Where’s the Romance?!

Posted on by David Wright

A dose of reality is always nice, but yikes:

It’s hard to capture the linked-to post in an excerpt, and even harder to gut-check yourself through sentences like this (particularly in the context of insight like this):

I don’t care who you are or how strong your ego is, you will have these moments — perhaps a continuous stream of moments — when you can’t take it anymore.

You see, I’m a mild idealist with a deep-seated desire to BUILD SOMETHING. A common sentiment among self-regarding 30-ish professionals with lots of ego and few prospects at the next margin of success.

The thought that taking the plunge into the entrepreneurial deep end is terrifying, risky and impoverishing isn’t pleasant. Most of the time these thoughts are easily swatted away by some ego-insulating doublethink (either: oh, but that wouldn’t happen to ME; or, yeah, but I can handle that shee-it – bring it on!).

But let’s not kid ourselves. What sacrifices is one really willing to make?

Probably fewer than we’d think.

Inmates Run the Asylum

Posted on by David Wright

Just finished Russ’ podcast with Daron Acemoglu on inequality and the financial crisis. There’s a lot of interesting stuff here.

The genesis of the podcast is a book by Ragu Rajan that I haven’t read. The ideas (as discussed in the podcast) are familiar, though: measured inequality goes up, everyone freaks out, politicians figure subsidizing housing is a good response, a housing bubble emerges and every special interest under the sun (the poor, Wall Street, Real Estate, etc) makes a killing.

Acemoglu has a great stat about how politicians’ voting records correlate most highly with the surveyed priorities of the top third of the income distribution, somewhat well with the middle third and not at all with the bottom third. Lots of interpretations here:

My caricature of Bryan Caplan would say that the top third are the informed voters and the rest don’t matter because their desires are nonsensical and they don’t vote anyway.

Super lefties immediately go for the corruption angle.

Who knows.

Tyler Cowen’s awesome essay on financial regulation and inequality screams for a mention here. It taught me that bailouts are impossible to a avoid, really.

The only people who know enough to figure out how to engineer a non-bailout system or command enough authority to convince the polity that bailouts aren’t necessary are in the system!

Depressing stuff.

Douchebag Alert!

Posted on by David Wright

Man do I hate this post. Let me count the ways:

Basic Math:

I’d say I correctly broke down how a dollar  of insurance premium gets distributed, but I made two errors. I stand by the main cost being claims and brokerage. I glossed over the breakdown of the rest, though. There’s profits (5%), Reinsurance (5-10%) and internal expenses (5-15%).

Different Reality:

The internal expense portion is massively dominated by one function: regulation. In the US, there are fifty regulators a nationwide carrier needs to cozy up to. FIFTY. Insurers are NOT just pools of capital. They are money + regulation passing machines. That function is pretty resilient to ‘streamlining’.

No Balls:

So why did I decide that the smallest share of premium is the one to automate? The fat is in the brokerage because they have the power over the business.

Facile Business Fantasy (I really hate this part):

‘Silicon Valley’? WTF are they going to do for you? Social networking or cloud computing? You going to improve our process by outsourcing it? The key problem here is that if someone else has an idea that’s great for insurers, they should just start an insurance company. All you’d bring to the table is regulatory expertise and work flow systems. Not very impressive is it?

All the money is in the distribution network. Forget insurance. Find a way to take out the broker and let the insurers play with the regulators.

This is why I was worried about writing more. I start slinging stuff out the door and only later realize it’s shit.

Destroying Jobs [not the guy!]

Posted on by David Wright

I’m obsessed with this idea that I work in a commodity business. That statement breezes through quite a lot of legitimate criticism, but I don’t care. I’m convinced.

And since I am in a commodity business, success at the margin requires developing a more efficient system for delivering that commodity. Exogenous price fluctuations are irrelevant.

Money tells us that sales are the second most important part of an insurance policy after claims. Brokers take a cut of between 10% and 20% of the premium.

Until the singularity comes along, our ability to extract the cost of salesmen from the system will be extremely limited, so that’s fixed.

Claims, the point of all this, are the biggest part, and cost about 60-70% of the premium, but they’re exogenous (commodity!), so forget them.

That leaves something between 10%-30% for corporate expenses, profits and other things under control.

Labour and capital. Salaries and systems and overhead. Capital + scale is no new idea. But applying capital to new areas is ripe for innovation.

Now, here’s my philosophy: new ideas do not exist. Certainly not in my head and almost certainly not in my business.

I take a cue from Fabrice Zinga. This guy made a fortune exporting the ebay model to non-US countries. I think that’s a bit of a naked wholesale swipe of a business model, but it worked.

I’m not quite so bold, but my plan is to spend as much time learning about innovation in OTHER businesses, particularly recent innovation, and figuring out if it will work in mine. I’d guess the implementation delay of a solid idea from Silicon Valley to insurance is about a year.

