Risk, unlike insurance, is no pig; an introduction to gamification

I understand why people get excited when Facebook makes a change.  Here is a good set of examples.  Quite apart from some changes - like default privacy settings - having been extremely poorly conceived and others poorly implemented, some people just don't like change.

But it is a testament to Facebook's success that their many changes - and they change things a lot and often - have generally been readily accepted, if not without initial 'sound and fury'.  And I like the fact that Facebook changes a lot.  Indeed, I suspect Facebook would be much less successful without frequent change.

Why is lots of change so important?

I certainly enjoy sharing my friends and relatives lives and doings on Facebook; for me and almost everyone else this is, of course, Facebook's primary feature.  But let's be honest, much of what we read about some of our friends and family is less than scintillating, so the sharing process itself has to be engaging.  Facebook isn't successful simply because it allows us to connect with people we know who are otherwise too far away to see and hear from everyday; nor is it successful just because it is an application we all enjoy using - an enjoyment that is kept fresh by change.  I think it is the combination of the connections and the process - in different proportions for different people - that explains Facebook's success.

It is as much the medium as the message that engages us.  Another day, I might ponder on what I see as Facebook's biggest challenge for its future - how it maintains an engaging process in the face of plans to become a utility, at least as that word is traditionally understood, and in the face of the "seen that, got the tee-shirt, move along" attitude towards sharing others' lives - but for now, that is a digression.

What I am curious about now, and what I see as offering significant potential to the risk and insurance industries, is a process I am seeing mentioned more and more often; 'gamification' - the use of game design techniques to engage audiences.  This post (by Confused of Calcutta) is a good discussion of the topic.  This TED video is good too.

Change is the biggest gamification example of them all - "a new game every week" - and Wikipedia lists the following further gamification examples:

• achievement "badges"

• achievement levels

• "leader boards"

• a progress bar or other visual meter to indicate how close people are to completing a task a company is trying to encourage, such as completing a social networking profile or earning a frequent shopper loyalty award.

• virtual currency

• systems for awarding, redeeming, trading, gifting, and otherwise exchanging points

• challenges between users

• embedding small casual games within other activities.

Back to the Confused of Calcutta link above, and where this all hopefully starts to make sense when it concerns risk, JP suggests something along the lines of: gamification used on its own is like "putting lipstick on a pig"...

He is talking about the fact that, if an underlying subject or process is fundamentally dull, no amount of gaming layered on top is going to make the slightest difference.  He is specifically talking about work - he now works for salesforce.com - and rather candidly suggesting, I think, that just sticking a salesforce platform under a dull business won't make it any less dull - but I am getting back to the medium and the message again and away from my point.

Gamification won't make the process of buying (or selling) insurance any more "fun" but it will be one of the tactics used to encourage people to share their knowledge about uncertainty - something I believe people are genuinely interested and concerned about, and which has nothing to do with insurance, right?

So, to the extent uncertainty about particular things (for example, activities {like driving}, events {a party for example} or processes {like banking}) is one core feature of the more general term "risk", I expect gamification will be a key element used to encourage people to start sharing knowledge about specific uncertainties.  Such collaborative processes will begin to cause reductions in some specific uncertainties, and lead all of us to be able to start thinking differently about risk generally, and produce new ideas for dealing with it.

And risk, unlike insurance, is no pig.

Banking really is a lottery!

You couldn't make this up...

The Halifax, a subsidiary of the 43% UK Government owned Lloyd's Banking Group has announced a savers lottery - with 3 guaranteed winners of £100,000 every month. 

I thought the UK Health Lottery was tacky until I saw this...

Because we think saving should be rewarded with more than interest, every month we're giving three savers £100,000 in our new Halifax Savers Prize Draw.
And, over a thousand other customers will win smaller prizes. All you have to do is hold £5,000 in qualifying savings accounts each calendar month and register.

