COVID Conversation With Michael Tanzer

Michael Tanzer is a portfolio manager at a hedge fund called Callaway Capital and author of a newsletter I read each week call Stuff to Read Over The Weekend (STROTW). Michael asked me if we could hop on a call and talk about COVID and I thought I might try just putting this out as a podcast as an experiment. I might do more of these with various people as I struggle to make sense of this crisis, partly to get my own mind off the concerns I have for myself and my family. Let me know what you think!

We cover a lot of my own current thinking about how insurance responds to this crisis and also models for economic and market disruption and how COVID-19 fits into all this. Is it an insurance-style crisis hitting the border economy?

In the conversation we talk briefly about a book that sounds pretty interesting called Diary of a Very Bad Year. It’s a book of the real time experience of the economic crisis by a crisis feels. I shall check it out!

Martin Gurri on the Revolt of The Republic

Martin Gurri (youtubemp3) is an author and former CIA analyst whose book, the Revolt of the Republic, describes how and why we have political revolutions and a seeming explosion of negativity in media and politics. 

Martin spent his career analyzing media reports around the world and noticed the decline of the primacy of ‘papers of record’ coincided with big changes in political discourse everywhere. I normally avoid political analysis and discourse as mostly unproductive shouting but Martin stands out as a dispassionate and insightful observer of current events.

In this interview we compare various social media platforms, discuss what the public really wants and how we might get out of this mess. Martin has the unique distinction of recognizing the commonalities between Obama and Trump and his theory ties together movements on the left and the right.

One quick bit of extra background from my research: other than his own experience, Gurri drew on material from Walter Lippman, a mid-20th century journalist who feared that the spread of mass media would disempower the ‘elites’ in a destructive and destabilizing way. These elites wring their hands with every new ‘wave’ of media technology as Gurri describes in the book. And for the most part they’re wrong.

Is this time different? The pessimist might say it’s a question of degree rather than type.. We are an archer walking towards a target, the closer we get the better our chances. More democratization of media means more frequent and more violent and more random the revolutions. Even here!

The optimist says there is a direction to history. All technology is an amplification of human nature: mostly good and partly evil. There is a natural check pre-built inside us that stops the madness from overcoming the wisdom of crowds at scale for long. 

Gurri is careful to not come down too strongly on this but offers some predictions for the world might change: institutions of authority must become more open. It’s an interesting nod (head fake?) in the direction of that ultimate fascinating but not-sure-where-it’s-going technology of our day: blockchain. See my show with Steve Mildenhall on that most open of technologies. 

Thanks for listening!

Herding Peacocks

I chuckled to myself as I read about the integration of two big insurance broking houses:

Chris Lay will continue as CEO of the UK & Ireland. Adrian Girling, currently Chairman UK, Europe and South Africa for JLT, will become Chairman of UK & Ireland Corporate and Risk Management for Marsh and report to Mr. Lay. Nick Harris, CEO of Australia and New Zealand for JLT, will become CEO of Pacific for Marsh. Scott Leney, currently Marsh Pacific CEO, will become CEO for Australia and report to Mr. Harris. Andre Louw, currently Chairman of Australia and New Zealand for JLT, will become Chairman of Pacific for Marsh. Christos Adamantiadis will continue as CEO of Middle East & Africa (MEA). Peregrine Towneley, currently CEO of MEA for JLT, will become Chairman of Middle East for Marsh. Robert Makhoul, currently Marsh & McLennan Companies Chief Client Officer and Chairman of Middle East for Marsh, will continue as MMC Chief Client Officer for the Middle East. David Jacob will continue as CEO of Asia. Alan Cheah will continue as Chairman of Asia. James Addington-Smith, currently Asia Specialty Leader for March and April , will become CEO of ASEAN, a sub-region of Asia, reporting to Mr. Jacob. I am the only continues to be CELEBRATION of COMPANIES that are on the road Continental Europe. Ricardo Brockmann will continue as CEO of Latin America.

If that looks like a blizzard of CEOs and Chairmen and my goodness who is in charge here and who cares, anyway!.. be at ease.. you aren’t supposed to understand. That above paragraph is in fact a masterpiece of corporate communication. To see why, you first understand a critical truth about brokers: we are peacocks. 

A Peacock is a status hungry omnivore. Brokers tend to be scrappy and thick-skinned and entrepreneurial while carrying surprisingly sensitive egos. This ego is bolstered by two facts: they control their client book, making them powerful, and the best of them interact with the highest status ranks of client organizations, CEO, CFO, etc. Consequently brokers need to be intelligent and high status in their own right to ‘belong’ in those relationships. Threaten that and you imply they are impostors in their social circle.

Managing egos is delicate work. Here are three things everyone wants:

  1. Status
  2. Money
  3. Autonomy

Supply of these is finite and can be zero sum. Compensation is usually the easiest because salespeople tend to work on commission. Autonomy on the other hand is most constrained. The more one salesperson gets, the more likely she’s going to wander onto another’s turf.

Status is in the middle. It’s primarily mediated by titles and the supply of titles can be increased. Hence title inflation yields a whole slew of the most senior-sounding honorifics scattered around broking organizations.

You could be forgiven for thinking this is nothing more than a ruse to convince everyone they’re simultaneously better than everyone else. It’s not. The political reality of a sales organization is that there really are that many cooks in the kitchen.

These organizations aren’t pyramids, they’re something called a frustum.. And clients like it because more of them can have access to the ‘top’.