-=-=-

Edit: and google is telling me that this post has gotten a pile of traffic, no doubt because of the word “jobs” in the title. I bet that the only better traffic bait would be the name of a certain former Alaska governor.

*shudder*

People of the world: I regretted writing this stupid post!

HR is a Low Priority

Posted on by David Wright

One frustration about working for a small company is the hiring ‘Strategy’.* The process (for general entry-level spots) goes something like this:

1. Realize you should have hired someone 6 months ago

2. Hire the next person you meet that seems suitable

3. Be annoyed 5 years later when you feel like there’s always a shortage of ‘skill’ positions.

4. Hit the sale rack for discarded talent.

The answer to this problem: choose carefully and train. Easy enough to understand.

Recently, I’ve been given the go-ahead to hire an intern. I’ll show ’em how it’s done!

(sigh)

Haven’t much to show for myself. Here’s why I think this is:

1. This process is effing TIME CONSUMING. College career services offices are painfully bureaucratic and only want to talk to a company that hires dozens of MBAs (ka-ching!), not one that might hire an undergrad intern per year. Maybe.

2. Learning is hard! Bumbling through the process with bureaucrats then try and sort out which students are duds? No fun. I remember, from ages past, the ratio of decent-to-disastrous candidates as something like 1-5 or 1-10, and that was from a heavily pre-selected University program.

3. Meeting people is hard. And chumming around with a gang of youths too nervous to flash me a glimpse of their real selves so I can probably reject them outright? Wearying.

4. And all for what? Short term pain, medium term breakeven (probably), long term massive gains. MY discount rate is prohibitive?! My bosses’ discount rates are astronomical by comparison.

Luckily I’m happy to tie myself to the mast with blog posts like this. Need some motivation!

* For small companies in my business, ‘strategy’ is something to do when idleness if forced upon you, the rest of the time, you’re broking/pitching/selling.

The Systems in Your Life

Posted on by David Wright

For some reason I have an enormous affinity for the word ‘system’.

I like to caricature the world as being broken into system-based activities and status-based activities. The former being the entire world economy before, say, 1900, and the latter being 99% of the economy in, say, 100 years.

But this isn’t about economics, this is about Colin Marshall’s post that resonated with me.

…if you want to make a life of some craft, it makes sense to institute a system, a schedule — no matter how basic — as soon as possible.

The point, as I see it, is that you are never going to get good at something unless you do A LOT of it. Very Gladwellian, of course, but I like reminding myself of this. As such, I think Colin’s a bit harsh on this point:

I respect most the work of creators who, broadly speaking, do what they want to do — especially when they don’t want to do it.

Now, Colin might not agree here, but I’d say that he’s got his correlation/causation mixed up. Systematized creators tend to have better work, so he likes them better.

Anyway, all this to say that I do this blog to practice my writing and work out ideas that pop into my head. But if I really wanted to get good at this, I’d have to crank out material on a schedule.

Am I up to it? (A very Colin Marshallesque question!)

Insurance is Complicated

Posted on by David Wright

Insurers are set up to pay three kinds of expenses:

1. overhead and commissions (under their control);

2. predictable claims (whose risk insurers ‘understand’); and,

3. crazily aggregating black mamba catastrophe claims (bolts from the blue).

Let’s play CEO: which one of these keeps me up at night?

Well, #3 looks pretty scary: that’s where the jacked-up Hollywood-style company killers lie in wait. It’s not just hurricanes, earthquakes and asteroids, either. Corporate scandals (think Enron and all the resulting litigation) and ‘latent’ exposures (Asbestos). Lots of drama, lots of victims and look! There’s Anderson Cooper, brows a-knitted, standing knee-deep in a floodplain shouting at a TV camera.

Meh.

Believe it or not, just knowing that some hairy stuff can happen keeps things in check: lots of capital, expensive insurance for Florida homeowners and constant testing of the market through the reinsurance process.

The softer blood-suckers (Asbestos and Corporate Scandal) resolve through the courts, which drag things out for EVER. This means an insurer, now anticipating lots of claims, can crank up the prices and effectively earn its way out of trouble.

Ok, how about #2? Tread carefully, there’s some action here, but the problem isn’t the cost, it’s the revenue and pricing. An organization needs to willfully brush aside good sense and undercharge for this to be a problem. And as stupid as that sounds, it happens because of…

#1: here’s the killer. No sucker is going to pay a premium for a fancy Louis Vuitton logo on the top of his/her policy, so insurers differentiate on price.

There are two ways of going about this: first, by identifying a poorly served subgroup. This is everyone’s favourite because the ‘winners’ feel smart for identifying a niche and the ‘losers’ feel smart for avoiding a trap. Realistically, this is hardly a scalable and sustainable business model.

The real answer is to pull costs from your process. Think like a manufacturer. Make. It. Cheaper. Then you know you’re in a better financial position at any market price. And the market does weird things.

For instance, imagine you’re a typical underwriter CEO when he finds he’s too expensive.

