The Parable Of The Ox (paraphrased)

PART 1

"In 1906, the great statistician Francis Galton observed a competition to guess the weight of an Ox at a country fair. Eight hundred people entered. Galton, being the kind of man he was, ran statistical tests on the numbers. He discovered that the average guess (1,197lb) was extremely close to the actual weight (1,198lb) of the ox. This story was told by James Surowiecki, in his entertaining book The Wisdom of Crowds."?

Not many people know the events that followed."?

The fair organizer, Bruce Wayne, was tasked with arranging Insurance for the Ox. Half a mile away, a Starbucks was popular among Insurers. Bruce thought of trying his luck. He went to the shop and saw some people talking about Insurance. He approached them immediately, introduced himself, and requested if someone could offer Insurance for an Ox. People first looked at him with amusement as this was where mainly Marine Insurers and Ship Owners met to discuss Insurance for Ships and Cargo.

Nevertheless, Clark Kent, a leading underwriter, offered to help and asked for details about the Ox like breed, weight, age, health condition, mortality rate, etc. These details Bruce provided promptly. Clark made some notes in a slip and asked Bruce to come after a few days as this was an entirely new class of Insurance, and he needed to refer it to the actuaries. Bruce was in a hurry, so he requested if he could get a ballpark figure to add to the price of Ox.??

Peter Parker, another underwriter, was overhearing this conversation at the following table. Being the gentleman he was, he proposed a rough indicative premium of $1 a year. Peter had assumed the Ox would be valued at $100 and the rate to be charged 1%. Bruce was delighted. This noble gesture by a friendly underwriter prompted other underwriters to get interested in the Ox. Within minutes people were quoting between 50 Cents to $5. Some bystanders enjoying their coffee, with no clue about how Insurance works, also started guessing. Just for fun!?

Wade Wilson, a clever insurance broker observing this event, did a quick statistic test. The average premium quoted by the shop that day came out to be $2.76.

A few days later, the actuaries handed the rating chart to Clark. As per the details of the ox in the slip, the premium was $2.75. This was shockingly close to the average rate quoted by the shop that day. This was brilliant!?

More people started coming to the coffee shop as days passed. Michael Corleone, the shop owner, was delighted with the outcome of these games. Sales of coffee skyrocketed. The guessing game became a rage, and insurance transactions multiplied.?

All that had to be done was to observe the guesses of others and take an average. Most times, it did work, but some days, there were not enough people in the shop due to rain. Michael Corleone knew this game won't work if the number of people participating was low.?

Great mathematicians and computer scientists from Ivy league colleges were approached to solve this problem. They invented complex mathematical tools and algorithms to calculate the average premium on an "as if" basis had the shop been full, had there been no rain!

All attention, tactics, and strategy were diverted towards finding a detailed and perfect guessing methodology. It was no longer essential to look at the Ox but at what others were guessing about it. This, indeed, was far removed from reality.

On bad days when there were fewer guesses, the results came to bight those Insurers who relied on poorly averaged guesses.?The number of pages of insurance contracts started increasing to solve this problem of poor guessing. In the name of saving paper and trees, some savvy managers reduced the font size of the policy wording to the lowest possible. Exclusions, Warranties, and Subjectivities were weaponized. Interesting words like "Utmost," "Prompt," and "Reasonable" were introduced.

All, done in "Good Faith."?

The interplay of a large number of words of an insurance contract started becoming more and more abstract and borderline poetic. A whole new industry came into being that could interpret a "simple" insurance policy.?

Courts, lawyers, experts, technicians, buyers, sellers, underwriters, brokers, consultants, rating agencies, regulatory authorities, surveyors, etc., got busy. Very busy. Alike.??

"And then the ox died. Among all this activity, no one had remembered to feed it."?

PART 2

Some numbers that could be of interest.

• The U.S. constitution has 7,591 words.
• Apple iCloud terms of the service agreement; 8,800 words.?
• The average mortgage contract is 14,000 words.
• Marine Cargo Insurance: about 32,000 words.
• Marine Hull Insurance: approximately 35,000 words.
• Marine liabilities ( P&I ) including rules: Just shy of 75,000 words.

I didn't bother to check other insurance policies like property, liabilities, engineering, construction, group life, and medical Insurance. My guess is these policies would average around 25,000 words.

If you are an SME or mid-corporate, you would ideally buy around 7 to 8 policies, like Property, Business Interruption, CGL, D&O, PI, Cyber, Group Life, Group Medical, etc. So, we are talking about around 25K*8 = 200,000 words/year.?

Let's move to personal lines; the story is very similar. Generally, people buy life, medical, motor, property, and travel insurance. Any given year, the insurance word count a person can be exposed to is above 50,000.

Our industry seems to be expecting a bit too much from insurance buyers. At the current level of complexity, insurance buyers are expected to be certified insurance specialists themselves.

It's like saying in order to buy a car, you need to be an automobile engineer; else, you are doomed.

Or, that everyone using a PC shall be a computer engineer as well.

Or, stretching that argument bit further, that every patient shall also be a somewhat doctor!

And, I am yet to meet a person who has read his life, medical, property, or travel policy word by word. And, who knows clearly and exactly how and when is he protected and when is he not?

PART 3

Complexity is just a tool to achieve simplicity.

Complexity can't be a strategy.

Businesses that cannot simplify things for their customers tend to serve complexity on the plate as a show of value which clearly it is not.