Back to the quote above, which serves three purposes:

  1. It’s a scorecard on distribution of influence following a merger of two organizations. Everyone in my office tallied up the score of JLT vs Marsh appointments.
  2. It shows clients who to access to push the organization around.
  3. Finally, of course, it serves the most opaque function of a reallocation of status within the firm. What signals does senior management want to send? Who deserves the roles?

The thing that has surprised me most about management is how much of the success of the job is simply getting along with other managers. You have such a little amount of time to spend building rapport but interdepartmental collaboration is perhaps the most important difference between good and great companies. And this quality of being able to get along with others is radically undervalued, especially by those who don’t have it.

So managing broking organizations is hard but at least sales performance is famously solitary work. One broker’s failure is irrelevant to another’s success. This contrasts with managing empowered risk taking institutions like reinsurance companies or hedge funds where a bad decision from one cowboy can bring the whole house down. Since your fellow trader / underwriter can put you out of a job you’re gonna watch his ass. Yet at the same time these people are enormously skilled and need to feel nearly as empowered as a broker would to put that extra effort in to find great opportunities. What a balance to strike!

I’ll leave you with a clip from my conversation with Bart Hedges where he discusses exactly this problem. Enjoy!

Tyler Cowen Interviews Me!

While my interview guests are getting settled in I occasionally ask them to read out some of the actuarial code of conduct and we discuss it. I’m assembling those clips into some content for my paid actuarial continuing education channel which all actuaries should check out (and get those CE credits before year-end!).

When I did this with Tyler my little warmup act turned into an impromptu Conversations with Tyler where we explore what it means to be an actuary and whether he and I might start a competitor organization! We end with a discussion of fronting and I missed an opportunity to talk about how fronting can enable competition among insurers but that will have to wait for another day!
Listen to the (10 min) clip here!

Episode Transcript

Tyler Cowen:0:29Hello, this is Tyler Cowen, precept five an actuary who issues an actuarial communication shall as appropriate, identify the principals for whom the actuarial communication is issued and describe the capacity in which the actuary serves.

David Wright:0:47Any reaction to that?

Tyler Cowen:0:49I don’t understand it. It seems general enough, it’s probably true, uh, but legally what counts as an actuarial communication? I don’t understand. And, uh, to describe the capacity in which the actuary serves. Again, it sounds trivial, the appropriate, but what it means in practice. Uh, I, as an economist, I’m not qualified to say,

David Wright:1:10Well, I’ll give you a bit of insight on that. There’s a fear overall and it’s an implicit fear. We don’t actually talk about it. Have people misappropriating an actuarial work product. And so the thing with any kind of, I think deep analysis is that it’s subtle and it’s intended purpose is really important

Tyler Cowen:1:25correct

David Wright:1:25for actually the content of the communication and and undefined. You’re right, and they don’t really tend to define it very often. Sometimes people define actual work product as anything an actuary does and you kind of have to define a little bit broadly because of the possibility for misuse. So you email something out, right?

Tyler Cowen:1:39Right.

David Wright:1:39And it says, here’s what my conclusion is, and if you’re not an actuary, you might not understand it. You might take it and say it, that supports my purpose and send it onto somebody else and screw somebody or do something maybe not nefarious, but maybe a little bit misleading or misleading enough that the original actuary wouldn’t want you to do that. And when you would see this is not an intended purpose and I didn’t want you to be able to. I didn’t want to empower you in this way. Uh, I wanted to empower you in these specific ways and so we have to be very careful about defining the, the scope of any kind of work that we do because we are dealing with people who need what we do. So we’re empowered in a certain way but don’t understand what we do.

Tyler Cowen:2:14The real lesson to me is how much background context can be behind an apparently simple statement.

David Wright:2:19Absolutely. Yeah. Isn’t it interesting. And so one of the things that fascinates me, both these I think that the precepts are under appreciated and I think people tend, you have to read them or every year, every actuary has to spend three hours doing professionalism development. So reviewing one of the things that we have to do where they go to talks or seminars or we had to sit down and read the precepts of the code of conduct in 3 50 minute private sessions and then a test that you did it.

Tyler Cowen:2:42And what actually is an actuary legally speaking, is defined at the state level by a licensing process or is it by some other.

David Wright:2:49Great question. So it’s not. So it’s a private organization. It’s endorsed by state regulators for signing off,

Tyler Cowen:2:55So it’s a natural monopoly, somewhat like a credit rating agency or. I would.

David Wright:2:59It probably is. I don’t know that there’s any kind of legislative. So here’s one of the things about insurance was interesting is that it’s state regulated and so there’s this herd of cats being all 50 states. There’s no federal kind of charter of any sort. Now actuaries are. I’m thinking it might get this wrong. I think it’s. It’s not mandated as centrally, but I think that there’s this coordinating process for state regulators to collectively say actuaries are the ones who can sign off on the final statement of financial statements of insurance company insurance is opaque. It takes a long time for the cost to be realized and so you have to have somebody say this insurance company solvent because it’s not obvious that they’re solvent and it’s kind of given point in time and so the actuaries have that power to build a sign off on the financial statements. So there’s. There’s an arrangement there, but it’s not. You don’t have to go to university to be an actuary. It’s a. it’s like a trade,

Tyler Cowen:3:43But let’s say I, Tyler Cowen came along and set up the actuary certification company in New York state.

David Wright:3:48Yup.

Tyler Cowen:3:49And I decided, ah, these seven people that are actuaries, how far could I get with that? Is there a legal problem or just everyone would ignore me? I don’t know. I think everyone would ignore you. You would say, I picked seven really good people. You’re one of them and then next year, you know, I pick another 20 and five years from now I’m picking the best people and I’m doing slightly better than the supposed natural monopoly. Is that a contestable market or do I just have no chance there?