As a marketing ploy, I am sure someone at the Halifax had a wonderfully plausible steaming great pile of MBA style bullshit showing why this was a good idea.  I imagine it included market segmentation showing how many savers would move funds to Halifax given the possibility of a £100,000 lottery win if only they save just £5,000.  I am sure the research suggested people would happily confuse headlines about gambling bankers with the chance to gamble with their banking too.

Now, as far as I am concerned, Halifax is quite at liberty to waste money however its shareholders let it but there will be others who will wail and gnash their teeth in all sorts of colourful ways.  Some will scream about taxpayers money being wasted on providing lottery wins to the already well-enough-off (to have £5,000 in savings) and others will talk sonorously about the small business loans that are foregone by this action.

Whatever...

I am just mildly surprised, when the very future of banking is being debated, including at the heart of the debate, how the risks of banking should be shared between customers, bankers, shareholders and taxpayers (to name most of those vying for the chance to fund banking losses), I can't help thinking that setting up a savings lottery is not the cleverest idea...

UBS fraud up-date; risk management systems almost bound to fail

I don't know why UBS risk managers ignored risk and operational systems that detected unauthorised or unexplained activity by Kweku Adoboli.  I don't know why they didn't investigate the signals or why appropriate action (whatever that means) wasn't taken to ensure their existing controls were fully enforced.  According to this Reuters report however, UBS's own internal report indicates all these things did - or rather didn't - happen


I am not surprised.  There are countless reasons why action might not have been taken, ranging from failure to understand the signals to a positive decision to ignore them.  But underpinning all the possible reasons is the fact that how risk management systems successfully monitor human/system (e.g. trading) interaction - never mind how humans successfully interact with risk management systems - has yet to be successfully worked out.  


One challenge is motivation.  When we wrote this Basel II report, my co-author and I spent a lot of time trying to think through what it was about man-made systems that made them different from natural ones in the context of risk.  We were particularly trying to think about the modelling and pricing implications for transferring operational risk under Basel II - of which Adoboli's 'alleged' fraud is a prime example.  


At that time, ten years ago, we came to a number of conclusions - some of which we might think about differently today (but not much).  One was that in a natural system (a tree for example), the system's agents (earth, sun and water for example) can be identified and their interactions (photosynthesis for example) observed, leading to the possibility of successfully inferring its objective (to mature and propagate).  


In a human system like a bank however, its overall objective (to grow and make a profit) is formally established (rather than inferred) as part of its design.  The agents (for example, people and capital) are brought together and rules introduced to govern their interactions, aimed at the achievement of the objective.  The problem is that how those agents actually interact is difficult to observe and cannot safely be inferred because the motivations of different agents can differ so considerably from the formally established objective.


In understanding this difficulty, we believed (and I continue to believe) that a key to understanding the true nature of risk in many human systems is to try to understand the true nature of power and influence relationships within organisations and the importance of the organisation's culture in determining the nature of those relationships.  Today, we would think in terms of a social graph but that wasn't possible ten years ago.


One recent book that rather supports one of our concerns with risk in banks - as I have very briefly outlined it above - is Delivering Happiness by Tony Hsieh.  One of the key points of the book is that a vital ingredient of a firm's culture is that the firm itself have a purpose beyond simply growing or making a profit.  


That's always going to be a tough sell in a bank, not because banks don't have purpose; after all, intermediation is absolutely critical for a capitalist economy to function.  But I wonder if it is the very importance of intermediation that means the profit banks can generate can be so high that profit blinds bankers to their genuinely valuable purpose - amongst other things...

Data exchange rate; what's your's worth?

On Sunday, I commented about plans that Facebook may have to sell data about our activities as endorsements to our friends and family.  I expressed the concern that something I read (or listen to or watch or whatever) but don't necessarily 'like', is taken in and of itself as an endorsement by me to my friends of either the content of the item or of the publisher of the item or both.  

I also said that I have no major objection to friends seeing most of what I do online but there are times when I would prefer they didn't.  It is not just that there may be sites I prefer they didn't see I had visited for embarrassment reasons (like Doctor Who, for example) but there are also competitive reasons why I would prefer my approach to knowledge gathering not be disclosed to everyone who knows me digitally.  Since Sunday, I have refined my thinking a bit 

My clarified concerns - if Facebook implements this plan - are divided between the credibility of endorsement and its value.  

