Tag Archives: complexity

Is Insurance Industry Too Complex?

Take a moment and consider these questions:

  • What are the most important activities you do?
  • What are the other activities that pull you from doing the most important activities?
  • How could you do less of the least important activities?
  • What paperwork, processes or requirements frustrate your customers?
  • How could you redesign the customer experience so they could do less of the frustrating stuff?

Organizational complexity slowly creeps into a business and propagates. We don’t feel its tentacles slowing taking their grip before they start to strangle our best performance. The slow creep of complexity happens due to the typical growth pattern of organizations – as we get bigger, we add structures, defined roles and responsibilities, committees, strict processes and so on and so on. Before we know it, our days are taken up with low-value meetings, responding to emails and keeping compliant. We lose track of the highest strategic priorities, and because we’re so busy we get stuck in perpetual firefighting.

What many leaders don’t realize is the tremendous performance surge that would come if all the low-value activities and noise that distract and soak up energy from people could be removed. Imagine the impact on performance if people were crystal clear on their top strategic priorities, focused their most productive part of the day on these priorities and had time to really lean into creative problem solving or building relationships with clients or whatever the priorities may be. Furthermore, imagine the customers’ enjoyment if painful bureaucratic processes were removed from their insurance journey. The opportunity to simplify work is huge, but it requires focus and effort.

It takes commitment and perseverance to simplify work. It’s a lot easier to add complexity than it is to design a simplified solution that delivers the desired function. It requires intelligence and perseverance to reduce something complex and messy into something streamlined, prioritized, and simple. It’s much easier to add on another process, rule or detail than it is to design something simple that strips elements away to reveal critical elements that can serve to solve the root cause of a problem, enhance focus or accelerate understanding and buy-in.

See also: The Insurance Lead Ecosystem  

While “getting to simple” may take hard work and persistence, there are some core ways to help those in this important endeavor. My list for how to simplify looks like this:

  1. Get clear on purpose
  2. Organize
  3. Reduce

Get Clear on Purpose

There has to be a clear sense of what the bigger picture is so you can begin to remove the things that are not as useful. Without clarity on the strategy, mission or vision, you simply can’t begin to remove or reduce the things that are cluttering the business. When this clarity is missing in companies, people lose sight of or are unsure about what is most important and are left to blindly adhere to their manager’s instructions versus being able to think and act for themselves. A broader understanding of the strategic context has to be the first step in simplifying anything.

Some questions that can help you to get clear on purpose include:

  • What does success look like?
  • What is the best outcome we could achieve?
  • What is going to deliver the greatest value?


Once a clear understanding of the strategic context has been established and key objectives are known, work can begin on organizing the chaos. A comprehensive picture of the current state, whether it be how work is done, content in a document or possible features for a product, should be obtained. When the laundry list or dump of current state information is collected, themes can be extracted and used to group and organize the minutiae. This enables sense to be made of the complexity as it creates a perception that the many have become fewer.

Some questions to help with organizing chaos include:

  • What are the themes?
  • Can the themes be organized by relative strategic importance?
  • Is there a way of assessing the degree of ease in removing or integrating non-core components?

See also: Insurance and Fourth Industrial Revolution  


Once you have the groupings or themes and you have a clear idea of what you’re trying to achieve, the next intuitive step is to prioritize and reduce and remove those things that are not essential. This is a key step in simplifying, but it is also very challenging. It takes a lot of creative problem solving, brainstorming and design to reveal how something can be streamlined and simplified. Antoine de Saint-Exupéry, the famous French writer, said it nicely: “Perfection is reached not when there is nothing left to add, but when there is nothing left to take away.”

Key questions that can be posed to help reduce something complex down its core include:

  • What is most strategically important?
  • What is least important and easiest to remove?
  • How can non-core elements be redesigned or integrated?

The opportunity to take a step back and simplify the insurance industry is tremendous. It will take focus and determination but the potential return in innovation, productivity and customer satisfaction will be well worth it. I encourage you to take the first step.

Complexity Theory Offers Insights (Part 1)

In the first of this series of four segments, we will look at the current state of the risk markets and the insurance industry; the emerging peer-to-peer (P2P) segment of the risk markets; how blockchain technology is enabling a new taxonomy in the risk markets; and what changes may occur as a result of these new technologies and methods.

