Why insurance is so boring (and why it needn’t be)

I began life in finance in insurance, taking the insurance
exams and gaining a professional qualification. 
I’m still a Chartered Insurance Practitioner today, even though the
sector leaves me cold.

Why?

Because it’s run by Actuaries who are just plain boring.

There was an old joke: When
do you know you’ve met an extroverted Actuary? 
They’re the one looking at someone else’s shoes.

I never met anyone looking at someone else’s shoes in our
Actuarial gatherings.

OK, I’m being harsh, but there were a few fundamental truths
that everyone did believe in insurance.

1. Risk analytics is key;
2. The industry works in predicatable cycles of premium growth
   offset by claims growth on a seven year or thereabouts roundabout; and
3. Innovation isn’t that important as you either
   have a customer for life (pensions and endowments) or you work on a rate churn
   (home and auto insurance).

Over the years, this has been reaffirmed by developments
such as comparasites, and the gradual shrinkage of the advisory sector, exacerbated in the UK by the
Retail Distribution Review, or RDR as it’s known colloquially.

So I was intrigued to debate this with an insurance gentleman
who attended the conference I was at today, and we rapidly started to discuss innovations
in insurance.

We asked questions, like:

• Why do insurers renew policies annually, when they could
  offer two, three or even five year policies. 
  Annual renewals just beg the question: why don’t you leave? every year.

• Whatever happened to the idea of an insurance policy on a
  pay-as-you-go or pay-as-you-use basis? That would be far more flexible than these bulk standard products that cover you regardless of usage and need.

• What about the idea that if you don’t use the policy in a
  given year, you can get a rollover effect or a reimbursement?  Sure, we talk about no-claims bonuses, but it’s
  not really a loyalty or demonstrable return to the customer.  There should be something better.

I then mentioned to him the two innovative insurance stories
I heard about recently from Aegon and Friendsurance.

Aegon has launched Kroodle,
a Facebook-based insurance service that requires no form filling.

The insurance service, for example, will provide you with
home insurance and will prefill as much of the form by scraping your name,
address and date of birth from your Facebook profile and, for example, offering
you home insurance by using your zipcode from your profile to calculate the
replacement cost of your home by feeding that into house valuation website.

Kroodle only recently launched in the Netherlands, and is described by Aegon in their Q1 review as: “The world's first Facebook insurance
products. Kroodle offers innovative, online products allowing customers in the
Netherlands to purchase insurance and manage their accounts through their
Facebook profile.”  

What is interesting is that if you watch the launch party
video (this is from a meeting on June 4^th in Amsterdam), the theme
is all about social media and entrepreneurialism with Chris Hughes, the co-founder
of Facebook, as they special guest speaker (if you don’t speak Dutch, Chris appears
in the video below after 3:42 speaking in English):

Wow!  Cool! A Facebook
insurance company with no form filling or application forms.

Then there’s Friendsurance in Germany,
a peer-to-peer insurance company.

Now this one gets really interesting, in that I always remember
insurance being described as: the sharing
of risk amongst the many to cover the uncertainties of losses amongst the few,
or something to that effect.

It’s all about creating a pool of shared coverage, so that
when an issue hits one, they can get it sorted out and not face financial ruin.

So when we talk about sharing
risk and creating a common pool, it
immediately lends itself to the concepts of social media and peer-to-peer
networking.  That is the basis of how
Friendsurance was created, with German founder Tim Kunde taking the view that insurance is just a social network to share risk.

How does it work?

From the Economist:
“the costs of smaller claims, which would normally be paid by a policyholder as
part of a ‘deductible’ amount, are shared within a small circle of friends, who
can either sign up as a group or hook up on the site. Part of their premiums
are set aside to settle these small claims. If something is left over at the
end of the year, each friend gets back his share.”

So insurance doesn’t have to be boring and it doesn’t have
to be offered in the herd mentality of the industry’s traditions.

It will be interesting to see how these themes develop in the
future.