1. Human Consciousness, the ultimate intelligence, is the product of the most complex machine in the known universe, the brain. There are about 20 billion neurons in the Human brain. Estimates vary, but it is believed the brain processes around 11 million bits of information at any given time, including while you are reading this blog. But, the brain makes you aware of no more than forty.?
2. Google has 20 billion lines of code. But, have you seen any??
3. Airbus A380 consists of around 4 million individual components. How many of these are visible??

Complexity is a response to a complex environment. This is essential to persist and evolve. You can call it evolution as defined by Charles Darwin. It's a natural process. However, the natural process of evolution that leads to complexity has a fundamental characteristic;?Invisibility.?

The problem starts when complexity starts becoming visible.

Imagine a person is blessed/cursed with the power to see inside his body. How would it feel to see the heart beating in all its glory, pumping blood through the most delicate arteries and blood vessels? Would this extra information and vivid details be comforting or scary?

Things that need not be known shouldn't be known. And more importantly, it shall not be shown.?

Why should hundreds of thousands of words of an insurance policy interest any person?

When all a person, a company is looking for is:

PEACE OF MIND!

Last few words:

1. More than being a financial tool, Insurance is a true social innovation through which we share our collective total risk.
2. Insurance promotes entrepreneurship and increases the risk-taking ability of individuals, corporates and governments, thus increasing the wealth of a nation.
3. I deeply admire and love Insurance as a concept; however, the complexity it has achieved seems to be highly misplaced against the interest of the end user.

So, far my love affair with Insurance:

"It's complicated."?

PS :?

• 1906 is the same year "The Marine Insurance Act 1906" came into being. To date, it remains the most comprehensive document for Marine Insurance.
• This article was inspired by the book "Other People's Money" by John Kay.

In case you have any more appetite for reading further :?

The Parable Of The Ox (Original)

John Kay, “The parable of the ox",?Financial Times, 25 July 2012.

In 1906, the great statistician Francis Galton observed a competition to guess the weight of an ox at a country fair. Eight hundred people entered. Galton, being the kind of man he was, ran statistical tests on the numbers. He discovered that the average guess (1,197lb) was extremely close to the actual weight (1,198lb) of the ox. This story was told by?James Surowiecki, in his entertaining book?The Wisdom of Crowds.

Not many people know the events that followed.?

A few years later, the scales seemed to become less and less reliable. Repairs were expensive; but the fair organiser had a brilliant idea. Since attendees were so good at guessing the weight of an ox, it was unnecessary to repair the scales. The organiser would simply ask everyone to guess the weight, and take the average of their estimates.

A new problem emerged, however. Once weight-guessing competitions became the rage, some participants tried to cheat. They even sought privileged information from the farmer who had bred the ox. It was feared that if some people had an edge, others would be reluctant to enter the weight-guessing competition. With only a few entrants, you could not rely on the?wisdom of the crowd. The process of weight discovery would be damaged.

Strict regulatory rules were introduced. The farmer was asked to prepare three monthly bulletins on the development of his ox. These bulletins were posted on the door of the market for everyone to read. If the farmer gave his friends any other information about the beast, that was also to be posted on the market door. Anyone who entered the competition with knowledge concerning the ox that was not available to the world at large would be expelled from the market. In this way, the integrity of the weight-guessing process would be maintained.

Professional analysts scrutinised the contents of these regulatory announcements and advised their clients on their implications. They wined and dined farmers; once the farmers were required to be careful about the information they disclosed, however, these lunches became less fruitful.

Some brighter analysts realised that understanding the nutrition and health of the ox was not that useful anyway. What mattered were the guesses of the bystanders. Since the beast was no longer being weighed, the key to success lay not in correctly assessing its weight, but rather in correctly assessing what other people would guess. Or what others would guess others would guess. And so on.

Some, such as old Farmer Buffett, claimed that the results of this process were more and more divorced from the realities of ox-rearing. He was ignored, however. True, Farmer Buffett’s beasts did appear healthy and well fed, and his finances were ever more prosperous: but, it was agreed, he was a simple countryman who did not really understand how markets work.

International bodies were established to define the rules for assessing the weight of the ox. There were two competing standards – generally accepted ox-weighing principles and international ox-weighing standards. However, both agreed on one fundamental principle, which followed from the need to eliminate the role of subjective assessment by any individual. The weight of the ox was officially defined as the average of everyone’s guesses.

One difficulty was that sometimes there were few, or even no, guesses of the oxen’s weight. But that problem was soon overcome. Mathematicians from the University of Chicago developed models from which it was possible to estimate what, if there had actually been many guesses as to the weight of the animal, the average of these guesses would have been. No knowledge of animal husbandry was required, only a powerful computer.

By this time, there was a large industry of professional weight guessers, organisers of weight- guessing competitions and advisers helping people to refine their guesses. Some people suggested that it might be cheaper to repair the scales, but they were derided: why go back to relying on the judgment of a single auctioneer when you could benefit from the aggregated wisdom of so many clever people?

And then the ox died. Among all this activity, no one had remembered to feed it.

Notes & References:

• Book: "Other People's Money" by John Kay.
• Book: "The Science of Storytelling" by Will Storr
• https://www.johnkay.com/2012/07/25/the-parable-of-the-ox/
• https://www.collaborativefund.com/blog/bs/