So first, it doesn't seem to matter whether I actually 'like' something; apparently I can still endorse it.  That just doesn't sound credible and I think my friends will see through such endorsements. 

Second, if I endorse something, I want to be clear what it is I am endorsing and why.  If I really want to endorse something to my friends, I want the endorsement to be helpful to them.   

Third, isn't what and how I endorse something quite personal?  Not private maybe, but personal.  I am not sure it can be done by proxy.

Finally, and most obviously, endorsement has value - or Facebook couldn't sell it.  But, is whatever Facebook gets for my endorsement (over and above what it already gets for my other data) still within the overall value of Facebook to me?  Looked at another way, as Facebook earns more and more out of my data/data about me (delete as you think fit), do I get a corresponding increase in value out of Facebook?  

I am not sure I know the answer or even that I have the faintest idea now how or even if it can be calculated; I am also not sure that I will spend too much time thinking about it but I suspect it is the kind of equation we may all need to think more about in the future.  Platforms like Facebook - and this clearly isn't just a Facebook issue - will come up with ever-more creative ways of 'monetizing' user data and we will need clearer ideas of what we think that data is worth to us.

Data is like a currency without an easily calculable exchange rate; what's yours worth?  

California Book Reader Privacy Law; so this is what they mean by a 'sectoral' approach

If you wondered about the difference between the US sectoral approach to privacy law and the EU's 'broad principles' based approach, this new law - that establishes privacy protections for e-book purchases - exemplifies the sectoral approach; in spades.

Facebook sharing should not mean endorsing

Sometime ago I reconciled myself to the fact that Facebook would make money - and so save me the cost of their service - by selling data about me to advertisers.  I understand the bargain; I get Facebook's tremendous value 'for free' and get adverts targeted to me, that I can ignore or not.

This story (from the Financial Times) takes things a lot further though.  It suggests Facebook is considering using everything I do online that is captured by the apps newly linked to Facebook (like Spotify) to make me an endorser of whatever it is I happened to have read/listened to/watched/written...

I am happy with the earlier bargain but I am not so sure about this.  Being the passive recipient of adverts targeted to me is very different to being an active part of a third party's ad campaign to my friends and family.

Sounds a bit like one of those terrible sweat shop jobs where people are forced to phone friends and family to flog stuff they know the friends wouldn't otherwise buy in a million years.  

Anyone remember what they used to think of friends that did that?  Exactly.

Cluetrain and the future of insurance

This is an interesting article from 'Confused of Calcutta', describing the lost promise of the Cluetrain Manifesto.  Maybe I should say delayed...

It describes how the hopes that Cluetrain engendered in believers like Confused of Calcutta (JP Rangaswami) and me of increasingly open conversations between companies and their customers - using the new technologies that 10 years ago began to enable such conversations - weren't initially realised.

Instead of openness, companies ran from the new conversations and retreated into themselves.  They built technological barriers (firewalls) around themselves to/and so (delete as you see fit) cut themselves off from their customers.  Their customers on the other hand, excited at the prospect of more and better conversations, swallow-dived (with tuck) into the fora that enabled them - social networks - and talked to each other.

Over the ten years since social networks began to transform how we (customers and consumers) communicate, some companies have been extraordinarily successful adopters of the entirely new business processes and models that the conversational enterprise demands; Zappos (as described in Delivering Happiness) is my favourite example.  Most firms however, and even entire industries - insurance is obviously my particular bug bear - have have been spectacularly luke warm on the whole subject.

At the end of the article, JP suggests that what we are seeing now is companies beginning to visit the places (social networks) where their customers already are and how they are beginning to enter the conversations.

I agree with JP that this is an interesting development - and not before time - but for me the really interesting developments will start when we see more companies changing their processes and business models to take account of what they hear in those conversations.  If you join a conversation and enough people in that conversation tell you the same thing, you won't be able to stay in the conversation unless or until you take on board what is being said.  For companies, I think this will mean more process and model change than many realise.