David Wright:4:12I think you have no chance and… But the thing is, I’m not totally sure what the mechanism for the failure is going to be. I think that I know that there you have to attest to the fact that you are an actuary when you sign off on financial statements, but that information comes from the actuarial body. Who, who, who actually.

Tyler Cowen:4:28Right.

David Wright:4:28You know who they write the exams, are they they build the exams that we have to pass to become sort of as an actuary. I don’t know where the mechanism is for the states to actually require that designation or or where it’s embodied in legislation anywhere. I think it probably is.

Tyler Cowen:4:40And what about cross border certification? Say I’m the best actuary in Canada and I want to do something in the United States. Is there a sort of free trade in that service or am I out of luck

David Wright:4:50no you’re out of luck. Well, in Canada

Tyler Cowen:4:52Is there any country where there’s cross

David Wright:4:53In Canada..

:4:54…European Union

David Wright:4:55In Canada there happens to be pretty close to one though. There’s one exam that’s different between Canadian actuaries and US actuaries, if you take. It’s like the accountants, so accountants, you have to actually have a recertification process to be an accountant in United States if you’re one in Canada, and so different countries have certain amounts of overlap between the educational qualifications. Canada is one of super, super close. The UK is not as much and some countries you can apply for an equivalence and you’d get your credential converted and sometimes that takes more work or less work. I don’t know that anybody has a real total clean shot in. I think anywhere you have to go, there’s some local knowledge you have to accumulate usually as embodied in an exam process or an or an application for an exemption from that.

Tyler Cowen:5:30How about within the European Union?

David Wright:5:32Uh, I don’t know. I think the UK is separate from the EU. The EU might be one. I’m not sure on that,

Tyler Cowen:5:38but if I’m a Croatian actuary I would be surprised if I could just show up in Germany and practice without hindrance.

David Wright:5:43I don’t know.

Tyler Cowen:5:44As a matter of fact, that seems to me one of those service areas where the EU is not really close to a free trade zone, at least not yet.

David Wright:5:51Well there. There’s another layer of complexity there because insurance is a, as it was a really long history of insurance. There was conflict between whether it’s a local or a national service. So you can think state regulation, right? It shouldn’t this be interstate commerce, you think it would be a lot of other financial services are not. And so there’s this hole and it’s a debate that kind of goes back and forth a little bit in the history of the regulation of insurance, but also just in the practice of the business as it is today. It’s a very, very local business. And you know, what’s amazing about insurance is that you’re an insurance agent in some small town and there was like, there’s like 3000 insurance companies in the United States compared to like how many smartphone makers, right? I mean this is a business which is non aggregated because the local relationships that people have, you know, and I think that this is, this has to do with what I like to think of insurance as a moral economy, which is like, it’s all really uncertain. We’re not sure what’s going to happen. So we’re going to have to trust each other a little bit here. And as a result, you trust people you know, and you liked the idea of having a local and it’s not something that I would choose myself. I’m with the big guys like lemony other people, but you’re living in a small town. I think you gain comfort from the fact you have a local agent, a local company that’s actually issuing your insurance policy and you’d like that. And so there’s this real low, you know, localization kind of idea. That’s in insurance. And so back to the EU example, it would surprise me if your Croatian actuary could go to German insurance companies because the Germans were like, we want the guys we know, right?

Tyler Cowen:7:05But say I’m a nationwide company, maybe I’m chartered in Delaware, but I’ve branches in all 50 states and I go to the Supreme Court and I say, I don’t want to be covered by any state regulator. I want to be regulated by the federal government. What would they say to me?

David Wright:7:20They don’t have. I mean, I think the federal government doesn’t have the legislative authority. They’re the way that

Tyler Cowen:7:24Well but the court could rule. I’m not saying they would, but what’s their argument for not doing so?

David Wright:7:28So I, I think right now there is actually a bit of legislative precedent or legislative structure for this where the federal government is allowed to regulate insurance where there is no state regulations. There was an act that was passed in the thirties, which correct. Which sort of clarified all of this.

Tyler Cowen:7:41What act was that?

David Wright:7:41Uh, I think it was McCarran Ferguson

Tyler Cowen:7:43McCarren. Yeah.

David Wright:7:44Yeah. And pretty important moment because at that point there was a supreme court ruling actually in the nineteen twenties that flipped from state to federal regulations reports that actually the precedent was wrong. This is really interstate commerce should be federal and then the whole thing blew up and they gave them like they think they gave them five years to figure it out and they said we’re going to, we’re just sort of set a ticker on this ruling and then the McCarran Ferguson passed and rewrote the rule book. And so federal regulation can exist. We’re a state. Regulation is not so state regulation is enshrined in the federal act, but if in some in some lines of business are federally regulated right now, you know there is a, there’s always this movement afoot and Dodd Frank at one point had a bit of a federal regulation of insurance conversion as a part of it and I don’t, I don’t. I think to some degree it did make it through in some degree it didn’t. So there’s always a tension there. So that battle is happening all the time actually. And, and you know, I’m not, I’m not aware of, you know, kind of a blow by blow analysis of it, but it’s not working. Staying state.

Tyler Cowen:8:33But you mentioned trust. So let’s say I’m in mostly a high trust country, but maybe a low trust state or province and I decide I want to do my insurance through Singapore because I trust them more than my local people. Does that ever happen? Is that the wave of the future or it really is about geographic distance.

David Wright:8:49It’s your, your insurance policy is, is as. You aren’t allowed to have one in the United States. If it’s not a federal, uh, not, not, not federally, if it’s not a regulated entity in the United States now.

