Insurance: Who’s Looking Out For You?

Walter Isaacson: You may not notice it if you’re not looking for it, but there’s a rare and peculiar historical artifact attached to the front wall of a magnificent old building in North London. The building is called Forty Hall, a grand 17th century manor house built by Sir Nicholas Winton, a merchant known for both his fine velvets and this short tenure as lord mayor in London in 1632. But it’s not Winton’s luxurious textiles or his political career that make his home unique. It’s a piece of metal affixed to the exterior wall. Lead plates like this were once found all over Britain’s capital. They came in an assortment of shapes, sunbursts, hands clasp together, and perhaps, most appropriately, a phoenix rising from the ashes.

They were known as fire marks. To understand their significance, we have to go back to a calamitous week in September 1666. That’s the Great Fire of London swept through the city, destroying just about every building in its path. The devastation was immense and almost overnight brought a new industry into existence, fire insurance. One year later, the first fire insurance company of its kind, which would eventually be called the fire office, opened in London. Homeowners would pay an annual premium. And if their house was lost to a fire, they’d be reimbursed. Naturally, the fire office would prefer if its clients’ houses didn’t burn down, and that’s where the fire marks came in. The company assembled its own private water brigade to protect its clients’ houses.

But, they didn’t want to waste their resources on anyone who wasn’t a paying customer, so they handed out those metal fire marks in the shape of a phoenix to affix to the front of their policyholders’ homes. If one of them happen to catch fire, the brigade would arrive, see the mark, and do their best to put it out. If you didn’t have a fire mark on your wall, well, you were out of luck. I’m Walter Isaacson and we’re listening to Trailblazers, an original podcast from Dell Technologies.

Speaker 2: Prospects received are people who need insurance.

Speaker 3: Life insurance companies have issued policies to more than half our population.

Speaker 2: Of course, Sam knows the value of insurance.

Speaker 3: A business founded on a basic need in human nature for protection and security.

Speaker 4: I just took a policy from you last week. Remember?

Walter Isaacson: Ever since merchants started piling valuable commodities onto ships and sending them over stormy seas in search of profits, we’ve tried to mitigate the risk and hazards that life inevitably sends our way. As far back as 1750 BC, the Code of Hammurabi included a provision to protect merchants from having to pay back loans if their ship sank. In the 1600s, as precious goods traveled back and forth all over the British Empire, merchants would meet in Edward Lloyd’s coffee shop in London to purchase policies from investors covering any losses if their ships met one of the many perils of the sea, such as storms, shipwrecks, or pirates. Today, insurance is a trillion dollar industry in the United States.

While the history of insurance as we know it goes back millennia, new technologies mean that this very old industry is still evolving. The word risk is commonly used in our everyday language, but that wasn’t always the case.

Jonathan Levy: Risk, the very term comes out of insurance markets. Specifically, it comes from marine insurance in networks of long distance trade going way back into the ancient world.

Walter Isaacson: Jonathan Levy is a professor of history at the University of Chicago and the author of Freaks of Fortune: The Emerging World of Capitalism and Risk in America.

Jonathan Levy: I’ve looked at these merchant records and there’s no maps, there’s no contacts, there’s very little certainty. You’re sending a ship out on the Mediterranean or later on, the Atlantic Ocean. It’s going to take a year for it to come back if it does. It’s an extraordinary commercial risk to take and quite quickly merchants think about ways that they could hedge their risk. Quickly they develop a specific contract where if the ship doesn’t come back or if property is lost, there’s compensation.

Walter Isaacson: The contract was known as ‘the risk’. While insurance protected the merchant’s investment, the underwriters who provided those policies wanted to limit their own liability. They came up with an idea where the insurance policy was carved into portions and sold to other underwriters. It was insurance for insurance companies. They called it reinsurance.

Jonathan Levy: One way to diminish risk is to diversify it or to take debt to chop them up to sell them to spread the risk across multiple parties. When this happens, oftentimes throughout history what you get is an almost magical belief that merely by spreading risk and diversifying risk across parties that we can eliminate it, that we can diminish it completely, and that’s not true. To some degree, we’re just moving risk around to different parties. And oftentimes, financial crisis, financial panics arise at moments where there’s a realization that actually in our attempts to diversify risk, we’ve forgotten that the risk still exists.

