Tag Archives: banking

The Great Blockchain Dilemma

Many insurance companies have a deep sense they should be part of the blockchain movement, but they are not quite certain how to approach its implementation. Once you pull back the curtains, there appear to be two sets of mutually exclusive incentives underpinning the blockchain technology movement. One of them could be the greatest thing that has ever happened to insurance; the other may be systemically toxic to everything insurance stands for.

A productive and sustainable economy requires stability — i.e., low volatility or no volatility. The insurance industry, by definition, must be able to identify predictable events over a long period. The value proposition of all insurance products depends on the ability to pool risk exposures appropriately and to lay off risk. These conditions limit the insurer only to those products where conditions are assured. The incentives of the insurance business seek to reduce volatility, categorize risk exposures appropriately and mitigate risks (where applicable). Anything less is called gambling.

See also: Why Insurers Caught the Blockchain Bug  

On the other hand, speculation may be needed to maintain efficiency and grow the blockchain. Speculation is often the sole basis of valuation for digital tokens and depends on high volatility to attract gamblers (for lack of a better term) to bridge the capitalization gap. Yet the creation and distribution of digital tokens is only a residual artifact of the blockchain use case, not the core use case. For the blockchain to maintain itself, the value of the digital token must exceed the cost of maintaining the blockchain. By contrast, a centralized organization would simply pay an IT department from operating revenue to maintain the system, whereas a decentralized organization, by definition, must be autonomous.

The Great Blockchain dilemma is clear: Volatility and stability are mutually exclusive.

The current blockchain/crypto-currency landscape is plagued by this dichotomy. Incentives are laid out to encourage speculation, yet the great vision of blockchain is one of a new economic paradigm ushering in an era of economic fairness and stability. Both of these things cannot happen at once.

For example, investment banking and corporate decision-making is driven by quarterly profits. The incentives on Wall Street have become tragically short-term. The current view of blockchain is a miracle drug that can eliminate large swaths of human administrators while also increasing the performance of data structures.

Not surprisingly, large banks have come together to form a consortium to define blockchain standards for transferring value within their industry. But this may be short-sighted.

The hallmark of a great society is the ability to capitalize on its needs, not its arbitrage opportunities.

While the case for creating a shiny new super currency is compelling, the primary objective should be to induce stability in the outcomes of events articulated on a blockchain. The value of the tokens must represent true human productivity of a physical nature. Otherwise, nobody else would be willing to perform work in exchange for it. With a broad social agreement, digital currency can achieve a state of mutual reciprocity and be traded widely across an economy without friction.

See also: What Problem Does Blockchain Solve?

Therefore, the highest and best use for blockchain technology is in the insurance industry and not necessarily the banking industry, because insurance can eliminate volatility. Properly deployed, blockchain technology can reduce the cost of capital by decentralizing risk. A developed economy is distinguishable from a less developed economy by the stabilizing force of insurance, not by the volatile nature of money.

Google

What We Can Learn From Google Compare

“The Google Compare service itself hasn’t driven the success we hoped for.” Google Compare announced in an email to its partners that it would be shutting its insurance and financial products comparison service tools in the U.S. and U.K. as of March 23. The lack of traction in both usage and revenue generation were named as two key reasons. Those were the headlines across the industry this week. So Google Compare is done – for now.

This is big news for the insurance industry, which has spent the last year figuring out how to shield itself from the potential impact that the tech giant would make. It turns out Google didn’t make much of a splash after all. In addition to insurance, Google is backing out of credit cards, banking and mortgage products. Google said  it is shutting down for now and focusing on “improving the customer experience.” Maybe Google will be back in a year, maybe five years, but what can we learn from it now?

When Google Compare was launched in the U.S. last year, it took the industry by storm. The agent/broker ecosystem was skeptical of any success, but they were also fearful – given Google’s size, wealth and talent. Could Google disrupt personal auto quoting?

What the agent/broker ecosystems did was to keep their (potential) enemy close by understanding what they were doing. They watched and hoped for failure. Meanwhile, a handful of insurers signed up to be part of the California launch: those insurers who could easily connect to the Google platform and wanted to be part of a potential success. And these companies had to explain their actions to their agents – who were in the wings watching and waiting to see what would happen.

