This is a commentary to a post by Hugo Wegbrans of Aon - "Blockchain for Micro Insurance"

Hugo's post (check comments and diversity of individuals making them!) is about partnership of three organizations to deliver micro-insurance using Ethereum blockchain to thousands of field farmers in Sri Lanka. That is, three global organizations joined each other in a consortium with a simple mission - ship a product farmers would love.

The three organizations are:

Aon plc, the #1 powerhouse of all global powerhouses of insurance brokerage and risk management world; Oxfam, an organization working to alleviate poverty, active in more than 90 countries, with development programs in Africa, the Middle East, Latin America, across Asia and in parts of Eastern Europe; and Etherisc, an open source protocol to collectively build insurance products and transfer risk of any kind to reinsurers and risk capital providers.

After learning more about the work Hugo Wegbrans and his team do at AON, I got to know a bit of the objectives and challenges they have at hand. This post is to provide feedback items, ideas and opportunities to Hugo and his team at AON, to Oxfam, to members of Etherisc ecosystem, and to fellow industry professionals. Of course, in the spirit of open-source software, I chose note to share these thoughts via private email. Instead, this is published for all (including competing industry) to access, copy and use as they see fit!

TLDR:

Broke.

Everyone in the industry has almost the same, template reaction to all crop, micro-insurance and natural catastrophe products being built or incubated by the Etherisc community, - "Sure, I completely understand that many farmers will be saved from bankruptcy, failure, family and community conflicts because a rapid payout after disaster often is the difference separating survival, and bankruptcy or at least hardship. BUT, it seems to be yet another micro-insurance type, which I know doesn't work, - because there is no money in micro-insurance! However it is nice of you and others working on it. Best of luck with the project."

Woke.

Not everyone can see a potential strategic value (which I estimate in upper single digit $billions worth of premium income over 5 year period) hidden in this and couple of other micro-insurance projects. Even fewer can spot, design or deploy mechanisms capable of creating and capturing this value. At scale.

Below I define the problem, then describe the nature of the mechanism of value creation, and finally hint to one of the mechanisms of value capture.

Who would benefit from this value capture? Beneficiaries (in descending order) are:

Nation states and their GDP-produicng population; Global insurance brokers; P&C risk capital markets such as the London market, Bermuda market; Alternative risk capital providers (ILS funds, hedge funds) and international/national/regional natcat/climate risk pools; Global reinsurers.

Claim:

The three organizations tasked with implementing this project may very well discover a possible solution to solve one of the biggest systemic problems preventing growth of commercial P&C business. To do so, they may use one of the 10+ growth hacking mechanisms which Etherisc provides to those who are building new insurance products, and those you are broking and transferring risks using open-source Etherisc protocol, at no charge and with open source code.

Problem:

One of the biggest competitors to brokers, carriers and reinsurers is.... government!

What a heresy, some would argue, perhaps rightfully! Yet, according to Inga Beal, CEO at Lloyd’s of London, the governments of both mature and emerging markets are increasingly competing with the insurance and reinsurance industry, as governments take the lions share of catastrophe losses.

Surprised? In one of the recent interviews, Inga revealed:

“ One of our major competitors seems to be governments. If you look at the history of major losses in the U.S. over many, many decades, 50 years ago insurers were paying much more of each catastrophe loss than they are now. Each decade the government has been taking on more of the risk and that’s a challenge for us,” she said. Continuing, “50 years ago insurers were paying 80% of the bill of these losses, now it’s about 20% it’s completely reversed.”

What is an opportunity, exactly? Why is it an opportunity? Can you prove it with facts and figures?

The opportunity is to solve the problem hindering the growth of premiums in the global Property & Casualty Insurance markets. - over last decades governments became increasingly self-insured to the tune of hundreds of billions if not trillions in exposure by effectively passing retention of exposure to their own tax payers.

Are there any leading indicators that may signal openings for a change, or a long-term trend reversal?

Apparently, if you collect and sift through enough data sets, one of the revelations you may find is that crop insurance has experienced trend reversal. It is one of the very few risks, where governments recently did a reversal, rapidly changing their mind for some reason, and began moving their exposure from self-retention to (re)insurance.

For example, major countries (e.g., India, China and Mexico) have introduced very pro-active government policies in support of index-based insurance.

Lets examine just one of these countries, India.

In January 2016, India announced its intention to increase the annual state crop insurance budget to more than US$1 billion with the aim of insuring 50% of total land area under cultivation (compared with 23% at present).

In 2017 the budget was increased to $1.5B.

For 2018 the budget was increased yet again, now to $1.8B, - nearly doubling premium volumes already in the billions.

All in less than 1,095 days.

Question. Can you name category of insurance where governments do the following:

Commit to solve the insurance gap with hard cash budgeted towards premiums, allocated and ready to pay premiums; Provide multi-billion dollar premium guarantees; Increase the absolute volume of guaranteed premiums at least 0.16%, per day, over 3 consecutive years?

We are still talking crop micro-insurance, right!? If you still with me, then lets get to work!

