In the opening segment of this series on complexity, I discussed the three network graphs that have emerged in the risk markets and which business models embody them. For quick reference:
In the second segment, I discussed the emergence of peer-to-peer insurance, which will accomplish the three core functions of the risk markets that currently exist in a “black market” unformalized state by using distributed managerial methods, which are:
In this final segment, I will look at the current balance of the market share of each graph type in the risk markets, how the balance may change and what the new equilibrium state might look like in the risk markets.
Before doing that, I would like discuss an important idea that emanates from the blockchain and cryptocurrency communities: the idea that there could be “one ledger to rule them all,” or, asked another way, “Could a single ledger be an all-encompassing ledger, accounting for all value?” The simple answer here is “no.”
No single ledger, technology or network will ever be all-encompassing. That would be silly, as it would reintroduce the systemic weakness inherent in centralized system structures, namely the risk that by taking out a single central node (or ledger, in this case), the whole system could collapse.
See also: 4 Marketing Lessons for Insurtechs
Just as was realized in the blockchain and cryptocurrency communities, the idea of a “risk ledger to rule them all” is not a desired structure; in the risk markets, a single distributed risk ledger to account for all funds escrowed against all risk types is not a desired structure. Because of the nature of risk and the diverse set of risk exposures in the world, there will need to be a diverse set of risk ledgers. We may see something materialize that looks like the following as an example of four distributed risk ledgers, each for a specific category of risk exposure.
Hold on to that thought for now….
I would like to again reference some of the work done by the Ripple team and their thought leadership toward a solution to address the concern of “one risk ledger to rule them all.” The Ripple team has introduced a protocol that will enable value to move in a cryptographically secure way between two or more distributed ledgers. It is called the Interledger Protocol, and more information can be found on their site here.
Using the Interledger Protocol, the Ripple team has articulated how various types of distributed ledgers, each engineered for a specific strength, can be networked together to create a term they have coined the “Internet of Value.” Without a single shred of doubt, it is a true statement that “finance is getting its internet,” and it is already here, albeit in a state of maturity similar to the internet circa the late 1990s. Unlike the slow pace of the internet’s growth, however, finance’s internet will not take as long to mature — mainly because it received an advantage from the preexistence of the internet itself and all that has been learned. Insurance and the risk markets of all the various financial services are the lowest-hanging fruit.
This might seem like a stretch in today’s environment, but it is not hard to imagine that by connecting many risk ledgers (each escrowing funds against a specific risk type) and using the methods outlined with Interledger protocol, that we will see the emergence of an internet of risk. Just like with the internet of value we see emerging today, the internet of risk will be made of many different distributed risk ledgers networked together.
I would define the internet of risk as a network of distributed risk ledger networks. The technical name for a “network of networks” in complexity science is a “multiplex.” Risk markets have been operating with an informal and non-digital multiplex structure for some time. Because each insurance company manages a risk ledger and because reinsurance companies function to connect insurance companies' risk ledgers together, the reinsurance industry effectively embodies a decentralized network of insurance companies — and both graphs combine to embody a multiplex of risk ledgers.
In all likelihood, over the coming years we will observe the digitization of the existing multiplex of risk ledgers that is the risk market into a network of digitally connected distributed risk ledgers, with each individual risk ledger serving the specific needs of a specific risk exposure.
KarmaCoverage is intended to be this “multiplex of risk,” organizing the connections between the risk ledgers of all types of P2P risk sharing. And it aims toward the goal of insuring that, as the P2P segment of the risk market grows, it maintains a high degree of resilience, enabling society to transfer risk efficiently among individual peers, successfully addressing the various risk exposures of those peers. You would expect to ultimately see this play out and create an internet of P2P risk ledgers that looks something like this:
'
To be fair, it is not possible to know the ultimate structure (or graph) of this multiplex of risk. It will emerge by a process of self-assembly. It must employ distributed managerial methods to avoid reintroducing the fragility inherent with its centralized structure. That said, many portions of it can (and should) be centralized for efficiency purposes. Distributed systems have weaknesses, as well, one of which is the introduction of some degree of inefficiency. We would not want to act out that behavior where “if all you have is a hammer, everything looks like a nail.” The functions that should be centralized combine a make the business case for something like KarmaCoverage.
Now, let’s take a look at how this may have an impact on the existing balance of market share where each graph serves as a percentage of total risk. Using data on the currently formalized methods of total risk and by assigning a percentage to each graph in the risk markets, you find that the graphs settled at roughly these percentages:
In the second segment, I discussed the emergence of peer-to-peer insurance, which will accomplish the three core functions of the risk markets that currently exist in a “black market” unformalized state by using distributed managerial methods, which are:
- Risk transfer;
- Escrow of funds for a defined purpose; and
- Management of reallocation of escrowed funds.