I have my own thoughts on why Google Compare failed this first go-around. First, consumers can get these quote comparisons elsewhere – insurers already do this. Next, maybe customers just aren’t quite ready for self-service compare engines – but by all accounts, they soon will be. I don’t think Google underestimated the complexity of insurance, nor do I think it underestimated the consumer. I think, probably, that the timing was off, and Google didn’t differentiate itself from existing solutions with comparative raters. Google probably lacked some of the innovation that would have been needed to differentiate itself from others in the market.

Google Compare, like many start-ups, has failed, at least for now. At SMA, we talk all the time about how there is an innovation journey and how even the best-laid plans will sometimes fail. Part of the journey is learning through failure and then coming back better than ever. This is especially true in insurance. The industry is complicated. It’s complex and heavily regulated. It experiences slow growth, a slow pace of change and relatively small profits. And it requires lots of resources, cash and expertise committed for a long time before it pays off. SMA research shows 88% of insurers understand that innovation projects may fail. Part of that acceptance indicates a growing ability to learn from failure.

So where do you place your bets moving forward? Will Google Compare opting out of insurance cause new disruption? Will new solutions move in to fill the void?

Many will place their bets on strong incumbents and today’s ecosystem. Insiders believe that, with Google Compare moving out, it will become unappealing for outsiders to move in and try to understand it, saying the barriers to success are too high. Others will say that something will come to disrupt and challenge the traditional ways of the comparative raters and that outsiders, with their naivete and innovative thinking, will find a pin hole in the ecosystems and exploit the market.

Either way, the wonderful thing about innovation is that it is the essence of change. The only constant is change. Things happen so quickly. Innovation can flip an industry on its side overnight. Google Compare isn’t going away forever; it is just shutting the blinds. While this may be a small win for the establishment insurers who viewed Google’s entry as a threat, it doesn’t mean these organizations should rest on their laurels. The time is now to innovate, fill a void and improve overall services. Finally, failures and what we learn from them serve to set the ground work for change and innovation. It is part of the innovation journey to improve and adapt. As we continue this year, I am confident there will be more changes to the industry … so stay tuned.

7 Reasons to Major in Insurance

1. 100% Employment: One of the big reasons to go to college is to make sure you’re employed in a good career after you graduate. The insurance industry is predicted to continue growing for decades, and the existing risk management and insurance (RMI) programs only feed 15% of its needs each year, which means if you graduate with an RMI degree you’ll be a hot commodity! RMI programs had 100% employment, even through the 2008-2012 recession.

2. An RMI degree is basically a focused business degree: Majoring in business is a very popular choice already, but it’s a very general degree that usually takes a few years to really get you a solid career. RMI degrees are usually housed by a university’s school of business and have all the usual classes you’d get in a business degree (accounting, finance, marketing, statistics, management, etc) with the addition of a few RMI specific classes. What this means is that even if you change your mind and decide you don’t want to work in insurance (which you won’t), you can still easily get the same jobs that you would have been getting with a general business degree.

3. It is preparation for a career making a difference: If you love making a difference in the world, you’ll absolutely love the insurance industry! Even though we get a bad name in the press sometimes, the reality is that we are here to help people and businesses get back on their feet when unexpected things happen, and being a part of that is very rewarding. Also, many carriers offer time off to volunteer and to study for insurance designations.

4. Insurance is an incredibly stable career: The economy will continue in its ebbs and flows, and that means every few years people will lose their jobs when the economy contracts. Some very popular careers like banking, consulting and real estate are usually among the worst-hit when the economy slows. Insurance is incredibly stable because pretty much regardless of what happens in the overall economy, people and businesses continue to need insurance. This means career stability for you!

5. You’ll have more vacation than most of your friends: Most insurance carriers start you up with around 18 days of vacation a year. That means much more time off than most employees just starting careers in other industries.

6. Your senior year will be a LOT less stressful: RMI majors are expected to continue to be in high demand and feed only a portion of the insurance industry’s need for new talent, which means that a lot of RMI majors have accepted great job offers by December of their senior year, a good five months before graduation, and senior year is a lot more fun when you don’t have to worry about finding a job afterward.