The purpose of this series hails from the open source movement in the software industry. Key to the open source philosophy is the transparent and voluntary collaboration of all interested parties. While this work has been kept fairly close to the vest for the past few years, I have taken meetings with two Fortune 500 insurance companies’ strategy and venture teams, both of which asked for a proof of concept — as well as with a handful of other large international insurance companies and one of the big four accounting firms.

At the other end of the spectrum, I have also spoken with other founders of P2P insurance startups around the world, and I have participated in the communities surrounding blockchain technology. I feel that these handful of folks have already enjoyed early access to these concepts, and my motivation with this series is to achieve a more level playing field for all parties interested in the future of the risk markets.

There are links at the bottom of this article to join the conversation via a LinkedIn group and get access to the whole series.
To begin, let’s take a look at the current state of risk markets. It is important to distinguish between drivers of economic systems and the impact they have on business models in the industrial age vs. in the information age.

See also: Should We Take This Risk?  

Hardware and technology was a key driver throughout the industrial age, which saw a growing batch of new technologies — from cars and planes, to computers and smart phones, to industrial robots, etc.

Industrial age business models were almost always “extractionary” in their nature. The business model engages with some market, and it profits by keeping some portion of the market’s value.

Extracting value from the market

The strategies of the industrial age were:

  • Standardization — interchangeable parts
  • Centralization — big factories, vertical integration, economies of scale
  • Consolidation —an indication that an industry is about to experience a phase change

In the information age, business models almost always embody some creation of “network effect.” When the business model engages with a market, the individual actors all benefit as more actors engage with the business model. The value creation is usually tied to a network’s graph, and the value creation will grow exponentially as the network’s density grows.

Creating value for the market, not extracting value from the market

The strategies and efficiency-drivers in the information age are:

  • Cheap connections — enabling multiple paths through the network’s graph
  • Low transaction cost — in terms of time, effort and money
  • Lateral scaling — not vertical structures, which will be flattened out (“top down” increases network fragility)
  • Increase in node diversity — and in the ways each node can connect

All of these drivers lead to increasing network density and flow. Things are moving away from large, brittle centralized organizational structures and toward “distributed,” P2P, “crowd” or “sharing economy” types of organizational structures.

Moving away from command-and-control organizational structures is almost impossible for organizations that profit from efficiency gains derived from a centralized effort. It is this attribute of their business model that necessitates startups and new business models coming in and bringing improvements to the market — challenging incumbent economic and business models.

The information age is all about networks (not technology), and building graphs that create positive network effects.

The conceptual framework best suited to understanding networks and the networked world we now live in is complexity science. The study of complex adaptive systems has grown out of its roots in the 1940s and has proliferated since the 1990s and the explosion of computer networks and social networks. Here is an introduction:

When looking at complex systems, we start by looking at the system’s graph. To get an idea of what a graph is, let’s look at a few examples of “graph companies.”

  • Facebook built the “social graph” of acquaintances; it did not create acquaintances.
  • Linkedin built the “professional graph” of coworkers and colleagues; it did not create coworkers and colleagues.
  • Google built the “link graph” for topics searched; it did not create back links for the topics searched.

Notice that, in each of these cases, the company built and documented the connections between the things or nodes in the network and did not create the things or nodes themselves. Those already existed.

To start looking at the risk markets, we must first understand what is being connected or transferred between the nodes (a.k.a. the users). It should be of little surprise that, in the risk markets, it is risk that is being transferred between nodes, like a user transferring risk to an insurance company. In terms of risk graphing, there are currently two dominant graphs. A third is emerging.

Let’s take a look at the graphs that make up the risk markets and the insurance industry.

  1. Insurance — is the “hub and spoke” graph.
  2. Reinsurance — is the decentralized graph connecting risk hubs.
  3. P2P Coverage — will be formalized in a distributed graph. (This is the one that does obviously not exist formally, but, informally, you see people calling parents/friends and using GoFundMe/their church/their office/other community organizations to spread risk out laterally.)

In today’s risk markets, insurance companies act as centralized hubs where risk is transferred to and carried through time.

The reinsurance industry graph is enabling second-degree connections between insurance companies, creating a decentralized graph. In the current industry’s combined graph structure or stack, only these two graphs formally exist.

While an insurance company’s ledgers remain a hub where risk is transferred to and carried through time, reinsurance enables those risk hubs to network together, achieving a higher degree of overall system resilience.

See also: Are Portfolios Taking Too Much Risk?  

The P2P distributed graph currently exists via informal social methods.

Stack all three graphs, and you can observe how total risk is addressed across all three graph types. Each has its strengths and weaknesses, which leads to its existing in its proper place within the risk markets.

