The Insurance Blockchain


In my pre-academic life, I spent a couple of decades as a technologist, consultant, and entrepreneurial software developer serving the risk management and insurance industry.  To this day, I get excited about cool technologies and their potential impact on the risk and insurance industry.  In other words, I’m a geek.

The latest shiny object for me to fixate on is blockchain technology.  In case you haven’t encountered this term yet, it is a foundational technology underlying the Bitcoin digital currency, and you can get a Blockchain crash course here.  A gross oversimplification of blockchain is to think of it as a decentralized, distributed, secure, database of transactions that eliminates the need for a central authority to verify trust.  Which makes perfect sense when you think of the Bitcoin digital currency that needs an underlying ledger to keep ownership of the digital currency secure and prevent double-spending without any centralized “bank” acting as the common intermediary to all transactions.  But what does blockchain have to do with insurance?

At first glance, one might think that we’re talking about transacting insurance business (i.e., collecting premiums, paying claims) in Bitcoin digital currency.  I attended a RIMS education session on this possibility back in 2015, so it is likely to happen if it isn’t already somewhere.  But the implications of blockchain technology are much, much deeper than mundane Bitcoin transactions. (See how quickly technology evolves?  Bitcoin is already “mundane.”)

Articles and papers discussing various blockchain applications in insurance are beginning to appear.  Blockchain technology may reduce or eliminate claim fraud by allowing insurers to instantly avoid duplication of payouts, and customer service could excel with smart contracts using blockchain technology to speed up claim payouts, or even proactively disbursing funds to repair/replace property that the Internet of Things reports as damaged.  And we’re just scratching the surface.

I am currently reading “The Business Blockchain” by William Mougayar in an attempt to wrap my own head around the possibilities of blockchain technology.  Mr. Mougayar asserts that the evolution of blockchain technology in all business contexts and industries will be as revolutionary as was the advent of the commercialized World Wide Web in the 1990’s.  As I learn more myself, I am entertaining a few intriguing research projects on the use of blockchain technology in risk and insurance.  If Mr. Mougayar is correct, the next 5-10 years are going to be very exciting.

Minimum Wage Thoughts


Proponents of hiking the minimum wage have been gaining momentum in recent years, and $15/hour is already happening in some cities like Seattle.  The economics arguments for and against are well-known.  Proponents argue that raising the minimum wage is a matter of basic fairness and survival for those at the bottom of the economic ladder.  Opponents argue that minimum wages in general, and especially one that spikes higher suddenly, create market distortions that cause job losses and reduced job opportunities.  Nothing new there.  Both sides  seem to have merit.

Not to take sides here, but there is more to the argument against minimum wage laws than just job losses.  Okay, so maybe I am taking a side.  Personally, I tend toward libertarian thoughts, especially when it comes to economics.  I do not begrudge anyone earning a fair rate of pay for the work they perform.  I have raised three daughters, two of whom are still college students and working in relatively low-paying hourly jobs that pay roughly the minimum wage or very close to it.  Would I want my daughters to work for less than their current pay rate if it were legal to do so?  Not especially, but if the alternative were for them have no job at all, forcing them to extend their dependence on me… Uh uh.

The current push for $15/hour wages nationally raises several concerns… for one thing, it’s inflationary.  The Wall Street Journal published an article this morning which described the tensions created by “wage compression” which occurs when those at the bottom are suddenly thrust ahead on the pay scale and begin earning nearly the same as those who have much more experience and seniority.  Now the employer is faced with some unhappy experienced workers who become less motivated to perform.  The employer may feel obligated to elevate their pay as well to maintain equity in the workplace.  All of this leads to some tough choices… eliminate some positions or raise prices or both in order to cover the added payroll costs.  Inflation ensues.

And what about insurance?  Workers compensation premiums are based on payroll, and workers compensation benefits are based on wage rates.  Higher minimum wages leads to increased premiums and increased benefit costs.  Inflation.  And then there is Obamacare.  How will those folks feel about smaller tax credit subsidies to help pay for their mandatory Obamacare insurance policy once their higher income kicks in (assuming they still have a job)?