Walter Isaacson: For centuries, the insurance industry thrived in the marine trade. Eventually though, it moved inland and into the lives of everyday workers.

In the 19th century, the factory workers and miners who powered the industrial revolution realized that if they should be injured or die suddenly, their families would be bereft. Their need to hedge against that all too common possibility produced a new insurance model, life insurance. If a worker died as a result of an on-the-job accident, there would be something left behind for their dependents.

Jonathan Levy: The realization that our own selves, the property we own in our own selves as free persons is like a commodity and that we could think of our life course, we could think of aging across the life term much like a ship traveling overseas and that we need to protect and insure our property interest in ourselves. On behalf of others, the critical party that has an insurable interest in life and that’s the family. Life insurance both kind of brings about that practice and really creates a new consciousness that actually risk is not just on the high seas, that risk is everywhere throughout our lives.

Walter Isaacson: It wasn’t an entirely new concept. The basic idea of life insurance actually dates back to ancient Rome when burial clubs would cover their members funeral expenses and help support their families.

In the late 19th century, the idea had begun to take hold in America. By the 1920s, Americans had purchased over 117 billion dollars worth of insurance. From there, it was a short leap to another form of personal insurance, one that is still the focus of heated political battles to this day. Since of the passage of the Affordable Care Act in 2010, health insurance has been a hot button topic. Healthcare is so entrenched in the insurance industry model that it’s easy to forget that managed care, as is most commonly practiced across the US, hasn’t always been the model. Until the early 20th century, Americans generally paid for their care on a per service basis, but this involved so much financial risk to patients who could be saddled with enormous bills when some unforeseen emergency arose that by the 1920s a variety of different approaches was emerging.

The goal was to provide more stability and help dealing with unexpected costs.

Christy F.C.: About 100 years ago, the healthcare market was actually quite vibrant.

Walter Isaacson: Christy Ford Chapin is an associate professor at the University of Maryland Baltimore County and the author of Ensuring America’s Health: The Public Creation of the Corporate Healthcare System.

Christy F.C.: There were lots of different groups that were experimenting with different ways of organizing and financing the healthcare market. Probably, the most interesting experiment that was going on is prepaid physician groups or prepaid doctor groups. What you had is a group of physicians as the name suggests, but unlike today, they weren’t a single specialty group. You would have a group of different specialists, no general practitioner, surgeon, OB, kind of like a one stop shopping. What patients would do is they paid a monthly fee not to an insurance company, but directly to the physician group and that tied the physician to the bottom line, which was really important for controlling costs.

So the physicians, they didn’t want to just run up a bill like they might today under the insurance company model because they were acting as the insurer themselves, so that wouldn’t make sense. On the other hand, they didn’t have any incentive to ration care because then they would lose patience, which would mean they would lose money and also they wanted to keep their patients healthy because that was also in their best financial interest.

Walter Isaacson: At any one time in the 1930s, they were between 300 and 500 prepaid physician groups operating in the country. But, these groups had an adversary, a potent if surprising foe, in the form of a well respected organization that still exists to this day, the American Medical Association. Their intentions were perhaps understandable. At the time, the AMA was wary of ceding any power away from physicians and towards administrators or government officials, who they were concerned would overrule their medical expertise. They were even opposed to the very idea of health insurance. Also, the prepaid model challenged the system that the association preferred, fee for service.

The AMA was capable of flexing considerable muscle to defeat any healthcare model they felt threatened them, and flex they did.

Christy F.C.: And they were actually very successful with shutting down these experiments because they had control over licensing and a lot of power over hospitals. So they were able to have physicians who participated in these models, they could often get their medical license revoked. They could have hospitals rescind their admitting privileges, so it just became too dangerous for physicians to continue with these experiments. But, the problem for the AMA was they’re creating this vacuum in the market.