A possible value capture mechanism:

Lets assume we (Etherisc, Oxfam and Aon) man up and deliver the hell out of this pilot program resulting in a group of super-happy farmers in Sri Lanka who love the product to the point of not wanting to farm again without it. Uhh, thats hard, I know. Lets not sign up for it. Well, why don't we ship a working product which customers like and provide positive feedback first!? Next, lets assume someone would be interested in capturing $1B+ in premium values, at scale. There probably be a party or two, right!? Together with such party, we sift through data sets the way growth hackers do, and set a goal to validate (or invalidate) the opportunity of scaling this program by 100x to 1000x in 5 years (measured in USD premium volume and/or # of insureds across 10+ perils). Hold on, 10x to 1000x? Are you sure? Isn't it too much? Lets define an optimization problem, and approach it the way growth hackers do. We may end up with a single "thin" solution with portability and interoperability prioritized to the neck. What do we have as a result? Peril-specific, and country-specific "modules" ended up as just add-ons. Lets start small, ship fast, fail fast and iterate as we are build for scale, right!?

Scaling, hah!? How would you do it, really?

To scale this program by 100x to 1000x in 5 years, we obviously would need to work with at least 50+ governments, and with 100+ organizations _on the ground_ in 50+ nation states, while focusing only and only on (let say climate risk). We assume that we will focus on only on one specific perils (an add-on modules, the rest we leave for ecosystem marketplace developers to build and monetize) as we want the solution to deliver unfair competitive advantage against status quo and alternatives.

Ship something people want!

"What are you talking about? Don't cast your Silicon Valley lingo and tricks on me. You know, we are in insurance industry. We are not shipping containers. However, if you are interested in wet marine, we can provide capacity. Oh, boy, do you know that insurance is sold, not bought!?"

Back in 2001 I turned 20 years old, and got lucky to write an e-commerce website which sold insurance online across the 50+ US states. Of course on a commission-only basis. Thats how we roll in insurance, right!? As a result of writing code, shipping, managing servers, doing SEO and PPC campaigns, reviewing server logs, talking to customers, satisfying demands of the State of Florida Commission of Insurance - I learned a thing or two about insurance including the line "insurance is sold not bought" which stuck and keep using it now and then. Years later, let me ask you a question:

Can you turn insurance into something people want!?

I'm obsessed with searching for answers to this very question. All. The. Time.

Claim: Government's monetary policies typically maximize for growth and stability of economy over anything else.

Challenge: How can we turn insurance into a practical solution within the bounds of three constraints:

Helps grow or hedge growth of real economy of a nation state (read "GDP"). Limited to narratives emerging within specific GDP-producing industry or any other segment of a real economy/population. Resonates to the needs, pains and wants of the voting population (last thing I heard applications of Silicon Valley-born growth hacking methods is now a "thing").

Step 1. Build a data set and short-list markets.

For example, if we were to go after risks affecting agricultural-sourced GDP, we could use the following technique to short-list the markets which have underlying GDP growth to be protected from catastrophic loss events:

Different horses for different courses. If we were to go after risks affecting property values, investment attractiveness we would use other data sets. For example, lets look at pains, needs, wants for some perils in the "Property" portion of P&C. You will find that most insureds would love to re-built with resilient infrastructure but can't because the insurance market typically pays for "replacement value" or worse - "original construction value". Compared to agriculture/farm related perils, data sets, segmentation and filtering of prioritization would be different, as well as go-to-market approaches. Despite this difference, you get the overall methodology for this business case is based on filtering down those the few markets where GDP growth may need protection the most, and where we can prove that GDP growth is closely linked, given the ability of GDP-producing population absorb shocks without impacting GDP.

Step 2. Build a business case template.

This one is out of scope of this comment, if you are interested in collaborating on a draft -feel free to email contact@etherisc.com (some of our team members monitor this email box, me included), or use InMail feature of LinkedIn.

Step 3: Gauge interest through a 5 day "question - proposal" turn-around cycle with an easy go/no go decision, with an easy next step if a "go".

In this step we reach out of nation heads and global leaders. With or without growth hacking applied. Without growth hacking, we reach out to gauge interest in growing GDP, protecting growth of GDP. How do we fund this? For many thats a standard B2B revenue gen - PR + marketing + sales + thought leadership. A "tried and tested" exercise for many - 10 channels, 10 markets, 10 campaigns. Run first 10%, pick the best combination of campaigns where cost of customer acquisition vs expected total customer lifetime value is the highest. Rinse/repeat.

Field organizations will ask, of course - "What are we selling? What is our Unique Value Proposition? What do we tell the customer? Can you provide a template to copy-paste?"

Sure. Here is a template for your area heads:

“Dear Mr. President (replace with "Governor", "Secretary of State", "Minister of Interior", "Minister of Finance", + CEOs/Owners of top 20 exporters/importers).