For an insurance example, consider this; risk and pricing knowledge - that which is most heavily guarded behind insurance company firewalls - is likely in the future to be generated faster, more accurately and more actionable form in social networks than by insurance companies operating alone.  This will have fundamental implications for insurers used to a business model that is founded on exploiting their 'better' risk and pricing knowledge.

Google's a teenager!

 Happy Birthday Google!

But not the most important birthday today...

Who wouldn't trust the BBC?

This is a great example of just how careful one needs to be on-line.  It is one of those scams that preys on the gullible - specifically the lazy and 'inattentive' - who imagine you really can get rich quick.

It involves a link in an unsolicited email - the first warning sign - purporting to show a BBC news story of someone living almost next door, making fabulous money working from home.

"Be careful out there"

UBS CEO resigns

Oscar Grübel, until this morning the CEO of UBS, has resigned.  Difficult to know whether he went or was pushed but either way, following the discovery of the $2b fraud at his London office, his departure was entirely predictable and I doubt he will be the last to go.  

Can you understand 'social' if you haven't read The Cluetrain Manifesto?

Of course, you can understand what 'social' means if you haven't read The Cluetrain Manifesto but social makes a whole load more sense if you have.


So, what is the Cluetrain Manifesto?  Here is its introduction:

A powerful global conversation has begun. Through the Internet, people are discovering and inventing new ways to share relevant knowledge with blinding speed. As a direct result, markets are getting smarter—and getting smarter faster than most companies. 

These markets are conversations. Their members communicate in language that is natural, open, honest, direct, funny and often shocking. Whether explaining or complaining, joking or serious, the human voice is unmistakably genuine. It can't be faked.Most corporations, on the other hand, only know how to talk in the soothing, humorless monotone of the mission statement, marketing brochure, and your-call-is-important-to-us busy signal. Same old tone, same old lies. No wonder networked markets have no respect for companies unable or unwilling to speak as they do. 

But learning to speak in a human voice is not some trick, nor will corporations convince us they are human with lip service about "listening to customers." They will only sound human when they empower real human beings to speak on their behalf. 

While many such people already work for companies today, most companies ignore their ability to deliver genuine knowledge, opting instead to crank out sterile happytalk that insults the intelligence of markets literally too smart to buy it. 

However, employees are getting hyperlinked even as markets are. Companies need to listen carefully to both. Mostly, they need to get out of the way so intranetworked employees can converse directly with internetworked markets. 

Corporate firewalls have kept smart employees in and smart markets out. It's going to cause real pain to tear those walls down. But the result will be a new kind of conversation. And it will be the most exciting conversation business has ever engaged in. 

What follows this introduction are 95 theses, the best well-known of which is probably the first:

1.  Markets are conversations.

Never has a thesis been as abused or as often mis-quoted as this one but when you understand that the sub-heading of Cluetrain is "the end of business as usual", you begin to get some idea what this book is all about. 


If you haven't read it, I urge you to do so because much of what it discusses is really only now emerging fully into the mainstream and you will make much better sense of the new mainstream if you have read Cluetrain.


You might wonder why I mention this now - and why I have quoted so extensively from Cluetrain above.  


As I indicated last week, I spoke at an insurance conference this week on network and cyber risks.  I was on a panel on social media, where I argued that the media part of social media was all about technologies and platforms, which are and will always be in a state of constant change.  This change is interesting and important to follow (I watched the fascinating f8 keynote last night for example) but, while I am interested in technologies and platforms as enablers of conversations, it is the conversations themselves - the social part of social media - which I find truly fascinating because it is conversations that are gradually but genuinely changing everything.  


On Wednesday for example, I tried to show that social was changing the nature of insurance's customers; it is also changing the risks they have and need to transfer.  Beyond that however, I also suggested that the conversation will gradually come to change how customers understand risk, which in turn will have significant implications for how we accept the risks they want to transfer.  


