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Ken Brandt (episode page) is the co-President of Underwriting at Trans Re and we recorded this episode on June 3, 2020. COVID-19 remains a pretty big unknown and my own initial feeling was that it wouldn’t be a big deal for insurance. My thinking is changing on this.

Let me pull out some quotes on the best and worst case scenarios for insurance from Ken’s perspective. First the Best Case:

Ken Brandt: I think our best and now I think more realistic market scenario is we actually get paid appropriately for the exposures we’re taking on… and they’ll be reinsurance pricing momentum and the opportunity to provide our customers with, you know, quality return solutions at a fair price is probably better, better now than it has been in the last decade.

DavidWright: Why?

Ken Brandt: Well, that’s a good question. Why we you know, it’s not like someone woke up and announced, let’s alter in the market together. You know, it’s coming from pain and anticipated pain. So if you look at what was happening, pre pandemic, the market was already moving in several large areas, particularly in the US, particularly in casualty lines…

Here’s Ken on the Worst Case:

I mean, let me without a doubt the worst worst worst case scenario, not just for trans re, the industry, is what we’re kind of hinting at here and that government or legislature’s retro actively push in business interruption coverage where none was intended. To me, that’s what do they call it when the meteors supposedly wiped out the dinosaurs.. extinction level event? Yes, that’s an ELE, you know, the industry is not capitalized for that, or will ever be capitalized to take on a large portion of the damage done to GDP by a global pandemic. So, now, I don’t think retroactive coverage is going to happen. But that’s still not resolved. But that would be a very, very bad outcome for translating for everyone else in the industry. Outside of that, you know, I think a worst case for for us and many, many others, obviously, is that COVID losses kind of hit the higher end of some of these estimate ranges. And maybe the market has additional cats along the way….

David Wright: and it’s fascinating to me about about the answers. If I think your best case and worst case scenario is, is there actually a difference of kind not really a difference of type, right, and so it’s like the best case scenario like we know we’re going to get losses. The best case scenario is the losses are bad enough that it wakes us up. But not so bad that it takes us out. And the worst case scenario is it takes us out.

Ken Brandt: Right? It’s a simple business, David

In the insurance industry some surprises are good for business because they remind the rest of us that not everything is predictable. But handle that dynamite with care! Maybe the surprise is even scarier than insurance geeks imagined. When society is rocked to its core, assumptions for how the world works must change. There’s a doctrine called legal realism that basically says the law is what people want it to be. If there is a dire social need to extract money from the insurance industry, out it comes. They’ve got the guns after all. 

I don’t think insurance will be nationalized but that thought is rooted in my belief that we will come through ok in COVID-19. If things get worse, the social contract of “we as a society will let you keep your money”, among many others, will get rewritten.

Jennifer Brady (episode page) is the Executive Director of Oasis, a non-profit helping women, teens and children rise out of poverty in the greater Paterson, NJ area. Among the many, many things that are concerning about COVID-19, I think the most underrated is how this pandemic will afflict the poor. Jen and I cover a lot of ground in 30 mins, including:

• How has the ‘COVID lockdown’ affected the working (now not working!) poor?
• How able is this population to comply with CDC-recommended social distancing and other prevention practices?
• What might be the social and political ramifications of substantial infections among the poor?

Think about huge groups of people that are predominantly first generation immigrants with poor English skills, highly concentrated in multi-generational homes (including the elderly and little children) and with high incidence of pre-existing health conditions. I can’t imagine a higher risk population.

What do politics look like when huge swathes of already marginalized people come down with a highly communicable disease that the richer parts of society overcome? And by politics I mean the potentially very ugly post-COVID politics where progressivism is dead?

Dark stuff, of course. The response Jen and the staff at Oasis are seeing so far is encouraging but there is a version of the future where when it turns worse when nobody is looking.

My guest for the latest episode (episode page) is Christy Ford Chapin (@christyfchapin), who wrote *Ensuring America’s Health: The Public Creation of the Corporate Health Care System*, which covers in enormous detail the historical origins of the US Health Insurance system. Here is my opening question:

David Wright: You wrote a paper with a great name: “Going Behind with the 15 Cent Policy: Black Owned Insurance Companies and the State“. So please tell us about the name, but also about the central idea. That is why black owned insurance companies were, at the dawn of the 20th century, at a disadvantage. And I mean in addition to fighting explicit racial segregation and usual things we associate with this line of thinking. Black owned insurers had an even harder battle to fight, right?

Christy’s central narrative is that the American Medical Association was the linchpin player in warding off the alternatives to the insurance-centric model. Today this would be a right wing effort but their position doesn’t conform to our familiar political battle lines. As they say, The Past is a Foreign Country, they do things different there. Try this:

Christy Chapin: …and it’s funny because a lot of people have thought have assumed that the AMA… I’ve seen other scholars err in thinking they assume that they’re pro-market because they are anti-government. Not at all. That’s just not the way ideology worked back then.

There is much more on that and so much more still, including the variety of alternative systems in the early 20th century, how fraternal associations were the original insurers, whether the political diversity of the US was really to blame, whether Medicare would have been passed if JFK hadn’t been assassinated and, of course, what discussion of health care is complete without an exploration of cost:

David Wright: I see lots of references way earlier than you think in your work about people kind of wringing their hands and complaining about the skyrocketing costs of health care.