"We are writing to you as we may have a solution to grow your GDP and/or protect existing growth. To receive a proposal, could you please:

a) Could you please name 5 segments of your GDP which you need to grow and/or protect as reliably as possible against failure

b) Could you please name 5 of your most valuable yet vulnerable citizen classes and industries to climate risk, nat cat, and currency risks

c) Could you pick one or more following perils - storm winds, storm surge, drought, riverine flood, earthquakes, tornados, or any other risk which impacts GDP or even causes trade deficit (i.e. your sovereign currency appreciation/depreciation vs currency of major trading partners of your state).

... Upon receipt of answers to questions a), b) and c) our non-profit, consortium-led group will design and develop a possible solution to increase GDP growth of your country, and/or soften GDP volatility. Exhibit A will provide a narrative which addresses the top needs/wants/fears of citizens and industry segment(s)".

"What is your USP" you are asking?

Compensation conditional to GDP growth or GDP resilience. No hands, no cookies, right!? Enough of exploitation of your country. Our proposals never push interests of a single global corporation. Anti-corruption penalties (monetary punishment) are automatically administered to those who want to rob the state and appropriate tax-payer's money. Such penalties administered in real-time, for each and every occurrence of corruption.

Q: "We have this problem of little money reaching the farmers. How is it so?"

A: Well, the solution features an provably honest and transparent funds distribution with real-time audits of honesty.

Q: "What do you mean, provable? How can you you prove it?"

A: Well, have you ever seen cryptographic proofs for price transparency and compliance? Check it out now how it works in country X. Visit www.abc....org, or dig into 0x.... - reporting based on an immutable ledger. And no, you don't have to trust us.

Q: "Why is it so? You mentioned some sort of anti-corruption which are administered in real time? What are the penalties, exactly?

A: While some may attempt to engage in corruption while we are at work growing and protecting GDP of your nation state, these shady individuals will have to spend at least $200,000, per hour, to slow down the network serving the data you are seeing, and $5B+ to to tamper with the data about policies, premiums, exposures, and who earned how much of taxpayer's money."

Q: "You know, we don't have much budget for IT. How much will such anti-corruption system cost the taxpayers?"

A: $0.05 to $0.50 to activate and permanently store a batch of 1,000 to 20,000 policies, their premiums, exposures, payouts, and earnings of the middle men (you pick how often - hourly, daily or weekly, and how many policies you send, per batch, to the "anti-corruption system").

Q: "You are kidding me, right? Why is it so cheap, exactly?"

A: No kidding. It is so cheap because its a public good. You know, like a Central Park in New York.

Q: "Can we use this "anti-corruption" system for other use cases?"

A: Why not, - anyone can use it, agencies, cities and schools, for any use case they see fit, and inspect its source code if they wish to do an audit. Because its a public good. Belongs to the people. Like a Central Park.

Nice idea, thanks. Can you do it?

We at Etherisc can't do it alone. So we decide to partner. Then the question becomes - - are there ANY organizations capable of executing a solution to the problem of competition with governments (retention of risk instead of risk transfer to open markets by the sovereign and their taxpayers) without a conflict of interests (posed by any single or consortia of reinsurers executing such solution)?

If you ask around the industry, a handful of organizations would be named. And one of them likely to be Aon in addition to obvious choices such as World Bank and Oxfam. Why Aon? For three reasons, perhaps - a) Presence in 120+ countries b) Neutral to the source of risk capital c) Leadership - many leaders now pro-actively embrace change, experiments and challenge (guess which brokerage sends 10+ people to Silicon Valley for one-ones with growth hackers and builders who "ship code")?

Lastly, some of of you, dear readers, wonder - "What is the rational behind open sourcing strategy, source code for software, underwriting rules, and even pricing models? What is their motivation?" To this I say:

If the insurance industry embraces open source, every major problem would need to be solved only once. Until then, every participant in the value chain will keep solving the same problems, in isolation, while the insureds will keep feeding us, and keep paying for it all.





Conclusion:

I could be wrong, but we very well could be on the verge of an amazing opportunity to start breaking down - one of the biggest barriers hindering growth of global Property & Casualty premiums - competition of (re)insurance and governments.

Beyond this, while we are creating and capturing value together, lets look at engaging others in the industry, and lets look at vehicles which could help us deliver thought leadership, and provide plenty of nurturing materials to the colleagues in the fields. For example, what about PRGDP Partnership for Resilience of GDP - one of the most effective Public-Private Risk Partnerships between between governments representing their citizens tax payers, and the risk transfer industry!? Don't bother googling PRGDP as I just came up with this abbreviation to test a hypothesis wether PPP narrative is strong enough to explore further:)

Go Aon, go!

P.S. I wanted to say special thanks to Tobias Noack. Tobias, this post would not be here if not for you, and your relentless campaign to bring this project forward! Quick question - I've heard about this thing called "Aon United" - is it for real or it is a PR exercise? The reason I'm asking is that deployment of global projects to nation states/Global 2000 is not something you deploy. There should be something that deploys you:) Just like those rocket launchers from SpaceX!

P.P.S. What market signals are YOU seeing? Are there any leading indicators that may signal openings for change or market openings? If you do, please share in the comments. And if you are are contemplating about quitting your corporate job and start shipping, reach out to me!