Is it Time to Rethink Insurance? The Tip Jar Analogy

Traditional Insurance Response: “The premium you pay is based on the info we have for all insurance policies and the odds of a claim happening. It is also used to cover the high costs of running an insurance company and the time and cost to run the processes.”

I’m not going to disagree with that statement. It is true. That is how the process is built and when a claim is paid, most insureds see the power over this process. But, let’s look at these from a Decentralized Point of View:

  • High Costs and Operations Expenses: In a Web3.0 world these inefficiencies can be drastically driven down. Imagine a community working together to support the underwriting process, data gathering process, and being able to do so in a matter of seconds. What does this mean for the costs traditionally attributed to insurance?
  • Annual Premiums Based on Historic Data: Now, we’ve found a faster way to handle data and we’ve found a more efficient way to manage the operations. So, we can build on this model to create real methods of rating based on projections and predictive modeling. And, worth stating — all controlled by the same community of people participating in the insurance process as well. So, all parties are aligned.

Rethinking the Premium Process — The Tip Jar

Take a minute. Think about how you pay your premium now. Think about getting your renewal information and bill to pay. Now think of a tip car at a coffee shop. Imagine dropping money into that tip jar. Then the next person does. And the next. We are all contributing to the “pool” of money that will go to the employees and have an understanding that it will be divided fairly between them.

  1. You walk up to the big Tip Jar of money for Risk Profile A and drop in your $200 cash. You are given a “promise to pay” in a short form way; readable and understandable.
  2. Whenever you want, you can reach out to The Wizard of Risk Profile A and ask her, “What’s happening with that big bucket of money?”. She tells you whatever you want to know. Total amount in the bucket. Total number of claims.
  3. A portion of that money is moved over to a Red Pail. That Red Pail is taken to Investment Bucket 1. After some time, that Investment Bucket returns the original money to Red Pail plus an additional 10%.
  4. The Red Pail is brought back over to the Risk Profile A Tip Jar and it is dumped in. The result, the Tip Jar now has more money than it did at the beginning of the year to divide between everyone.
  5. Now imagine everyone else who dropped money in the Tip Jar had a great, safe, happy and healthy year. There were no claims. So, that bucket of money set up to pay claims is even bigger than it was before.
  6. You walk up at the end of the year ready to drop more money in the Tip Jar. The wizard looks at you, smiles, and says, “Thanks, but we still have all this money here and it is still enough to pay your claims. You can contribute more if you’d like, but you don’t need to”.
  7. As you walk away, you are handed a $20 bill. Your portion of the 10% return that was provided from the investments into the Tip Jar.

Rethinking Other Processes — Actuarial Royalties?

The same re-imaging can be applied to the underwriting process, the actuarial process, and the claims process. More on this to follow. A little teaser for those actuaries out there:

  • What is minimum premium anyway? If we can pay people in fractions of a penny now, does that impact “minimum premium”?
  • Do I need to be fully indemnified? Were the odds ever in my favor that I would be fully indemnified?
  • What’s the deal with deductibles?

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Adam Hofmann

Adam Hofmann

Building a Democratized Risk Insurance Protocol. I believe in decentralization and the utility it provides. 21 Years in Insurance and still a Musician at Heart.