The fact that insurance as a financial service gets more expensive per $1,000 of coverage as coverage approaches the first dollar of loss means that, as a financial service, there is a boundary where insurance’s weaknesses will outweigh its strengths.

My expectation is that much of the risk currently being carried on the hub-and-spoke insurance graph will accrue to the P2P distributed graph because of improved capital efficiency on small losses via a trend of increasing deductibles. This may lead to some of the risk currently carried on the reinsurance decentralized graph being challenged by centralized insurance.

The proportion of total risk — or “market share” — that each graph carries will shift in this phase change.

When people say insurance is dropping the ball, they are expressing that there is a misunderstanding or poor expectation-setting about how much of total risk the first two graphs should be absorbing. Users are unhappy that they end up resorting to informal P2P methods to fully cover risk.

To increase the resilience of society’s risk management systems and fill the gaps left by the insurance and reinsurance graphs, we need the third risk distribution graph: a distributed P2P system.

Society needs a distributed system that enables the transfer of risk laterally from individual to individual via formalized methods. This P2P service must be able to carry un-insurable risk exposures, such as deductibles, or niche risk exposures that insurance is not well-suited to cover.

Much of this activity already occurs today and, in fact, has been occurring since the dawn of civilization. KarmaCoverage.com is designed to formalize these informal methods and enable end users to benefit from financial leverage created by the system’s network effect on their savings.

When observing a system through the complexity paradigm, another key measure to observe is a system’s level of resilience vs. efficiency. Resilience and efficiency sit on opposite sides of a spectrum. A system that is 100% resilient will exhibit an excess of redundancy and wasted resources, while a system that is 100% efficient will exhibit an extreme brittleness that lends itself to a system collapse.

When we look at the real world and natural ecosystems as an example, we find that systems tend to self-organize toward a balance of roughly 67% resilient and 33% efficient. Here is a video for more on this optimum balance.

Industrial-age ideas have driven economics as a field of study to over-optimize for efficiency, but economics has, in recent years, begun to challenge this notion as the field expands into behavioral economics, game theory and complexity economics — all of which shift the focus away from solely optimizing for efficiency and toward optimizing for more sustainable and resilient systems. In the risk markets, optimizing for resilience should have obvious benefits.

Now, let’s take a look at how this applies practically to the risk markets, by looking at those three industry graphs.

Centralized network structures are highly efficient. This is why a user can pay only $1,000 per year for home insurance and when her home burns down get several hundred thousand dollars to rebuild. From the user’s point of view, the amount of leverage she was able to achieve via the insurance policy was highly efficient. However, like yin and yang, centralized systems have an inherent weakness — if a single node in the network (the insurance company) is removed, the entire system will collapse. It is this high risk of system collapse that necessitates so much regulation.

In the risk markets, we can observe two continuing efforts to reduce the risk of an insurance system collapse. We observe a high degree of regulation, and we see the existence of reinsurance markets. The reinsurance markets function as a decentralized graph in the risk markets, and their core purpose is to connect the centralized insurance companies in a manner to ensure that their inherent brittleness does not materialize a “too big to fail” type of event.

Reinsurance achieves this increase in resilience by insuring insurance companies on a global scale. If a hurricane or tsunami hits a few regional carriers of risk, those carriers can turn to their reinsurance for coverage on the catastrophic loss. Reinsurance companies are functionally transferring the risk of that region’s catastrophic loss event to insurance carriers in other regions of the globe. By stacking the two system’s graphs (insurance and reinsurance), the risk markets’ ability to successfully transfer risk across society has improved overall system resilience while still retaining a desired amount of efficiency.

Observations of nature reveal what appears to be a natural progression of networks that grow in density of connections. Therefore, it makes sense that the reinsurance industry came into existence after the insurance industry, boosting the risk markets’ overall density of connections. Along the same line of thought, we would expect to see the risk markets continue to increase in the density of connections from centralized to decentralized and further toward distributed. A distributed network in the risk markets will materialize as some form of financial P2P, “crowd” or “sharing economy” coverage service.

A network’s density is defined by the number of connections between the nodes. More connections between nodes mean the network has a higher density. For example, a distributed network has a higher density of connections than a centralized network. However, a higher density of connections requires more intense management efforts. There is a limit to how much complexity a centralized management team can successfully organize and control.