7. You’re pretty much mathematically guaranteed to be in demand: The current makeup of the insurance industry workforce is very mature, meaning that 1 million insurance professionals, 43% of the workforce, are expected to retire in the next 10 years. In addition, the industry is growing and is expected to create 400,000 jobs. RMI majors are already pretty much immune to unemployment; they will be in increasingly high demand right around the time you graduate!

You pretty much can’t go wrong by majoring in RMI! There are not a lot of RMI schools out there, so click on the map below to open an interactive map of RMI schools. Schools marked in red have a full RMI major while schools marked in green have an RMI minor or concentration.

It’s Time for a Data Breach Warning Label

The breach at Home Depot is only the most recent in a torrent of high-profile data compromises. Data and identity-related crimes are at record levels. Consumers are in uncharted territory, which raises a question: Is it time to do for data breaches and cybersecurity what the nutritional label did for food? I believe we need a Breach Disclosure Box, and that it can be a powerful consumer information and education tool.

Once just a normal part of doing business, data breaches today can sap a company’s bottom line — and that’s the best-case scenario. At their worst, data breaches represent an extinction-level event. The real-world effects for consumers can be catastrophic. Because there is a patchwork of state and federal laws related to data security—some good, some bad, all indecipherable—and none that work together, it’s impossible to know just how safe your personally identifiable information is, and has been, at the places where you shop and with the companies and professional organizations where you do business.

Data security, identity-related consumer issues and privacy are all areas screaming for big-picture solutions. This is a situation in search of a paradigm shift—one that produces tools that enable consumers to make informed choices.

There is a precedent that could serve as a template. It was passed in 1988, though not implemented until 2000. You may recognize its name—it’s called the Schumer Box. This is the law that put the fine print of credit terms and conditions in your face—bigger, bolder and easier to understand. You see it all the time featured in those countless pleas for your credit business that land in your email and your mailbox.

The Schumer Box is simple. It requires that financial services companies provide certain information to the consumer when making a pitch for their business—information like long-term rates, the annual percentage rate for purchases and the cost of financing—and that the information be displayed in a standardized fashion. The Schumer Box is to credit cards what the nutritional label is to food.

A Concise Disclosure for Breaches

The Breach Disclosure Box that I am proposing would need to be simple, too. While I believe it is important to create a system that informs consumers about breaches, bear in mind that all breaches are not alike. There are breaches where the only piece of compromised information was a credit card number, which can be easily replaced and for which the consumer had zero liability. Then there are breaches involving Social Security numbers, detailed banking data or personal health information. These are very different situations. But they all share one thing in common: Something about you is “out there” and can be used by a criminal to commit either a crime against you or in your name.

The “solution” — regardless of a breach’s severity — is the same. I place “solution” in scare quotes because it’s a misnomer to talk about solutions and identity-related crime in the same breath. There is no solution to the pandemic, only containment strategies and best practices.

The Breach Disclosure Box would be a crucial part of data-related best practices at the consumer level where it’s all about the 3 M’s: Minimizing your exposure, monitoring your public records and financial accounts and managing any damage that occurs from data compromises.

Best practices can mean the difference between having a bad day and being financially ruined (or worse), and knowledge of a company’s data security track record can help consumers be better-informed about the risks they’re taking – and ultimately to decide if the risk is worth it.

The Breach Disclosure Box would also be a catalyst for companies to step up their game on data security as well as design and implement a breach preparedness plan that promotes an urgent, transparent and empathetic response to any compromise of consumer and employee data.

While the following list of Breach Box disclosures could be longer or shorter, the basic idea of a Breach Disclosure Box is essential to consumer safety in this ever-changing and crafty world of data-related crime and data breaches. The box should list:

  • How many times has this company been breached within the past five years?
  • If there has been a breach, what kind(s) of information was exposed?
  • Does this company encrypt all consumer and employee data?
  • Does this company have a breach notification policy?
  • What did the company offer affected consumers?
  • What type(s) of information are customers obligated, or not obligated, to provide?
  • Best practices for avoiding victimization (The 3 M’s)

The contents of the Breach Disclosure Box would ultimately have to be framed by lawmakers and interested parties intent on limiting the amount of ink spilled (or bytes used) to comply with whatever the legislation looks like when it leaves committee; but this bipartisan issue goes way beyond blue state-red state politics. When it comes to data-related crime, we’re all in the same state—a state of emergency.