Tyler Cowen:9:00But they could have a shell of some kind in the US, but the actual business is done in Singapore and I get on a plane to Singapore. I meet them, I shake their hand, I say, Oh, I trust Singaporeans. This is what I want to do. Sure.

David Wright:9:11So that can happen and that happens in my day job I do organize such arrangements periodically, but where it falls down, it’s not necessarily on a preference. It falls down because of the economics or the finance financial arrangement is just not profitable because if margins are too thin and insurance companies and you get to pay another another mouth in the chain just doesn’t make you don’t make any money so you can do it, but you won’t make any money doing it. If you wanted to pay more for it as a consumer, you could probably organize that and you said, yeah, well I’m going to be paying 20 percent more for my insurance premium if you wanted to do that. I could organize it for you tomorrow. And insurance policy through a federal relay Shell.. Front company on front companies, United States with the financial backing of somebody in Singapore. It does happen.

Tyler Cowen:9:47Can we put all this into my podcast too?

David Wright:9:49Absolutely. You got it. Um, okay. So that’s the warmup. Holy Cow.

Blockchain! With Steve Mildenhall

This week I published (mp3youtube) my blockchain episode with Steve Mildenhall and reprised the topic with Steve for a talk at the Casualty Actuarial Society Annual Meeting (see the videos page!). These two ‘events’ were the culmination of a few months-long deep dive into the technology and application of blockchains, particularly for insurance.*

For the sake of this post I thought I’d put down some of the more important reference material for my blockchain education. These sources were invaluable. Enjoy!

Chris Dixon’s comment in this podcast that crypto currencies are the natural funding mechanism for networks was a powerful early aha moment for me:

Here’s Vitalik Buterin’s podcast with (NU Guest) Tyler Cowen (Vitalik invented Ethereum):

Here I learned a lot about the pre-history of bitcoin, which was embodied in BitGold, a precursor in many ways. It was in studying BitGold that I learned that the real innovation in Bitcoin was

  1. The social innovation of getting miners to collectively agree on the latest block by voting with their hashing power.
  1. One other difference was the decoupling of computing power and coins produced. Computing power is a waste product.

and Szabo:

Szabo on origins of money:

You can learn a lot about a technology by learning what the key incremental innovation was that made it work. Blockchains are a governance innovation, a *social* innovation.

Here is another good interview with Buterin:

*I put together a ‘working’ insurance company on my home machine running a local Ethereum node and found the whole experience fascinating. If anyone is interested in seeing it I’d be happy to walk you through the thing.

The Not Unreasonable Book Club-Episode 1

Today I’m kicking off a new series tentatively called the Not Unreasonable Book club to be co-hosted with Steve Mildenhall (who is running for the board of the Casualty Actuarial Society, so vote for him!). Steve is an assistant professor at St John’s University’s school of risk management and former head of Analytics at Aon Re. Steve’s an all-around smart dude and I’m looking forward to learning from him and hopefully disagreeing once in a while!

Books and papers discussed in today’s show (youtube, mp3):

On Radical Markets: Uprooting Capitalism and Democracy for a Just Society by Richard Posner and Eric Glen Weyl

Steve: The basic idea was that you have a wealth tax that would be a self-assessed so you would post your reservation price on assets you own particularly property and you would be taxed according to that to that value but if someone else came along and they wanted to buy it they could buy it at the value that you had posted it

David: that’s your sell price

Steve: yes, it’s kept you honest in your assessment.

David: if you put your too high your tax bill goes up and if you put your price to low somebody will buy your property

Steve: It’s a way around eminent domain problems and hold-outs against construction. If you’re bought every other house along the Train or the right of way or whatever and you know this would be a way of ensuring that those projects that would maybe have a greater of social value would be able to proceed.

David: what do you think about the argument?

Steve: I mean it’s I like it’s concept it sounds great

David: it’s cute

Steve: it is cute. As someone who lived in the same house for 25 years and had an unreasonable attachment to, I didn’t like the idea that someone could come along and just move me out of my house. I did think they missed a couple of points. Presumably if I could post a low price, they could post a price and I could just buy it back. It would be like sniping on eBay auctions where you’d have your listed price and in the back you’d have an actual price you’d bid up to. So it would be a more complicated market than they described. The piece that I struggled with was that they identified the use with the highest value as the use to which the use to which the person who’d be willing to pay the most would put the property and I don’t think that actually is true.

Capitalism without Capital: The Rise of the Intangible Economy by Jonathan Haskell and Stian Westlake

David: one of the ideas that I just love thinking about is the idea that intangible assets have increased as a share of total assets.. insurance companies are maybe not a great example because they’re entirely made of intangible capital..

Steve: Well I’d argue that they’re entirely made of tangible capital

David: Cash

Steve: The cash is the only capital. This is an interesting discussion. It comes down to when a you set up an accounting standard which is what we’re talking about here is what is the objective of the accounting standards and therefore what should I count an asset. And if you think about insurance companies, statutory accounting is around ensuring that claims are going to be paid and so can only count assets that can turn into Cash. If that asset that is not going to turn into cash it shouldn’t be on the statutory balance sheet…

David: Let me go back and try and defend my view that insurance is entirely intangible assets…

The Theory of Risk Bearing: Small and Great Risks by Ken Arrow

Steve: Arrow’s paper has a number of implications for how risk should be shared and what is paper says is risk will end up being shared through a large number of bilateral contract and the net effect of it is that all risk will be thrown into pool and then everyone will Quota Share the pool. And if you do that all of the diversifiable risk has gone away because all the risk is in the pool and you’re just left with the systematic risk ‘what’s the size of the pool’ is the only risk variable that’s left.

