Time magazine's 2010 Person of the Year is going to reinvent the insurance industry. In 2011, when he is no longer able to be insured under his parents' health policy, he will understand the industry more.
Mark Zuckerberg, the 26-year-old CEO of Facebook and 35th richest person in the U.S., has attracted more than 500 million users to his social networking empire. Facebook has been reported to account for as much as 7 percent of all Internet traffic.
The insurance industry is facing challenges that make it ripe for a "Napster Moment," the moment when some other industry steps in and redefines the game. Zuckerberg is just the guy.
You understand why the moment is nigh. The insurance industry faces shrinking distribution, increasing regulation, public scrutiny and market dynamics that nobody can seem to keep up with.
Many are looking to tangential industries for the answer... investments, banking, even retail. I am betting on the younger, dark horse Zuckerberg.
Facebook and Social Media in general have three key elements that are required for insurance to work:
1. A large, diverse pool of people
2. The ability to track and store large amounts of data and make predictions from it
3. Social awareness of the burden of uninsured risks
And it has four things that today's insurance industry does not have, but probably wishes that it did:
1. Significant levels of involvement and engagement by users
2. Viral marketing power
3. Instant feedback about what people like, dislike and what is attracting the most attention at any given moment
4. A hedge against antiselection (Yes actuaries, lean into this one....)
Before insurance was created, communities dealt with the threats of risk and destitution with a method that was affectionately known as "pass the hat." When the breadwinner of a family died or became severely sick or injured, communities would respond by taking up collections to help the family get by, and thereby avoiding them from becoming a burden on society. In the 1700s, Lloyds of London had the idea to execute this collection process "in advance" of the events versus "in arrears." It would then take the reliance off of the generosity of others and into structure. They called the contributions premiums, and they set it up so that only those who contributed their fair share would be eligible for any benefits when they needed them. The concept of pooling of risks made this more effective than passing the hat, and the innovation of insurance was born. In the case of life insurance, the government gave incentives in the form of tax benefits to encourage the use of this vehicle for the good of society.
Over time, the industry shifted its focus to older, wealthier people who could afford to maximize those tax benefits, leaving many younger families underserved. In addition, the economic risk of death is not as catastrophic as it once was, causing the product to become less relevant.
If you are to get into the heads of today's younger people, they would probably be more favorable to the life insurance industry if it defined itself as being in the "lifestyle continuity" business. That is, making sure that any risk of messing up their future plans is covered.
So what happens when a 20-something falls victim to one of these risks like losing a job, getting very sick, wrecking their car or losing their home? They could go home to mom and dad, which is one option. But what if they don't have parents or their parents don't have the means to help them? They turn to each other for help. And they are a generation of kids very willing to help those in need. They are interested in social good and sustainability. So they "pass the mobile device." And they put their troubles out on Facebook, and they ask for help -- and often get it. What if this ability was more formally structured? And the method for collecting and distributing funds was simple?
More than $24 million was raised for Haitian relief after the earthquake in January of 2010, and it was all done with text messaging in a matter of about a week's time. A bank never touched the money. The telecom companies were the ones that got to handle it for a moment.
Now, if you combine that ability to collect and distribute funds quickly with the power of a social network, the "Napster Moment" in insurance is born. Facebook has the opportunity to cover the risks handled by the insurance industry today.
And you actuaries who were waiting for the antiselection hedge, it lies in the transparency of knowing who is contributing and who is receiving benefits, as well as the lifestyles and habits of these individuals. Someone who is a bad risk to the pool (i.e., a particular social network) will be addressed by the group. It's all out there for people to see.
I suspect Mark Zuckerberg is not reading this article; however, I also suspect that he doesn't need to in order to come up with the idea. Could an insurance company lead this instead? With the right innovation process and "out-of-the-jar" thinking, perhaps. Maybe I should post this suggestion on Facebook and see who "likes" it.
Maria Umbach is Vice President for Financial Services Innovation at Maddock Douglas, Inc, an agency of innovation focused on helping large brands bring new ideas to market.