See also: 5 Steps to Profitable Risk Taking  

When a network’s connections outgrow centralized management’s capacity to control, the network will begin to self-organize or exhibit distributed managerial methods. Through this self-organization, a new graph structure of the network’s connections will begin to emerge. As this process unfolds, an entirely new macro system structure will emerge that shows little resemblance to the system’s prior state, much like a new species through evolution.

What emerges is a macro phase change (aka “disruption”) that does not necessitate any new resource inputs, only a reorganization of the resources. For example, the macro state of water can go through a phase change and become ice. The micro parts that make up water and ice are the same. The macro state, however, has undergone a phase change, and the nature of the connections between the micro parts will have been reorganized.

In his book “Why Information Grows: The Evolution of Order from Atoms to Economies,” MIT’s Cesar Hidalgo explains that, as time marches forward, the amount of information we carry with us increases. That information ultimately requires a higher density of connections as it grows. This can be understood at the level of an individual who grows wiser with experiences over time. However, as the saying goes, “The more you know, the more you know you don’t know.”

In the history of human systems, we have observed the need for families to create a tribe, tribes to create a society and society-organizing-firms to achieve cross-society economic work. We are now at the point of needing these firms to create a network of firms that can handle increased complexity and coordination.

It is this network of firms that will be achieved via distributed methods because no individual firm will ever agree to let another single firm be the centralized controller of the whole network — nor could a single firm do so.

In the next segment of this series, we will look more closely at the distributed graph that will become formalized, creating a P2P system in the risk markets.

I have started a LinkedIn group for discussion on blockchain, complexity and P2P insurance. Feel free to join here: https://www.linkedin.com/groups/8478617

If you are interesting exploring working with KarmaCoverge please feel free to reach out to me.

How Google, Amazon May Lead Disruption

In response to a great piece here by Barry Rabkin, I have a strong opinion. That doesn’t mean to say I’m right here, but I’m reflecting all the customers and partners I have spoken to at length on this topic over the last many months.

Barry, really interesting piece. I hear this question nearly every day, about whether Google, Amazon and other tech giants will enter the insurance business. I have heard this nearly every day for the last 24 months now, maybe longer. This question won’t go away and will continue to spark ideas and pique the interest of individuals and boardrooms up and down the country, fearful for the large, digital, (perceived) nimble enterprises that could engulf them in a swift clean swipe.

I think if you break the question down further — to personal and commercial lines — the story may evolve even further. Take the small and medium-sized enterprise (SME) side, particularity the S part of this. These organizations (and I include our traditional carriers here) have an ideal opportunity to further leverage what they do so well today, but, as you point out, it’s well known what they do and how to imitate or improve on that.

While I agree with you that Google, Amazon, et al. are highly unlikely to become direct insurers themselves, they are already heavily involved in the insurance value chain as creators and orchestrators of data. These organizations are data companies, and we are an industry of risk-based data. We have some good examples already of Google in the U.S. providing advanced weather data and subsequently crop insurance. In the UK, Google has an insurance price comparison site, albeit loss-making at present – however, don’t let this fool us.

These are the guys who help create the data, the Internet of things (IoT), Internet of customers or Internet of everything (whatever today’s buzz word is) — from your mobile location (Nexus, Android), your home (Nest, Google TV), your location (driverless cars, maps, Android), your health (wearables) and so much more! This volume of data on us as individuals has immense value and power in the right hands to reduce the inconvenience in our everyday lives.

However, what if Google and Amazon were to partner in the same way they do with hardware providers for mobiles and other devices with a re-insurer, not having to worry about the things you clearly highlight and instead focus on the one thing they do well – the customer (Google), the supply chain (Amazon), the experience (Apple) and the community (Facebook)? You would have a very powerful story! (Queue scary music!)

What if this community were to all club together with the digital networks and relationships that exist today? It could use the platforms these giants have created to break down the sequence and focus on the parts they truly dominate in, disrupting the very tenants that have formed the backbone of this industry for decades. The worrying situation here, therefore, would mean the traditional product manufacturer is further removed again from creating and maintaining customer and brand loyalty. We simply disappear into a land of brand unknowns.

The only thing I would add to your list would be there are two customers here – our customers and our shareholders — and we have a clear obligation to both.

I think they could be here anytime they want; however, like you, I don’t believe it will be anytime soon. In my view, they will only enter when our margins are good enough or theirs are bad enough.

Just don’t rule out the partnerships or consortiums on the personal lines side. It will be a harder debate in the complex commercial world.

Disruption is coming!