When all is said and done, and the political winds calm down, we will likely see a new national minimum wage that could be as high as $15/hour.  The earth will continue to rotate and the stars, moon, and sun will still be in the sky.  But I have to wonder… if $15/hour is going to be so great for the American working class and our national economy overall, then why stop there?  Why not $20 or $25 or even $50 per hour?  If $15/hour is great then a $50/hour minimum wage should end poverty and hardship forever.  No, you say?  $50, $25, $20 are arbitrary and ridiculously high pay rates.

So is $15 for entry-level jobs that were never intended to be a career.


RIMS 2016 Impressions


The semester may be winding down but there is no shortage of activity and obligations for students and faculty alike.  So it was particularly refreshing to spend a few mid-April days at the RIMS 2016 annual conference in San Diego with two Ferris State Risk Management and Insurance students, Melissa Klinger and James Freid.  The conference and the venue were both exhilarating experiences just before the end-of-the-semester final push.

Melissa and James experienced the incredible scope of the conference and the industry itself, from the moment we strolled into the opening breakfast session and keynote speakers, to the vast exhibit hall, and the dozens of educational sessions.  We had a very enlightening conversation with representatives from the captive insurance industry that was entirely an instance of serendipity as we sat down at a random lunch table one day.

I could go on and on about my impressions of the conference and the students’ conference experience, but I’d prefer to let them speak for themselves.  So here are thoughts from Melissa and James on their RIMS 2016 experience:

Melissa Klinger:  “This experience gave me a chance to get out of the classroom and my online classes to learn more about the risk management and insurance industry. There were over 300 different companies that attended this convention and had booths in the exhibit hall. Also, every day there were a number of different educational sessions. A few of the educational sessions that I was fortunate to be able to attend were: a construction industry session, ‘Risk Management in the Driver’s Seat: Navigating the World of Automated Vehicles,’ ‘We Didn’t Start the Fire: A Mock Property Claim,’ and a couple of other sessions. Each of theses sessions were different and gave a different view and look at the risk management industry. We were also able to go and see the three finalists of the Spencer-RIMS Risk Management Challenge present their case study on The LEGO Group. This gave James and I some things to think about and improve on for next year when our group wants to compete in this challenge again. This entire conference was a little overwhelming for a student going for the first time, but it was very beneficial and I definitely do not regret this amazing opportunity. I would have to say that my favorite parts of the conference other than the fact that it was in San Diego were the opening keynote speakers. I enjoyed Vinh Giang, the illusionist, the most because he used magic to explain how to overcome misdirection in life and in the business world. I cannot wait for RIMS 2017, especially since it will be closer to home in Philadelphia.”

James Freid:  “The RIMS 2016 conference in San Diego blew me away. The conference made me excited to graduate and begin my career. At the conference I met many professionals in the Risk Management field and was able to get my name out. I was exposed to a side of the industry I did not realize existed based on textbook learning. The most interesting part of this area of the industry was the captive insurer’s area. Captives make up a much larger portion of the insurance industry. There were about ten different states attempting to attract captives to come to their respective states. It was really interesting having the opportunity to meet professionals working with captives to learn where this section of the industry fits into the industry as a whole.

The second half of the conference was focused on different sessions on risk management topics. My favorite session was about calculating loss reserves and how companies can forecast the overall cost of loss. These sessions allowed for students, like myself, to gain a glimpse into day-to-day functions of a risk management professional.

The conference as a whole was a great experience. Being able to go to such a prestigious event for risk management was an experience I am very grateful for. I feel that I am a step ahead in my vision for my career because of my ability to experience this event.”

I couldn’t have summed it up any better myself.  Nice job Melissa and James.

San Diego here we come!


The Risk and Insurance Management Society (RIMS) annual conference will be held in San Diego, California next week.  I will be attending along with two students from the Ferris State Risk Management and Insurance academic program.  As I type these words, I am watching snow flurries floating through the Michigan “spring” air.  The palm trees of San Diego are looking mighty inviting right about now.

RIMS is one of (and perhaps) the largest gatherings of risk and insurance professionals.  It provides never-ending opportunities for learning, networking, and collaboration.  I always relish the opportunity to take students to this industry event and watch their reaction as they gain a new appreciation for the scope and impact that this industry has on business and society.