David: the only variable that should inform pricing.

Steve: Risk, and people.. sort of the share can come back is inversely proportional to my risk aversion so if I’m more risk-averse I’m prepared to accept a smaller share back in exchange for having gotten rid of all of the risk, right. Less risk averse people will take greater share of volatility. And this was Arrow’s theory that risk was implemented through Arrow-Debreu securities which you may have heard of, which pay $1 in one particular state of the world. So that’s the most fundamental insurance contract if you will and from that I can price any security because any Security is just a combination of these fundamental Arrow-Debreu securities. So this is a wonderful theory when it all works kind of nicely.

David: Except it doesn’t

Steve: It works nicely in theory, I should say. So Ken Arrow’s observation around this is well there should be a lot of risk sharing going on and we also noticed that there’s no place for an insurance firm is in this Arrow-Debreu world… and yet we see them everywhere.

The Nature of the Firm by Ronald Coase

David: An interesting paper that won the Nobel Prize I think in economics which was amazing really for another really short paper and easily readable paper written in 1937 still resonates today. And the question is why do we have firms at all in any industry because if the market mechanism allocates things efficiently to your point there I think but I don’t know if arrows theorem had been.

Steve: It was afterwards.

David: It was afterwards, but we’ll just take it for granted that the economic economic allocation of resources is efficient because of market transactions because you have the price system that governs the value and Ronald Coase says why the heck do we have companies then because companies are not markets they are command and control organizations where you have a CEO telling somebody else what to do and they do it and there’s no price transaction between them.. why? Steve, why don’t you give us the answer.

Steve: [laughs] So the argument against command and control is a sort of amusing everyone looks at the government and oh, the government is necessarily going to be inefficient and stupid at doing things it is so amusing to me or ironic maybe the better would that the theory that sealed that came about just after the second world war that was won entirely on a command-and-control basis.

David: Sure, militaries are the original corporation.

Steve: Governments get this bad rap, but what’s the difference between working in a government and working in a firm…

Do listen to the whole thing!

Many thanks for Steve and feel free to email me with ideas for books we can cover in future episodes at

Are you an actuary? Someone you know? Check out the Not Unprofessional Project, for the price of a CAS webinar you get unlimited access to content dedicated to Continuing Education Credits for Actuaries, especially Professionalism credits. CE On Your Commute!

Subscribe to the Not Unreasonable Podcast in iTunes, stitcher, or by rss feed. Sign up for the mailing list at See older show notes at

The Pestilence of US News

Every morning I get US News delivered to my door. It’s the only dead tree newspaper I’ve ever subscribed to in my life. Lest you begin to think this is some kind of endorsement, know that I never signed up for it, I don’t pay for it and I tried a couple of times to cancel the thing. It’s a pestilence.

When I say delivered to my door, I actually mean chucked out of a moving car onto the bottom of my driveway. This means that every day if I don’t pick the thing up and throw it out it will accumulate, rain or shine. When it snows we inevitably miss picking up a few and after the melt find a few soaked lumps of pulp we then  scrape into a garbage can.

But US News doesn’t care. They’re selling ads. It’s better thought of as an advertisement flier than a newspaper even though every day they publish news stories. And my routine has settled into a grim coexistence with this pest on my driveway. Each morning on my way to work I pick it up and at least get to muse at what headline they decided to put above the fold. It’s a kind of meta-curiosity for me: what is the world focused on today? Then, without even the courtesy of unfolding the thing, I casually toss it into the train station garbage as I jog to my 632am ride into town.

Today I opened it.

US News obviously noticed my haughty indifference and mutated to deliver its payload (advertisements) to its destination (my driveway) more efficiently. You know what doesn’t matter to US News, anymore? The news. Check out the front page:

US News Front Page Advertisement

I realize this kind of publicity is what they wanted but they can only abandon their journalistic integrity once (assuming this is the first time). Hope it paid well!

Disruption in Insurance: Harder than it Looks

I wrote the following long form essay for an industry publication. Enjoy!

Disruption in Insurance: Harder than it Looks

I think it was AirBnB that did it best. And I suppose Uber. These two companies introduced a new way of conducting very old businesses, transforming the experience where most would never think transformation was possible. Taxis in particular are horribly contaminated by regulation and special interest politicking. If they are vulnerable, isn’t insurance? Isn’t everyone?

I am a reinsurance broker and one of the things we do is link startup insurance businesses with the capital and partnerships they need to execute. After a while of doing this, you notice even dissimilar ideas fail for similar reasons, which I’ll get into below. As a salesman I am of course an optimist so think of this essay as a list of critiques you, as an entrepreneur, need to overcome to leave your dent in the insurance universe. I hope you do!

I used the word disruption up there and it (the word) is everywhere these days. However, if you were Clay Christensen, the Harvard Professor who coined the term “disruptive innovation” in a 1996 HBR article and subsequent book, you’d probably be frustrated. The term has become massively popular, of course, but widely misunderstood to mean something like ‘tech startups win!’, which isn’t what he was going for. For one, all businesses use technology and new entrants have always used it better than incumbents. Yet all new entrants aren’t ‘disruptive’. Uber has brought dramatic change but Christensen himself is on record saying he doesn’t think it’s disruptive, in the sense he meant for the word.

Real disruption, as defined by Christensen, is scary. For most companies, being relentlessly focused on the customer is a good thing: know what they want and deliver that with focus, discipline and low prices. Or maybe not! In Christensen’s telling, disruption reveals this strength to also be a deadly weakness.

