The Great Hack: Part 3 — DISRUPTIONS

Long before governments got around to changing their laws, insurers changed their policies. After the Great Hack, as a connected device manufacturer you could not get liability coverage at any price, unless the device incorporated those now proven techniques for consensus security. If you purchased a connected device for your home or business, you would be unable to ensure it against damage — or any damage it might cause — unless it followed those same guidelines.

This was not a particularly difficult ask. Long before the Great Hack, a range of companies — from startups through to some of the world’s largest IT firms — offered consensus security solutions. Licensed or purchased outright, their security-as-a-service solutions raised production costs but lowered insurance costs, so the customer saw almost no change in pricing.

That policy change by insurers initiated a set of events began that had lasting consequences for the entire insurance industry. Consensus security, which began as form of risk mitigation, gradually began to be applied across wider swaths of the insurance market.

The transition started off almost invisibly, because it first took root in the poorest areas of the world. By 2020 eighty percent of all adults on the planet owned a smartphone, and for the vast majority of them — earning just a few dollars a day — it had always been understood that sophisticated financial products like health and life insurance were beyond their reach.

Those products were beyond their reach because the costs to administer those policies far outstripped any potential profits. Consensus security systems disrupted that equation. Every individual could now subscribe to an insurance policy, embedded as an app on their smartphone, a policy both approved and backed by similar apps running on a lot of other smartphones. Like a fleet of automobiles, checking in with one another and protecting themselves collectively, these smartphone apps checked in with one another, using consensus security to manage the risk for their customers.

Consensus security eliminated layers of administration and housekeeping, dramatically lowering the cost of insurance by putting it on a device with a well-developed payments system. Policy subscribers could pay in daily — even hourly — increments.

Fraudulent claims, the bane of the insurance business, were handled through a combination of boots-on-the-ground examination and artificial intelligence. A sufficiently large claim would merit an investigation from a ‘claims officer’ — a subscriber who received a reduced price on their insurance, in return for certifying the validity of a claim. Between human and AI monitors, fraud in these ‘microinsurance’ enterprises almost vanished at almost zero cost.

These microinsurance businesses sound very innovative, but they didn’t have to invent technologies for either consensus security or fraud detection by AI, because the financial services sector had cleverly worked out all of these details in the mid 2010s. Nearly every technique microinsurance put into practice was imported from research on the digital currency Bitcoin, whose ‘blockchain’ provided the archetype for all consensus security systems that followed.

Although Bitcoin itself remained a small player in global financial markets, the technology of the blockchain slowly spread through a wide range of financial products, because the consensus security it offered — sufficient to maintain a highly valued currency — recommended it. IBM latched onto the blockchain in 2014, and began work on the consensus security system that protected the few autonomous vehicles not infected by the Great Hack.

At the same time, IBM’s Watson AI research program demonstrated that a computer could absorb enough data to learn to detect patterns and make decisions. Bankers built fraud detection systems using Watson — systems that could learn much faster than humans, analyzing countless streams of real-time data. Such systems became another core element of the ‘fintech’ revolution that unfolded in the last half of the 2010s.

The blockchain and artificial intelligence collided with the insurance sector in the months following the Great Hack. The industry as a whole rapidly adopted these new tools to manage the massive risks of a connected world. For a time, the sector recovered and thrived. But it wasn’t long until insurance markets began to erode — from below.

A microinsurance business built from blockchain-based collective security technologies, and buttressed by AI fraud detection, is, at its essence, a new technique for mutualisation. While microinsurers focused on the very poorest, insurance businesses neither noticed nor cared that a change in mutualisation would fundamentally disrupt their business models.

Only one thing had to change for that disruption: the microinsurance businesses dropped the ‘micro’, and began offering insurance services at almost impossibly attractive prices to customers in developed economies throughout the world. These companies were already well-capitalised, and had fully developed their operational models in the leanest economic conditions imaginable. They were built to be incredibly efficient.

The rest of the insurance industry didn’t stand a chance.

Consensus security, hailed as the salvation of the insurance industry following the Great Hack, led — within the space of just a few years — to its ultimate disruption and collapse, as the existing, expensive, centralised and bureaucratic business models faded before a new generation of insurers that were fast, collective, mutualised, and backed up by artificial intelligence.

It’s a shame no one warned the insurance industry that this day would come.

Now go read my 29 October 2015 column in The Register — “Insurance companies must start buying security companies” — and thanks!

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