotiable, which means that it can be freely transferred/assigned from one party to another, either through endorsement or delivery. The terms "commercial paper" and "negotiable instrument" can be used interchangeably. However, the insurance policy itself prohibits such commercial paper marketability and negotiability via internal contract prohibitions against its easy transfer/assignment to another (because of prohibitions against assignment of the policy without specific written consent.)
The UCC identifies four basic kinds of commercial paper: promissory notes, drafts, checks and certificates of deposit. The most fundamental type of commercial paper is a promissory note, a written pledge to pay money. A promissory note is a two-party paper. The maker is the individual who promises to pay, while the payee or holder is the person to whom payment is promised. Insurance could be considered a conditional promissory note (conditioned on the happening of a covered peril causing damages to the insured property, whereby the insurer pledges to pay). Now you realize why you didn’t recall buying insurance as commercial paper for its investment purposes; you can’t.
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Big data is seen by some insurers as a fix to the “brain drain” caused by the retiring baby boomers that are skilled in the insurance “arts,” rather than actually training newer employees in what has been a successful historical model in insurance. Removing the personal touch in the equation may be a mistake. Walking into Walmart, you are often greeted with a friendly hello by the official greeter. Walmart brought greeters back after an unsuccessful cost-cutting experiment removing them resulted in an uptick in both lawsuits and shoplifting. As innocuous as the initial move sounds, the fact is that people do not sue or steal as often when it involves a human personality as when it only involves a faceless corporation. I write elsewhere, “Go ahead, insurers, cut out the personal touch, the plaintiff’s bar will be glad to step in to that spot when their client is now more likely to sue you.” The answer to question three is that, for most people, suing a faceless corporation is generally not an issue.
- Commoditization may lead to application of the UCC against unsuspecting insurers.
- The blockchain advantages in commercial paper/negotiable instruments/open transactions are lessened by the realities that the insurance policy prohibits ease of transferability and that insurance does not possess the attributes of Amazon, although insurers would like to emulate its marketing success.
- Removing the personal touch in the insurance process may increase the likelihood of being sued.