He defines disruption as entering a market from an overlooked customer base, of which he says there are two kinds: low-end footholds and new-market footholds. Low-end footholds start with “less demanding customers” in that they consume much simpler, lower quality products than the mainstream market. The disruptor then progresses up to higher quality customers. In new-market footholds, the disruptor tackles non-consumption first by cultivating customers who had never used the product, then moves into an incumbent’s turf later. In both cases, the end game is offering the final group of customers an equivalent product to the incumbent’s but at a dramatically lower price.

Startups are trying to do this all the time and they are failing all the time. I picture an incumbent smugly chuckling to himself as a constant buzz of startups tap against the window over and again until they drop. What do they fail? Maybe the incumbent thinks discipline of execution and focus on the customer keep it from wasting time on these fancy pants tech ideas. The poison in that chalice is that a company can get in the habit of dismissing everything new and assuming an old ‘bad’ idea can’t ever become good. Venture capitalist Marc Andreessen likes to roll out the old dotcom bubble whipping post,, and note that, an almost identical business, was recently sold for 3.3bn. Timing is more important than creativity and timing cannot be planned.

In insurance, the best example of real disruption comes from developing countries in the form of microinsurance. Check this out from the Microinsur website:

We have introduced new forms of protection for emerging customers, including micro-health, political violence, crop and mobile insurance all over the world. In each case, we didn’t start by designing a product in a board room – we visited our customers in markets and villages to understand how they cope with the variety of risks in their lives. The result of this client-centric approach is a new suite of solutions, and the opening of a new market for insurance.

This hits both of Christensen’s entry points: new and low end! In listening to Microsinsur’s founder Richard Leftly’s interview, it’s clear he is aware of this, talking about the power of delivering insurance solutions at phenomenally low overhead costs. A good idea, then. How about timing?

Microinsurance only becomes disruptive if it moves upmarket and the challenge there is regulatory: most insurance buying is forced. Compulsory purchasing makes customers stupid, especially at the low end of the market where the smartest bargain hunters live. Regulators set the rules for what customers can buy and don’t want change. And they have good reason! New products make it hard to tell when someone is underpricing to win, later to collapse in a mess the regulator needs to clean up.

Are regulators ready to try something different? I don’t see it but it’s common for insiders to miss signals of coming revolution. That’s the problem with timing, you need to try (and probably fail!) in order to answer the question: why now?

Enter Disintermediation

I think that when people say disruption they really mean disintermediation. Disintermediation is probably the number one ‘swing for the fences’ strategy for any business. Everyone deals with intermediaries and endures their transaction costs for the benefit of accessing a market. Disintermediation removes the transaction costs but also removes the market! Let’s take three examples:

  1. Cutting out brokers (going direct to consumer or agents)
  2. Cutting out insurers (Automated underwriting)
  3. Cutting out everyone (peer to peer insurance)

Each has been around for decades but none has taken off, really. Here are some ideas for why.

*Cutting out Brokers*

Example: direct insurers and reinsurers

Your broker protects you from getting screwed. Screwed means buying something when an identical product could be had for less. Brokers protect by forcing insurers into the ring to fight for your business. Now, insurance is also complex, requiring some expertise to ensure coverages and terms really are identical before you compare prices. Such expertise means brokers cost good money! Is it worth it?

Let’s come at this a different way by asking “do brokers cause more competition or does more competition cause brokers to appear?” I say the latter: brokers are a symptom of competition, not a cause. And competition is not constant, which means the strength of the broker also rises and falls. That, in turn, means there are two ways to legitimately cut out a broker: 1) remove the need for competition; 2) get insurers to compete without a broker.

Removing competition is not as crazy as it sounds. Consider my business, reinsurance: over the last 30 years the market has had several big negative surprises, causing incumbents to question their understanding of certain businesses, opening up room for several waves of startup reinsurers with distinct appetites. No question those were competition-enhancing episodes.

In between those episodes we’ve witness the reverse: appetites converging as the claims environment settled down. This means carriers consolidate to save on costs since they find it harder to secure an underwriting advantage against others’ identical view of risk. We call this a soft market.

Fewer differentiated options in the market makes a direct relationship more appealing. That said, a complete unification of strategy among reinsurers in volatile business will probably never happen. And even then brokers will always have deeper relationships with the marketplace than a reinsurance buyer and that means better deals. A disempowered broker is still the best place to keep from getting screwed.

In direct insurance things are a bit different, particularly in non-catastrophe-exposed personal lines where products are homogenous and margins are thin. There, new entrants are unable to replicate the data of the incumbents and so bear enormous risk of unknowingly underpricing their business.

Critical mass of is not a new problem in insurance. A hundred years ago the market solved it by banding together to create rating bureaus, centralizing the analysis and often prescribing rates themselves. It was an era much more comfortable with collusion and monopoly than today. That solution is showing its age in many lines: the data needed to put together a state of the art personal lines rating plan has exploded and is growing still. ISO, the heir of the rating bureaus, isn’t keeping up. So market participants have two options: strengthen ISO or be huge. They chose the latter.

The real technological development is that direct carriers are passing on discarded customer leads to competitors, in effect creating bilateral marketplaces. GEICO pioneered a version of this by generating a customer, stripping out the auto and partnering with other carriers (mostly large) to sell the other products. The additional cost of passing a lead to another carrier’s system is zero so why not have a world where large direct carriers are all linked up and whichever portal you enter generates an extra fee for that carrier? That would be a market without a broker but can carriers really stop themselves from manipulating the prices somehow or denying access to the market until your reject a higher priced policy first?

