We’ve Reached ‘the Other Half of the Chessboard’ - Insurance Thought Leadership

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December 20, 2013 — 2484 views

Editor's Note: We’ve Reached ‘the Other Half of the Chessboard’

When I started writing about information technology back in 1986 for the Wall Street Journal, it was fascinating to meet so many of the folks I’d been reading about: Bill Gates, Steve Jobs, Mitch Kapor, etc. But I felt as though I had somehow missed the excitement of the early days of the personal-computing revolution. IBM’s PC had been out for a full five years. Gates had already taken Microsoft public and had been on the cover of Fortune magazine. Jobs had been at the revolution so long that he’d already been pushed out of Apple and was wandering the wilderness, preparing his second act.

I soon realized that it was still the early days—the very early days of the revolution. And I saw that each year was going to bring powerful new surprises that would be even more powerful than what came before and that would change industry after industry, eventually even reaching ones like insurance that saw themselves as being insulated. The reason is a phenomenon known in the tech world as “the other half of the chessboard.”

The notion comes from the oft-told story of the ancient king who was so pleased with a minister that he told the minister to name his reward. The minister said he just wanted a bit of rice. The king was to have one grain of rice placed on the first square of a chessboard, then twice that many on the next square, twice as many again on the next, and so on—1, 2, 4, 8, etc. The reward seemed far too modest to the king, but each new square added as much rice as was already on all other squares, plus one grain. The number of grains grows so fast that by the time a board would be half covered it would have more than four billion grains of rice on it and be on its way to holding enough rice to fill a million fully loaded aircraft carriers.

The tech world has picked up the chessboard image because the same doubling has been occurring with the power of semiconductors since the integrated circuit was invented in the late 1950s. Intel co-founder Gordon Moore made that doubling famous through what has come to be known as Moore’s Law—that the number of transistors on a chip would double every year and a half to two years. Moore’s Law has worked its magic so effectively that a gigabyte of memory, which cost $300,000 in 1980, costs less than a dime today. People rarely even bother to count the number of transistors on chips any more. (Like those grains of rice, they now number in the billions on Intel’s most powerful chips.)

The doublings don’t matter much for a while. Who cares that the eighth square of the chessboard would hold 255 grains of rice or that an early-generation processor would contain some thousands of transistors. But once you get to the second half of the chessboard and start counting in the billions, the effects become enormous—and, as with the rice, every new round of technology may have an effect greater than the total of everything that has come before.

Here are three ways to start thinking about the enormity of the effects of Moore’s Law, even on the world of insurance, and about how events may play out:

–You can view the personal-computing revolution as being in three stages. The first stage, beginning in the late ‘70s and early ‘80s, put computing power on everyone’s desk. The second stage, allowed by the spread of the Internet beginning in the mid-‘90s, connected all those computers together. The third stage, beginning in the past decade because of the wholesale adoption of smartphones and tablets, lets people take the Internet with them wherever they go.

Despite all the hype at the time, the first stage didn’t improve productivity and didn’t change personal habits that much. But the second stage had huge effects, and the third will be even more revolutionary—it’s just getting started.

–Techies like to think in terms of laws, and there’s a lesser-known one called Bell’s Law that suggests a fundamentally new type of computing device isn’t far away. The law was stated in 1972 by Gordon Bell, who developed the first minicomputer for Digital Equipment in the 1960s. Bell’s Law basically says that there will be a new class of computing device every decade, and it’s been right. Gordon has shown me the original charts he developed, and they predicted very accurately the advent of the PC, then devices that turned out to be laptops, smartphones, tablets and so on. The smartphone is going on a decade-old, and we’re years into the tablet phenomenon, so Bell’s Law suggests we should keep our eyes open for what’s next. (My bet is so-called wearable computing, though not necessarily in the forms, such as a smartwatch, that are being described today.)

–There are six technologies that are coming together to form a perfect storm of innovation: mobile devices such as smartphones and tablets; social media; inexpensive cameras; ubiquitous, cheap sensors; “the cloud”; and “big data.” These six, in combination, will have profound effects on every part of the insurance world. Look at the article we posted recently on how video is being added to home alarm systems. That change is just a simple use of cheap cameras connected to central stations through “the cloud,” yet I believe it will revolutionize the home alarm industry. And that’s just the start. As cameras become widespread, they will reduce home burglaries, both by acting as a deterrent and by helping police identify and lock up burglars. Home insurers will have to adapt policies and premiums, creating an opportunity for some companies to win and others to lose.

I’ll go into those technologies in later posts and lay out some thoughts on how insurers should innovate in the face of great change. For now, I’ll just point to a book on the topic that a colleague, Chunka Mui, and I published this week, called The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups. The book describes the implications of those technologies at length and lays out a detailed process for innovation that we call Think Big, Start Small, Learn Fast. The book includes an extended case study about the driverless car, exploring implications for auto insurers and, to a lesser extent, health insurers. We argue that the driverless car puts $2 trillion of annual revenue up for grabs in the U.S. alone and that the effects from the technology will reach the market much sooner than people seem to realize. Here is a link to the book.

Please let me know what you think, whether about these blog posts or about the book. The world of insurance is on the cusp of great disruption, and we’ll all manage the change better if we work together.


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