Money, banking & insurance

Peer-to-peer Insurance

The global insurance industry is worth $4.6 trillion according to Swiss Re, a reinsurance firm, yet many of its practices have not changed for over a century. Inefficiencies are legion. No wonder two tech entrepreneurs (with no insurance background whatsoever) recently launched Lemonade, an insurance company for homeowners and home renters in New York.

The company’s app appeals to the digital generation and, not surprisingly, first time buyers of insurance too. (Some 80% of its first 2,000 policies were sold to people who had not bought insurance before.)

Lemonade’s business model is based on the idea that the insurance industry rewards the wrong type of behaviour. Over 25 per cent of Americans admit to cheating on insurance claims, which has pushed up premiums. Lemonade’s solution is to reward under-claiming customers by donating money to a chosen charity. Also, instead of expensive underwriters, brokers and sales people, the company uses algorithms, AI, machine learning and chat bots.

It seems to work. Last Christmas a claim was paid in just three seconds after a customer had answered a few questions using a mobile app. Humans will still be needed for more complex claims, but the company could be backing a winner.

So what's the bad news? One big problem could be Big Data. For the company to grow and get smarter, it needs lots of data but, if customer numbers remain small, so will the intelligence of its systems. In the meantime, big insurers with mountains of data could simply use similar technology.

Bye Bye Branches

Between 1989 and 2016 half of UK bank branches were closed, according to the Federation of Small Businesses. This was caused partly by economic circumstances, and partly because of the shift towards digital and mobile banking.

Unfortunately, older customers are most likely to rely on physical branches. For them, the vanishing ability to withdraw cash, especially in rural areas, is becoming difficult. One in three people over 80 have never used an ATM and many banks poorly serve those suffering from a disability, particularly poor eyesight.

The internet is not automatically the answer. In the UK 4 million households have no internet access whatsoever and a further 12 million, largely those living in remote areas, have very poor access. Overall, just 53 per cent of single pensioners had internet access in 2016 and only 7 per cent of over 80s bank online.

The bank solution to this, apart from moving everything online, is to place into branches plucky 20-something ‘greeters’ armed with iPads. For the older generations, this isn’t especially empathetic.

So what’s the solution? One idea might be to use the UK’s 11,600 Post Offices. Compare this network, for example, to the Royal Bank of Scotland with a mere 1,000 branches nationwide.

The March of the Machines

In what could be a world first, insurance giant Aviva has asked all its 16,000 staff whether a robot could do their job. Staff who answer ‘yes’ will be offered alternative roles or retraining.

A study by Frey and Osbourne at Oxford University suggested insurance is the industry most likely to be automated over the next 20 years, with a 98.7 per cent certainty that insurance underwriting jobs will disappear. This seems a little precise, but other studies paint a similarly gloomy picture. (Overall the Oxford study claims 35% of jobs in the UK are under threat over the next 20 years. See our stories, Why the middle class will suffer and Full time for robots; part time for humans.)

A Bank of England study says around half of UK jobs (15m out of 31.8m jobs) will be lost. However, while basic administration, clerical and production tasks are undoubtedly threatened, we should remember we’ve been here before within manufacturing. Robots, automation and computers did remove large numbers of factory jobs, but UK factory employment remains at a record 74.6 per cent.

Moreover, while McKinsey has warned administrative staff within the insurance industry may lose their jobs, it forecasts insurers will need more human employees to sell, analyse and market digital products. More still will be required for fraud protection.

Coming Clean about Dirty Money

Dirty money is pouring into many of the world’s capitals. According to the Financial Crimes Enforcement Network of the US Treasury, around one-third of top-end real estate bought in North America is suspect. In London it could be even more. The money is used to buy up physical assets, especially in the West, leaving no trace of where it came from or who it belongs to.

In the US, some of the money is Chinese or Russian, but most of the cash appears to originate from South America. In London and Sydney, the bulk of this money is Russian, Middle Eastern or Asian. How is this possible?

Offshore tax havens protect against regulation, hiding the true identities of buyers and often protecting them from local taxes. Of course, a substantial percentage of these homes is never lived in or other assets ever used. They are merely ways to safely stash cash or launder money. Corrupt politicians steal the money from their own people or business people do it to avoid transparency.

How did this come about? Before WW2, capital controls largely prevented the movement of money abroad. In 1963, a group of bankers in London created a legal way to hold money in dollar-denominated bonds called Eurobonds, which weren’t taxed or regulated anywhere.

This was the end of democratic control of capital and the start of what is now one of the largest financial markets in the world. These markets are also responsible, indirectly, for promoting corruption and even fuelling alienation and injustice among those without the ability to avoid tax or buy assets.

It’s a boon for corrupt politicians and giant corporations seeking to minimise or avoid tax, but the implications for society and the world have been disastrous. According to the FBI and the UK’s Serious Fraud Office, anonymity of companies and capital is the main reason why the world’s fraudsters and villains are not brought to justice.