As always, cutting out the broker begs the question: how do you know you’ve got the best deal?

*Cutting out Insurers*

Example: catastrophe hedge funds cutting out insurers and reinsurers and going direct.

Insurance deals in risk. Risk isn’t real, really, like buildings or dishwashers or iPhones are real. Risk is a bad outcome we can’t see coming. Since we can’t see it we can’t avoid it.

That’s nice, says the insurer’s accountant, but that doesn’t help me fill out this tax return. How much money are you making and if you tell me none of it is real again you’re going to jail? Well insurers start with revenue for taking the risk (premium) but no claims payments for a while. What should the accountants do with that? Well, before insurers there were two options, a legal one and an illegal one. The legal option is to declare all the policy limits as obligations and put them on your balance sheet. But we can’t just pay today for every bad outcome that might happen tomorrow, there are too many possibilities!  So enter the illegal one –  to just pretend our way to an answer.

Boy the second one sounds way better. But we still have risk! Now the risk is that the insurer really is insolvent and we don’t know it yet. Who takes this risk? Nobody wants it, least of all policyholders who need their claims paid. So the state takes the risk and puts it into a box called a guarantee fund. They charge for that little trick, of course, demanding money and regulation.

Insurer disintermediation is a really about cutting out the regulator but then someone else has to take the insolvency risk. A workaround exists: using a ‘front’, being a business that takes no risk and only supplies regulatory services. All the other functions: underwriting, finance, claims processing and claims risk are all administered by a variety of agencies, consultants and reinsurers.

Fronting companies are really small, financially speaking, because the premium all goes to pay the agents and consultants and reinsurers. There remains this tiny little probability of the reinsurers, agencies and consultants going out of business or not honoring their various promises. They call it tail risk. But the front is riskless, so who takes that?

Great question! In the (non-fronting) wild, the insurer takes it and keeps a few risk absorbers against bad outcomes: premium, capital and the guaranty fund. The thin front doesn’t keep the premium base, being the first and biggest of those absorbers. As a consequence, modern fronts tend to be incredibly selective of what they accept and/or push as much of this as possible onto the other counterparties.

But as soon as you need to quantify the insurance limits exposed you’re back to the pre-insurance era of accounting, declaring all the limits and capitalizing them on your balance sheet. It really doesn’t work:

There are something like 29 million small business in the US. Each has a GL policy for, say, $1m limit and pays probably something like $1,000 for it. In theory, then, there is 29 trillion in GL limit outstanding for 29 billion in premium. That’s a 1000x disparity.

That’s why insurers aren’t asked to hold collateral against all that limit exposed. But the scope for something going wrong is huge and finding a way to absorb tail risks is the challenge in disintermediating insurers. Policyholders with valid claims aren’t going to get a haircut. Shareholders are tiny compared to the limits exposed. To disintermediate the insurance company you need to answer: who gets the tail risk?

*Cutting out Everyone*

Example: reciprocals, pools, captives, lemonade.

Here’s a cartoon example of how insurance works: we pay premium to an insurer who pays it right back to us as claims. Well, they also sit on it for a few years and keep about a third of it to fund the system: brokers, underwriters, finance departments, taxes. A third?! For giving us back our own premium? Yes.

To an economist, literally everyone in the industry, not just brokers but insurers, reinsurers, adjusters, etc, are intermediaries: they aren’t ‘doing anything’, just shuffling money around, keeping some for their trouble.

Exciting opportunity alert! Let’s cut them all out, go peer to peer and pocket the savings. Not a new idea, I’m afraid. Legend has it that the first insurance companies had exactly such a structure: merchants pooling their losses from sunken ships. So literally every other feature we see of the insurance industry was deliberately invented: brokers, underwriters, finance departments, actuaries…

Let’s defend all our jobs by first stepping back a bit. Insurers protect us from random chance (God) and moral hazard (other customers!).

Protecting us from God is about getting enough volume. House fires are too volatile to pool among 10 or 15 friends. And bigger pools are hard to coordinate so you have to pay someone to help with that. Enter the insurance company processing department and perhaps reinsurance for extreme cases.

I’d argue every other feature of our business exists to protect our premium dollars from moral hazard (ie our fellow customers). Think of the merchant in our primordial insurance pool who lies about his ship sinking and pockets the cash. An insurer is really just a pool of money that each insured has a claim to. Is it so surprising some will greedily eye that cash when they think nobody is watching? Defending the pool against wrongful claimants is what the industry does.

But what about customer service! Lemonade in particular uses the idea of insurers’ poor service as its key promotional message. Even granting that customer service is poor, root problem isn’t that insurers are evil, it’s that customers lie! Even forgetting simple fraud, how about the insured that doesn’t repair his sprinkler system because he has an insurance policy? Moral hazard is incredibly tricky (expensive) to identify. Even then, the higher expense of oversight yields massively larger benefits in reducing the cost of invalid or avoidable claims. This makes insurance cheaper! The chance that you need the customer service is pretty low. The chance that you want those hundreds of dollars of premium back in your pocket is pretty high.

So you can think of the insurance market as having found a balance between low premiums, which customers like, and suspicious and skeptical customer service, which customers don’t like. Cut all that out and you have to answer: how do I protect customers from each other?

So It Can’t Happen?

Now, of course Uber and AirBnB, in particular, looked completely stupid at first. Lots of very serious people had lots of really good reasons for why they would fail. And look at them now! The problem is that those serious people, wrong on those two counts, are normally right. Startups capture the imagination exactly because they’re so outrageous and unlikely. In a mostly market economy like ours, the world is complicated and dramatic changes are very rare. Want to make the highest probability prediction for next year? Start with “more of the same ahead”.