Walter Isaacson: Something had to fill the vacuum. Opposed to both government intervention and private health insurance, the AMA eventually went with what they thought to be the lesser of two evils. They agreed to bring insurance corporations into the healthcare market, but with a strict set of guidelines.

Christy F.C.: The insurers were not allowed to pay physicians on a salary or a per patient capitation fee. It had to be fee for service, which meant when a patient went to a physician’s office or to the hospital, every single service and procedure that was offered in that visit would go into the bill. There’s no set flat rate for going to visit the doctor. This is not exactly a very good deal for the insurance company because they have to finance a supply of medical services for which they can’t even forecast what that’s going to be and they have no control over limiting it. In fact, it’s such a bad deal for them that they really don’t want to have anything to do with this model just because it was so inefficient and inelegant and just everybody recognized at the time it was not a very good model.

Walter Isaacson: Private health insurance began to boom in the U.S. after World War II during which time wages were controlled by the federal government. Companies had little wiggle room on salaries, so health insurance became a perk that the companies could offer to attract employees and employer-sponsored coverage became a norm that remains to this day. At first, at least from the doctor’s point of view, the system worked great. The insurance companies where at such an enforced arm’s length from their practice that the model was extremely profitable. But with little oversight and fees paid on a per service basis, it was also easy to abuse.

Christy F.C.: During the 1950s, there’s a crisis that is covered in the press about unnecessary surgeries. You start having the pathologist in some of these hospitals testing tissue after, for example, appendectomies and saying “Wait a second, we expect 10 maybe 12% of these come back as healthy tissue and an erroneous surgery that maybe shouldn’t have happened. But if we’re finding 60%, 70% with appendectomies, hysterectomies, this looks like physicians are simply doing these surgeries in order to collect an easy fee.” So that gets a lot of bad publicity for the AMA.

Walter Isaacson: That’s not to mention medical costs for test and treatment that began spiraling upwards, which gets worse with the introduction of Medicare in the 1960s, a government insurance program that’s shoehorned into the private insurance model.

Speaker 7: This great nation cannot afford to allow its citizens to suffer needlessly with the lack of proper medical care.

Walter Isaacson: Ironically, though doctors originally opposed alternatives because they were worried about ceding control of healthcare decisions to bureaucrats, that’s exactly what started to happen.

Christy F.C.: Then insurers gradually start introducing cost containment measures for physicians start to have to, for example, ask permission to put a patient into the hospital, have to fill out more paperwork explaining what they’re doing. Soon, you start to see the representatives of insurance companies coming around and so gradually little by little and this occurring over the course of decades, you see that insurers through these cost containment measures actually start to become more like the supervisors and managers of care and of physicians.

Walter Isaacson: For patients, it’s created a fragmented system that can be frustratingly difficult to navigate, especially for complicated cases.

Christy F.C.: If you have something that’s wrong with you cannot figure out what it is, the system that we have set up will really drive you crazy because what’ll happen is you’ll go to physician, say you start with your GP, they do some testing, they do everything they can, under, of course, the dictates of the treatment blueprint that they’ve been handed by the insurance company. But once they’ve done with this standard blueprint presents, well, then they’re just going to send you off to a specialist. You might go to a specialist and again same thing, they’ll try everything on the treatment blueprint. If they can’t figure it out, well, okay, we tried. Let me send you to this other specialist and on and on you might go.

Walter Isaacson: The result today is an unfriendly system of health insurance that just about everyone is unhappy with, but which nobody seems to be able to figure out how to fix. But, there may be some hope taking root in other areas of the insurance industry, but technology is disrupting the old ways of making a claim.

In last 2017, Waymo, the self driving ride sharing company originally founded by Google, announced a partnership with an upstart insurance company by the name of Trov. It was an unusual approach to car insurance. Generally, a company like Waymo would have a blanket policy that covered its passengers in the case of accident or lost property. Trov proposed something new. Every time a passenger got into a Waymo car, a new micro duration policy would cover them for the duration of the ride and no more. The contract would be initiated not by the rider, but by the electronic brains of the smart car itself.