There will be more to say once we arrive at RIMS 2016 and begin to take in the keynote addresses, educational sessions, and exhibit hall offerings.  I will endeavor to post a few blog post updates that will be disseminated through my other social media channels.  I also intend to ask the students to provide their perspective on the event that will be shared here as well.

Until then, I’m trying to ignore the snow outside my window and just imagine the Pacific Ocean breeze and warm sunshine.

Present, but absent


Presenteeism, according to one recent research report, is ten times more costly to business than absenteeism.  Presenteeism is what happens when employees show up for work but put forth significantly less than a full effort.  This is not a new phenomenon.  I’ve witnessed it anecdotally in various work settings throughout my career. The cult-classic film “Office Space” provides an entertaining depiction of presenteeism.

In fact, to be totally honest, there have been days in my working life when I’ve been “present, but absent” on the job.  Not recently, but there have been those days.  As the Office Space character Peter Gibbons says, “It’s not that I’m lazy, it’s that I just don’t care.”  There were times in my professional past when the work wasn’t challenging, the bureaucracy and politics were oppressive, and the mission was unclear.  All of those conditions result from poor leadership in the enterprise.  When the work environment is such that the effort seems futile, presenteeism is the result.  The truly alarming fact is that no employee is immune, and presenteeism can become an insidious cancer within an organization.

There is more to the costs associated with presenteeism than just lost productivity.  Customer and supplier relationships can be damaged, co-workers can be “infected,” and employees can suffer long-term physical and mental harm.  It has long been known that distracted employees are more likely to be injured on the job, and long-term presenteeism can result in atrophy of a worker’s skills and abilities.  Presenteeism is more than just a productivity issue – it is also an employee wellness issue (for the benefits staff to consider) and a workers compensation issue (for the risk management staff to consider).

The natural inclination among managers with an industrial-era scientific management mindset (archaic in this knowledge-economy era, but still very much alive) is to “buckle down” to make sure that employees are working to their full potential at all times.  That’s a knee-jerk reaction that leads to micromanagement and paternalism.  Approaching presenteeism from that angle is anathema to employee engagement and knowledge worker productivity.  My own doctoral research examined this area quite closely.

The true answer to presenteeism is not to treat the symptoms but to cure the underlying disease.  Remove the conditions that cause employees to “check-out” and do just enough work to avoid getting fired.  That means providing challenging work, adequate authority, opportunities for personal development and mastery, and then get out of their way.  A great book that gets at the heart of motivation for modern-day knowledge workers is “Drive” by Daniel Pink, or check out his TED talk on the same material.

Employers, specifically leaders and managers, must come to grips with the magnitude of the presenteeism problem.  Perhaps more importantly, they need to recognize the difference between effective and counterproductive responses to the presenteeism problem.   Our economic health as well as the physical and mental health of our employees depends on it.

What, Me Worry?


In my younger years, I enjoyed the irreverent humor of “Mad Magazine” with its fictitious mascot, Alfred E. Neuman.  I’m not saying that Warren Buffett resembles the goofy Mr. Neuman in any physical sense, but Neuman’s catch-phrase, “What, me worry?” comes to mind as Mr. Buffett has made some news with the recent release of his annual letter to Berkshire Hathaway shareholders.

Full disclosure:  I own a few shares of Berkshire Hathaway.  A very few shares.  Just enough to brag that Warren and I are business partners (sorta) but not enough for me to retire any time soon.  In fact, although Berkshire has been a high performing stock in my personal portfolio, my Berkshire holding is so small that if I sold it today, it wouldn’t even buy me a new car.   Just for fun, consider the following exercise in wishful thinking:  I purchased my small Berkshire stake back in 2002.  If my parents had invested the same amount (adjusted for inflation) in Berkshire stock in my name back in 1965 (when I was one year old), you would be reading the words of a guy sitting on a nearly $7 million stake in Warren’s enterprise today.  If only…

Needless to say, I have a great deal of admiration and respect for the Oracle of Omaha.  Still, I am a bit perplexed by his recent discussion of climate change in his annual shareholder letter.  In general, it seems clear that Mr. Buffett prefers to err on the side of caution by assuming that the threat of climate change is real.  The letter refers to major commitments that BH Energy has made “to the future development of renewables in support of the Paris Climate Change Conference.”  With respect to a proxy proposal that will come before shareholders this year, Mr. Buffett waffles a bit.  He does say that he believes it is “highly likely” that “climate change poses a major problem for the planet.”  But then Mr. Buffett proceeds to explain that he considers the unknown consequences of climate change to be so potentially catastrophic that even if the chances of the consequences coming to fruition is only 1% it merits a “highly likely” conclusion in order to invoke action before it’s too late.