You’re losing money, but out of ideas. Cut your prices, fiddle the reserves a bit to buy time and hope the market turns!

I imagine these poor suckers like submarine captains who just realize they’ve been spotted on sonar and quickly rig for silent running.

Hundreds of feet beneath the sea, quiet as a mouse, on the brink of death and waiting, desperate for a happy ending…

Jumping the Shark?

Posted on by David Wright

Back in 2008 I started following a blog called “Obama in Kenya”. It was a catalog of pictures of Obama paraphernalia in Kenya. Kenyans were pretty fired up.

It was neat but fell into disuse in the February, 2009 or so but I never took its RSS feed off my reader.

This morning I got a blast of posts from the blog dating back to November, 2010 which I would call… different:

Someone starting today can certainly generate more income than a few other individual who has been around for over a year. It’s strictly between you and also the one that you invite to find out about your dollars gifting activity and sharing club. Should they just like the concept, they could accept to offer you a cash gift. Direct. Individual to individual. No pyramid anywhere.*

That’s a pretty typical post in terms of comprehensibility and content and is titled (I kid you not):

tructured by having an make an effort to copy or “clone” [sic]

Obviously this site has been taken over by some pretty shady folks who have kept the url intact and spend a lot of time thinking about,  um, legal process and cash gifting?

Here’s another title (reproduced in whole with punctuation intact):

people would walk approximately

What was that? You want some content from this gem? Sure:

Plus, through the years I’ve supported many ministries and charitable organizations financially. Not just that, there are lots of instances when people would walk approximately me and hand me cash as being a gift to bless me.

Hilarious. And no deposed King of Nigeria for me to bail out? Come on!

Maybe this is a Turing test.

*I’m not going to link to this thing for fear of tee-ing off a blast of spam.

Triceps Surae

Posted on by David Wright

Otherwise known as the calf muscles. Weird word.

(did a bit of research and, apparently, the muscle and the baby cow are only coincidental homonyms).

Anyway, the first book I ever read on exercise was by Joe Weider, who more or less invented the ‘sport’ of bodybuilding. I now think that whole system of exercise is, at best, ridiculous and, at worst, harmful, but recently I was reminded of a passage describing Ah-nold’s struggles with his calves.

“Everyday you walk around. When you walk you are using your calves. You are pushing at least your body weight every time you take a step. So, when you go to the gym and work out your calves with light weight, are you really stressing your muscles?”*

So lately I’ve taken up barefoot running. Actually, it’s sock-footed running until I get my new ‘shoes‘ – who knew treadmills got scalding hot as you run on them?!

And my calves are toast.

Ever thought about the difference between walking and running? Walking is when you always have a foot touching the ground. Running is more like small controlled jumps. When you land, you’ve got your entire bodyweight slamming into the ground.

With the standard modern running style, this force is absorbed by the heel of your shoe as your foot strikes and, apparently, can cause ‘downstream’ problems in your knees, hips and back.

Barefoot running is stealth running; think of it as trying to run without making any noise, on the balls of your feet like a thief in the night. Now there is no heel strike and the shock gets totally gobbled up by those hard-to-stress calf muscles.

So Ah-nold is right, but for the wrong reasons. Calves would be hard to ‘build’, but not because you walk around; I’d say it’s because they evolved to absorb a ridiculous amount of punishment (running long distances barefoot) and all that toughness lies dormant.

*swiped this from another website, but it’s the right sentiment

Brokers

Posted on by David Wright

Second-hand story:

A colleague of mine was at the bar before dinner with a client and a few others. A reinsurer walks in (reinsurers sell, client buys, we’re in between) and this client, a rambunctious sort, challenges him:

“So, [blank], what do you think about BROKERS?”

“Honestly?… I think they slow things down, cost money and favor the client.”

Zing!

-=-=-=-

Let’s break it down. The third point is irrelevant: there’s no such thing as impartiality and besides, at the margin, buyers have more power than sellers in commodity businesses.  They can take their ducats elsewhere all to easily. We’re supposed to favor the client, dumbass.

The second point is (as they say) what it is.

The first, though? That’s not playing nice-nice, is it.

But even as narrowly and stupidly put as it is, it’s still not really a burn. Negotiation is a tricky business* and it isn’t obvious what helps and what doesn’t. Sometimes, slowing things down is a good thing. Most times, brokers play a role SOMEBODY has to play and, if not for brokers ready to take the blame, you’d be bitching about slow internal processes at the client for generating the data.

Our friend [blank] was probably stirring the pot, though, because he decided to completely overlook what we actually do.

We’re matchmakers. Building and servicing a network of people that buy and sell hundreds of millions of dollars of reinsurance every year takes a lifetime. It’s a weird job, for sure, but one that has withstood the ultimate test, competition from direct (ie non-broker) markets, for generations.

It’s very hard to create economic value. Very very hard. It’s also hard to identify economic value sometimes.

Luckily money talks.

*(TED has loads of good stuff on this, from a related field.)