Scott Walchek: When I was asked to go speak at a small gathering of a bunch of executives, Google was in the audience, and the next day I got a call from them …

Walter Isaacson: Scott Walchek is the founder and CEO of Trov.

Scott Walchek: Google took the lead and recognized that what we had built in the technological capability of giving someone the ability to swipe right to turn on insurance, swipe left, could you in fact give to the brains of a robot car the same kind of initiation? Could an event, could data, could the state change recognized by the operating system of the smart car, could that trigger the same on and off moment?

Walter Isaacson: Trov isn’t just for smart car rides. They’re a pioneer in this new form of what they call micro-duration insurance.

Scott Walchek: Generally speaking, insurance has been quite opaque for the consumer. Because of regulatory strictures and legacy investments and legacy processes, consumers have been forced to protect things they don’t necessarily care about during times when they don’t need them.

Walter Isaacson: That means you’re paying for insurance on your camera, for instance, when it’s just sitting in your desk drawer at home for months at a time. Or paying a higher premium because you occasionally short term rent your apartment even if it’s only for a couple of weeks a year. Trov looks to get around that with insurance that’s on demand, meaning use its app to turn it on and off as needed with information about your possessions stored in a digital trove.

Scott Walchek: Once you decide that you want to protect something, you flip through your trove, which is nicely illustrated and organized and literally you swipe right on that item and it goes through a process of verifying the current retail replacement value of that item, takes information from your profile, and then creates a quote in that quote shows up in a daily form. It might be $0.32 a day for your watch or whatever it might be, you’re protecting the time your expensive camera gear.

Walter Isaacson: Trov’s granular approach is one way insurance startups are leveraging technology to protect their customers from risk to their property. Others are taking deep dives into big data and artificial intelligence.

Assaf Wand: We believe that there’s more and more data sources that are popping up in the world.

Walter Isaacson: Assaf Wand is the CEO and co-founder of Hippo Insurance.

Assaf Wand: I want to at least evaluate every data source that is around and to understand whether I can potentially price you more correctly and can I help prevent and then basically mitigate some of your risk. This is how we look at everything.

Walter Isaacson: Hippo keeps watch on its home insurance customers, determining any major changes to their property that could cause trouble down the line if they were ever to make a claim without properly adjusting their policies. Rick McCathron is Hippo’s chief insurance officer.

Rick McCathron: Some of the data sources we get are high def aerial imagery that we use our algorithms and our AI to determine what are specific components of that image that we need to pay attention to. We can look at things like what is the condition of your roof. We can look at trees and notice that one is leaning towards the house or away from the house. We can see that you’ve added a swimming pool, you’ve added a deck. We get all of these images refreshed several times a year, so it’s a combination of the high definition aerial imagery we get and then our own proprietary algorithms and artificial intelligence as to what we do with that data.

Walter Isaacson: Most everybody knows someone who has a horror story about trying to collect on an insurance claim. Hippo is trying to break away from the idea that insurance companies don’t want their customers to actually use their services. Rick McCathron.

Rick McCathron: We actually think people should use their insurance when they need to do so. One of the states that we got a lot of business in is California. We have real time connections with California wildfire databases. When we see a wildfire, a brush fire that everybody sees on the news popup, we reach out to all of our customers that are in harm’s way and we help them identify what their needs are. That’s even before they thought about filing a claim. If it turns out that their house isn’t damaged, all the better for everybody. But, we automatically make hotel reservations before the hotels fill up. So we have a very proactive approach in making sure that before the event happens to them, the customer knows what their rights are, they know how to contact us.

Walter Isaacson: Big data, apps, and artificial intelligence may be rewriting the rules for an industry that dates back hundreds of years and placing more power in the hands of consumers. But just as a lead plate over your front door won’t guarantee that your house doesn’t burn down, we’ll always look to guard against the hazards of the unknown because life after all is a risk. I’m Walter Isaacson and you’ve been listening to Trailblazers, an original podcast from Dell Technologies. To find out more about any of our guests on the show, you can head to our website at delltechnologies.com/trailblazers. Thanks for listening.