In the wake of that murky reasoning, Buffett proceeds to downplay the proxy proposal (which would require the company to issue a report on the dangers that climate change poses to BH’s insurance business) by suggesting that there is no evidence of increased losses due to climate change, and that if increased losses should materialize it would actually be good for the insurance business.  The basis of Buffett’s argument is that any increased loss costs year-to-year, are matched with increased premiums year-to-year, because most insurance policies are written with one year terms.  He further justifies this reasoning by pointing out that if GEICO’s loss costs per policy had remained at their $30 per policy levels of 1951, the company would be only a $600 million firm rather than the $23 billion firm that it is today.  The implication is that rising loss costs will drive revenues up as well, thereby creating growth.  Buffett concludes this section of his letter warning that homeowners in low-lying areas may want to consider relocating to avoid the consequences of climate change, but “when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries.”

In fact, Mr. Buffett seems to be a climate change believer who fears cataclysmic, Biblical outcomes are possible, if not “highly likely” unless we act to quell climate change now.  But don’t worry… if there are more storms and more losses from climate change in the future, Berkshire Hathaway (and other major insurers) will somehow benefit from as opposed to being threatened by climate change.  Perhaps I am too simple-minded to properly understand these seemingly contradictory perspectives on climate change, after all, Mr. Buffett does have billions to his name, and I almost had $7 million, if only…

Oh well.  What, me worry?



Care for some Lemonade?


There was celebration in several corners of the insurance industry (particularly in the agency system) this past week as news broke that Google was pulling the plug on its insurance-shopping comparison site, Google Compare.  Carriers are certainly open to all cost-effective distribution models for the insurance products that they sell, but there still exists an uneasiness with the online distribution model that emphasizes price as they key differentiation above all else.  Commoditization of the insurance product and service is a race to the bottom, as the industry knows all too well.  Independent agents, on the front lines of the industry, know this better than anyone.  Which is probably why there was rejoicing among the independent agents I was hanging out with earlier this week at the MAIA convention when a speaker mentioned the Google Compare news.

But the story is not over.  Online insurance distribution is not going away.  CoverHound (one of Google’s partners) said that this may just be a temporary hiatus for Google Compare, allowing Google to re-tool and re-brand the online comparison and distribution service.  CoverHound itself continues to offer insurance comparisons online.  There is also comparison and purchase opportunities from the likes of PolicyGenius.  In short, it may be welcome news to insurance agents that Google, with its billions in cash and technological deep bench, has exited the marketplace, but the game is not yet over.  In fact, it’s still early in the first quarter.

Consider the birth of Lemonade as a peer-to-peer insurance carrier who coincidentally (or perhaps purposefully?) also made news this week with the hire of high-profile behavioral scientist, Dan Ariely.  If you haven’t heard about Lemonade yet, think of it as the logical extension of the peer-to-peer networked economy that has given us Uber, Airbnb, and countless other industry earthquakes.  Just as Uber totally disrupted the taxi market, and Airbnb has dented (if not disrupted) the hotel industry, Lemonade could have the same effect on insurance.  Uber and Airbnb also upset the existing regulatory framework in their respective industries, and Lemonade might do the same to insurance although they seem to be moving more cautiously than their more brash peer-to-peer brethren.  Lemonade recently announced reinsurance partners that include several industry stalwarts.

Can peer-to-peer insurance work?  Let me put it this way:  I’m not going to bet against it.  Will it disrupt the insurance market?  Absolutely.  Is it the death knell of the independent insurance agent? No way.  The insurance product is far more complex than taxi rides and overnight stays.  I believe that there will always be a place for insurers and agents who provide real risk management services (personal and especially commercial), and win business by marketing more than just a commoditized price.  Keep that in mind every time you sip your cool lemonade drink during the summer months ahead.