In this final segment, I will look at the current balance of the market share of each graph type in the risk markets, how the balance may change and what the new equilibrium state might look like in the risk markets.
Before doing that, I would like discuss an important idea that emanates from the blockchain and cryptocurrency communities: the idea that there could be “one ledger to rule them all,” or, asked another way, “Could a single ledger be an all-encompassing ledger, accounting for all value?” The simple answer here is “no.”
No single ledger, technology or network will ever be all-encompassing. That would be silly, as it would reintroduce the systemic weakness inherent in centralized system structures, namely the risk that by taking out a single central node (or ledger, in this case), the whole system could collapse.
See also: 4 Marketing Lessons for Insurtechs
Just as was realized in the blockchain and cryptocurrency communities, the idea of a “risk ledger to rule them all” is not a desired structure; in the risk markets, a single distributed risk ledger to account for all funds escrowed against all risk types is not a desired structure. Because of the nature of risk and the diverse set of risk exposures in the world, there will need to be a diverse set of risk ledgers. We may see something materialize that looks like the following as an example of four distributed risk ledgers, each for a specific category of risk exposure.
Hold on to that thought for now….
I would like to again reference some of the work done by the Ripple team and their thought leadership toward a solution to address the concern of “one risk ledger to rule them all.” The Ripple team has introduced a protocol that will enable value to move in a cryptographically secure way between two or more distributed ledgers. It is called the Interledger Protocol, and more information can be found on their site here.
Using the Interledger Protocol, the Ripple team has articulated how various types of distributed ledgers, each engineered for a specific strength, can be networked together to create a term they have coined the “Internet of Value.” Without a single shred of doubt, it is a true statement that “finance is getting its internet,” and it is already here, albeit in a state of maturity similar to the internet circa the late 1990s. Unlike the slow pace of the internet’s growth, however, finance’s internet will not take as long to mature — mainly because it received an advantage from the preexistence of the internet itself and all that has been learned. Insurance and the risk markets of all the various financial services are the lowest-hanging fruit.
This might seem like a stretch in today’s environment, but it is not hard to imagine that by connecting many risk ledgers (each escrowing funds against a specific risk type) and using the methods outlined with Interledger protocol, that we will see the emergence of an internet of risk. Just like with the internet of value we see emerging today, the internet of risk will be made of many different distributed risk ledgers networked together.
I would define the internet of risk as a network of distributed risk ledger networks. The technical name for a “network of networks” in complexity science is a “multiplex.” Risk markets have been operating with an informal and non-digital multiplex structure for some time. Because each insurance company manages a risk ledger and because reinsurance companies function to connect insurance companies' risk ledgers together, the reinsurance industry effectively embodies a decentralized network of insurance companies — and both graphs combine to embody a multiplex of risk ledgers.
In all likelihood, over the coming years we will observe the digitization of the existing multiplex of risk ledgers that is the risk market into a network of digitally connected distributed risk ledgers, with each individual risk ledger serving the specific needs of a specific risk exposure.
KarmaCoverage is intended to be this “multiplex of risk,” organizing the connections between the risk ledgers of all types of P2P risk sharing. And it aims toward the goal of insuring that, as the P2P segment of the risk market grows, it maintains a high degree of resilience, enabling society to transfer risk efficiently among individual peers, successfully addressing the various risk exposures of those peers. You would expect to ultimately see this play out and create an internet of P2P risk ledgers that looks something like this:
'
To be fair, it is not possible to know the ultimate structure (or graph) of this multiplex of risk. It will emerge by a process of self-assembly. It must employ distributed managerial methods to avoid reintroducing the fragility inherent with its centralized structure. That said, many portions of it can (and should) be centralized for efficiency purposes. Distributed systems have weaknesses, as well, one of which is the introduction of some degree of inefficiency. We would not want to act out that behavior where “if all you have is a hammer, everything looks like a nail.” The functions that should be centralized combine a make the business case for something like KarmaCoverage.
Now, let’s take a look at how this may have an impact on the existing balance of market share where each graph serves as a percentage of total risk. Using data on the currently formalized methods of total risk and by assigning a percentage to each graph in the risk markets, you find that the graphs settled at roughly these percentages:
- Reinsurance: 40%
- Insurance: 60%
- P2P coverage: 0% (This does not account for all the risk transfer activity that occurs informally in the black market of P2P risk transfer.)
- Reinsurance: 20%
- Insurance: 30%
- P2P coverage: 50%