Christy Chapin: Right

David Wright: When was the first was the first instance of that that you can recall?

Christy Chapin: Oh, it’d be hard to say because and also this book gosh, It came out in 2015 and haven’t worked on it so and now I’m working on finance. It was so long ago, but I am thinking about how I did look at some reports in the 1920s. And it was a problem before that because, you know, the discovery of germ theory end of the 19th century….

I used to think that health insurance was different than other kinds of insurance but I’m not as sure anymore. It’s incredibly important to us and yet it’s also a rare case of insurance that isn’t compulsory. Auto, Home, Workers Compensation, even most forms of commercial insurance are mandated by third parties and each has its own unique reasoning for being compulsory. Health’s unusual mix of voluntary purchase and extreme importance is what attracted me to the business. It’s surprisingly a lot like reinsurance! 

In the coming weeks and months I’ll be exploring all kinds of great topics, including more on the history of insurance, Artificial Intelligence algorithms, theories of the mind, managing AI teams, theories of why consumers choose and occasionally some real hardcore insurance geekery. Thanks for listening folks, you can reply to this email to reach out any time!

My guest for this episode is Ty Sagalow (episode page), one of the founding members of the Lemonade Insurance Group. Ty has held various underwriting and product development position at AIG over his 25 year career there and served as Chief Innovation officer at Zurich North America and Tower Group before joining Lemonade as its first Chief Insurance Officer.

Ty wrote a book about his Lemonade experience called the “Making of Lemonade” which is the topic of the interview!

We cover all kinds of ground in the conversation but I didn’t take long to get to the heart of the matter. The thing that distinguishes many tech startups of course is that their technology is so great. What is that like? Here is a relevant bit:

Ty Sagalow: If you want to create a new process, it’s a thousand times fold better, you’ve got to start from very beginning, start completely from scratch and that takes a different type of way of looking at things. Um, and I’ll give you, I’ll give you one of my best examples.

So, um, we were at the tail end of almost getting all licensed from, uh, from New York and they wanted to make a number of changes, a dozen changes. So I call up Moshe and I say Moshe, we need to make a whole bunch of changes. So I start rattling off these changes as fast as I can and I’m hearing clicking noises in the background and at the end of, by dozen changes, and I’m saying as quickly as I can, I say to Moshe, do you got that? And he says, what do you mean Ty? And I said, well, have you taken note of everything that I’ve just told you we have to change? And he said, no. And I said, Moshe, why the hell not? He says, well, I made the changes as you were saying them should, should I have not done that? Should I undo the changes? And I said, [laughs] no, you don’t have to undo the changes. And that’s the last time I ever questioned Moshe Lieberman. If I was dealing with a traditional insurance software provider, I would have to send that in email. It would then prompt a meeting, which would prompt a number of emails, which would prompt then a number of meetings and maybe six months later I would have it.

It’s worth pointing out that this explanation, that building a system from scratch is better because of the flexibility that developers have in using more modern techniques appears to fly in the face of software development orthodoxy. See Joel Spolsky’s famous post Things you Should Never Do: Part 1:

…they did it by making the single worst strategic mistake that any software company can make:

They decided to rewrite the code from scratch.

…

There’s a subtle reason that programmers always want to throw away the code and start over. The reason is that they think the old code is a mess. And here is the interesting observation: they are probably wrong. The reason that they think the old code is a mess is because of a cardinal, fundamental law of programming:

It’s harder to read code than to write it.

Contrary to popular belief, most software ages more like wine than cheese. Bugs are hard to find and take enormous time and care to replicate, isolate and eliminate. Software needs time in users’ hands to become fully functional and to the extent that it looks like a mess that just means it reflects a messy reality and complexity in the operating environment.

On the other hand! There is real progress in software development tools, especially since modern consumer businesses are vastly greater in scale than before. One very (the most?) interesting innovation actually honors Joel’s quote above: microservices. This is the philosophy that software should be built of detachable component modules that you can replace if you want. A piece of software tends to be an accumulation of a lot of different functions (ingestion, storage, billing, reporting, etc) and these can be made architecturally distinct. If you want to totally change your web app you can just pull that part out and keep the rest together. This lets you keep the wine and throw out the moldy cheese.

That doesn’t mean I disagree with Ty! There’s a difference between licensing systems and building systems and I think an important exception to make for software that supplies the critical business function of a firm. And for an insurance firm that means recording its history.

Every company is different and every policy management system needs to be just as different or the insurer will be hopelessly unable to adapt the system to their needs.

So if you licensed a vendor system and you’d have to rewrite most of the software to suit your needs anyway, you might as well not pay for the legacy code you won’t use. That means that the new code (your code) is written by a few developers who, if they are good, can make changes quickly because they don’t need to read their own code, it is already sitting in their heads.

Yes you need to have a developer good enough to code a system almost single-handedly, and overall smarts and development knowledge is definitely a critical advantage of the valley startups.

The rest is maybe just not being afraid of building your own software!