Now, it is not a new experience to be politely told that "I am not sure I completely agree with you"; that wonderfully English and understated way of suggesting I am talking out of my arse.  I think therefore that I coped reasonably well when that was the introduction to a question on Wednesday but what I may have hidden less well was my surprise when, in my reply, I quoted thesis 1. above - and referenced Cluetrain - to a completely universal set of blank stares from the audience.


I accept that Cluetrain is not mainstream reading but I had assumed that, in a room full of insurance people gathered together to discuss social media, at least one person other than me would at least have heard of it and its primary thesis.   
   
Apparently not.  If you have read this far, scroll back up and look at the picture which is part of the Cluetrain introduction.  Need I say more?

'Social' enterprise changes everything

ZDNet is carrying a story this morning about Mark Benioff, CEO of Salesforce.com, an enterprise cloud computing company.  In it, they say he believes companies won't abuse social data they can 'scrape' together about their customers from multiple sources.

By the way - try to watch the key note from Cloudforce 2011, "Welcome to the Social Enterprise"; it was something of a 'eureka' moment to see that firms are really getting to grips with what 'social' means for us and how we interact with companies - as both employees and customers.

Anyway, I digress because the ZDNet article actually reads:

"Companies will not combine data from different sources for analytics purposes to an extent where customers are alienated."

This rather sounds to me like the quote could be interpreted such that companies will only combine data from different sources ...up to the point where alienation makes combination inefficient.  It is a certainty that many companies will scrape all the information they can and will seek to use scraped information as effectively as they can.  Some will only stop using the information when they know it pisses their customers off more than the benefit the company derives from the activity.

The interesting difference to watch for in the future will be the extent to which different firms stop at different times and what causes each firm to stop.  For some firms, the economics of the situation will determine but for others, reputational cost will be a significant part of the equation, making such firms stop earlier than the others.

This seems to me to be the essence of social - Benioff's point, I believe - but I cannot avoid thinking of Bentham's Panopticon whenever I think of issues like this.  Social has re-modelled Bentham's prison design.  Instead of those who can be watched changing their behaviour because they think they might be being watched (whether they are or not), those doing the watching (or scraping) are having to adjust their behaviour because the walls that formerly isolated those being watched have been destroyed.

In the past, firms had little need to listen to isolated complaints (though many did) but every firm must react, and better still avoid altogether, uniting their customers with reason to complain.

Adoboli loss - nothing new to see here, move along; really?

Predictably, there is much hand-wringing in the press today (16th September 2011) about bankers and their inability to manage their own, never mind other people's, money.


There is something in this, though this inability is hardly new; it just seems to manifest itself less frequently than it used to - assuming you ignore Jérôme Kerviel of course...


So, not quite so infrequent after all then; in fact, because I remember Sumitomo, Daiwa, Morgan Grenfell, Allied Irish, Orange County, Metallgesellschaft and others - all operational risk losses of the mid 90s and early 00s - I just think we have been going through a quiet patch recently.   


Also, compared to Kerviel at €4.9 billion, this loss isn't that big - though it is not easy to type that a £1.3bn loss 'isn't that big'.  Several of the above were bigger than Adoboli though curiously, it is almost exactly equivalent to the loss Nick Leeson caused to Barings - if you trend Leeson's £827m at 2.7% (the average inflation rate since 1995 when Barings collapsed).


So, is it appropriate to say "nothing new to see here - move along"?


Well first, it is far too early to say anything sensible about this loss because, so far, we basically know absolutely nothing about it.  Who did what, who said what and who knew what and most important, when all was done, said or known may take years to be established and will definitely take longer to be publicised by a Swiss bank.


That all said, there is nothing startling about the amount of the loss, as far as we can tell so far, and I don't expect there will be anything too surprising about the details when we hear them, though in insurance porn terms, I am sure they will be lurid.  


What would surprise me is if the FI sector of the insurance market has been able to provide meaningful coverage for this loss; UBS may not buy any coverage because of this.  More surprising still would be that we pay the loss quickly - even if it is evidently covered; we just can't/don't work that way - more on that another time.