The answers you need to the questions above need to be better than the answers the industry already has:

  • “How do you know you’ve got the best deal?” I test the market with a broker
  • “Who gets the tail risk?” Insurance shareholders and guarantee funds
  • “How do I protect customers from each other?” underwriting and claims management
  • “if disruption, why now?”

The answer to the last is to usually point out any number of the cutting edge technologies of the day and scoff at how slow incumbents are to adopt them. I agree there is opportunity there.

But even startups launched by insiders underestimate the reason insurance is different: you don’t know your costs up front. Without a track record of success regulators, rating agencies and reinsurers will slam the door shut. Building that track record takes time. And during that time incumbents catch up and startups often assimilate, are acquired or blow up.

What’s a startup to do? I say don’t fight against the basics of insurance, use them to your advantage instead. There are times new entrants are allowed in. We call them hard markets and they can work as laboratories of insurance innovation. Incumbents lose faith in their understanding of the risk and deliberately retreat. The system is begging for someone who can be more nimble and solve the market problem.

As I write this perhaps the Caribbean is a good choice, decimated by Irma and Maria? These are challenging situations because along with whatever technology a new entrant wants to bring to the market they need to solve a pricing problem for the risks. But the entrant has a pricing problem no matter when they enter. At least they’re on even ground with everyone else in a hard market!

”This article was first published in the Journal Of Reinsurance, a publication of the IRUA – – and is reproduced with permission.”

The Face of the Intangible Economy


In my industry, small firms are going extinct. It’s crystal clear in the reinsurance broker world but the same thing, I think, is happening to all links in the insurance risk chain from agents to reinsurers. Why?

I’m looking forward to an upcoming podcast conversation where I’ll try to make some progress on that question and in advance I’ve been brushing up on all kinds of literature. This year a key book came out, *Capitalism Without Capital* which has interesting things to say about the rise of the intangible economy.

What I love about this book is that it refers to data that is available to download, so I did! My question: how have firms actually been changing over the last 20 years?

The big three intangible categories were R&D, software and something called “organizational capital”. All are growing in the amount of ‘capital’ they represent in firms of all industries though R&D is growing more slowly than overall capital growth (so its share is declining) and software much more quickly.

No big surprises so far and much of the commentary I’ve read on this topic tends to focus the mind’s eye on R&D and software when drawing up interpretations of what is going on. But what on earth is organizational capital? It’s growing at about the same rate as the overall capital growth so its share is constant. Oh, and it’s the biggest (in the UK*)!


To find its definition you need to dig into the source material, specifically this paper by Carol Corrado, where she describes two components of “organizational capital” (I’ve transcribed the description below in a giant quote):

    1. an external component, being money paid to management consultants; and,
    2. an internal component, being the proportion of payroll paid to management.

I haven’t been able to find a breakdown of the internal vs external component. I used the UK data above because it was easier to get the nominal data as a check. This doesn’t include any judgmental adjustments for how much of the spending creates a persistent asset (obviously much time is wasted and some time from managers for example will be spent on things that aren’t necessarily related to intangible assets).

So, compared to fifteen years ago the average firm today spends a ton more money on software, a lot more money on consultants and management and somewhat more on R&D. 

That makes sense to me. More thoughts to come in the podcast.. stay tuned!


*The US data has much more R&D and much more mineral exploration than the UK, the latter of which I think distorts things a bit. Organizational capital is about 15% of the US figures and its share is rising quite fast.

the giant quote from Corrado:

Investments in organizational change and development have both own account and purchased components. The own-account component is represented
by the value of executive time spent on improving the effectiveness of business organizations—that is, the time spent on developing business models and corporate cultures. The purchased component is represented by management consultant fees. The purchased component is estimated using the SAS annual revenues from the management consulting services industry, which rose substantially in the 1990s, from $27 billion at the start of the decade to more than $80 billion during 1998–2000 (table 1.3, line 9a).

The own-account portion is estimated as a proportion of the cost and number of persons employed in executive occupations, which rose very rapidly in the 1990s. Given that executive median pay exceeds the median pay for other employees, the fraction of total private payroll spent on executives and managers is substantial, almost 22 percent in 2000 (Nakamura 2001). Applying the executive and manager payroll share to total private business-sector compensation yields an estimate for managerial and executive costs of nearly $900 billion per year in the 1998–2000 period.

If just one-fifth of management time is spent on organizational innovation, then businesses devoted more than $200 billion per year to improving the effectiveness of their organizations during 1998–2000 (table 1.3, line 9b). This figure is highly sensitive, of course, to the admittedly arbitrary choice of one-fifth as the fraction of time managers spend on investing in organizational development and change; as a result, our estimate for this component ranges from $105 billion (based on a one-tenth fraction) to nearly $350 billion (which assumes one-third). Adding in the $80 billion annual expense for management consulting (described above), our point estimate of total spending on organizational change and development is nearly $300 billion per year from 1998 to 2000.

Interview with Me

I did an hour-long interview with Nick Lamparelli for his Profiles in Risk podcast. Nick and I met when he commented on this very blog a few years ago, an experience that he says inspired him to engage with social media, blogging and podcasting himself. Needless to say, Nick’s rocketed past me in accomplishment there.

In the interview we cover:

    • That time I cried and other exam experiences
    • How my two main jobs now, sales and analytics, are both things I hated/feared before starting work
    • Honesty and being real
    • Reinsurance and the recent hurricane events

Link to the full interview here. I did enjoy it. Maybe there’s something to this podcasting thing. Stay tuned!