But it is because we can't work like that, that a friend and I co-wrote this report to the Bank for International Settlements in 2001.  We were responding to a request from them for ideas about how operational risk might be transferred in such a way that insurance became an effective back-up to a bank's operational risk capital.  


I think we would write it slightly differently today but, given that the losses haven't gone away and the coverage for them remains inadequate, I am not sure we would change its basic premise.

  

City Rogue Trader Arrested

As I mentioned here, I was a Bank's broker when I first entered the insurance market, so headlines like this always catch my attention.

There have now been so many losses in excess of $1bn that it would be easy to become blasé about them   but they still take my breath away.   Trouble is (and to explain why I should get out more), I also wonder how this loss will end up being dealt with by insurance?

Depending on the wording used for this bank, they may or may not have coverage - and regardless of the wording, I expect they they will expect to be covered.  I doubt there will be anything so old-fashioned as a two part definition of dishonesty, where there has to be both the manifest intent to cause the loss and a gain for the perpetrator but you never know...

One to watch.

Is social media a 'hot' insurance topic any more?

For the last few years, there has been standing room only at conference break-out sessions dealing with social media.  I doubt this is the case any more.  


This is fine as long as you don't have to speak at a conference (C5 Data Risk, Cyber and Network Security Insurance) next Wednesday on the subject of social media insurance exposures, like I do... 


Now I am not saying social media isn't fascinating, nor that it's time has past (I don't think we have reached the end of the beginning yet, never mind the beginning of the end) but I think (and hope) that the hype with which the insurance industry has surrounded social media has subsided to the point where we can look at it objectively.


Like many 'new things', our industry was spooked by social media when it first burst on the scene.  Now generally, if something spooks us, it probably spooks our clients too and this is a good thing because spooked clients buy more insurance.  It is just scary to sell coverage for something that spooks us as much as it spooks our clients and so coverage for spooky exposures is a 'hot' topic until we realise it wasn't quite as spooky as we first thought.


And yet...


I think we got spooked about the wrong part of social media.  'Media' worried us more than 'social', where we were spooked by the new scale and scope that 'social' brought to 'media' exposures like IP infringement, breach of confidentiality and invasion of privacy for example.   This spooked us because we understand that media exposures are very real exposures and we further assumed that if they were going to exist on a hitherto unimaginable scale, this was a very spooky thing.


The thing is though that media related claims just haven't materialised and anyway,  customers just don't seem to be as spooked about this exposure as we thought they would be and so haven't been buying as much of the coverage as we hoped they would.


What they have been doing though is getting involved with 'social' in a big way - a much bigger way than anything we have so far seen in the insurance industry.  For example, 'social' has moved way beyond transforming how businesses market their products to fundamentally affect core business processes and models.  


I am not sure our industry has fully grasped the implications of 'social'.   It is not simply a question of thinking about specific policies for new spooky exposures but how social will gradually come to affect nearly every type of policy we sell.  


'Social' will inevitably change (I think fundamentally) how both insurance buyers and sellers understand and transfer risk between them and so that is what I have decided to talk about next Wednesday.   

I should get out more

'You should get out more' is advice that has been thrown at me so often, I have finally taken the hint and decided to use it as my blogging home.

I am not completely sure if the advice is offered because I work in insurance and people feel sorry about that or because I sometimes find it difficult to take things at face value.  As I use this setting to think through and share some of my thoughts, you can decide for yourself.

My former blogging efforts can be found at The Market Network and Specialty Casualty.

The Market Network was (generally) where I discussed ideas for improving the process of understanding and transferring risk.  I still hold those ideas but will from now on discuss them here.

Specialty Casualty deals with the subject matter of my day job at Towers Watson - I run the Specialty Casualty team there.  I use that site to post and comment on interesting stuff I come across relating to the types of coverage we deal with in the Specialty Casualty team and I will continue to use it for that.

I tweet @shouldgetoutmor.

For the sake of clarity, none of my online ramblings have anything to do with Towers Watson and I am responsible for my own comments and thoughts.