A route to true social insurance?

In case you are wondering, social insurance as I am using the term, has nothing to do with taxpayer funded, government run insurance schemes...

The Sunday Times (5/12/10) has an article suggesting that "insurers use facebook to vet lifestyles".  This isn't the biggest surprise I read over the weekend but the article was interesting in that it discussed how studies by Deloitte Consulting "suggest that people's online data detailing their food purchases, activities and social groups can be as good an indicator of their life expectancy as conventional medical examinations."  (I would like to have put a link here but The Sunday Times hides behind a firewall.)

Reading that someone's social graph could provide what I will call an individual risk profile did surprise me however, because it links with some ideas I put together with a friend nearly nine years ago, in a paper we wrote to the Bank for International Settlements (BIS) on the implications of operational risk as defined by Basel II - new banking regulation then first being considered.  Basel II defined operational risk as the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events.

In that report (click the link and download the EWB response), we didn't talk about social graphs but I think we might have been tempted to use the term 'corporate graph' if Mark Zucherberg had coined his term a bit earlier.  We were thinking explicitly however, of individual risk profiles for banks conceived in terms of various kinds of agents (employees/customers/etc) interacting in multiple ways (deals/projects/etc) with all sorts of consequences, some intended, some not.  We added consequences to the profile (our version of the graph) because risk for a buyer of insurance is most readily understood in terms of unintended consequences.

We felt such an individual/unique risk profile was essential in order to be able to understand and deal with operational risk for a number of reasons.  For example, such a profile would allow the entity and its stakeholders (including its insurers) to understand the nature and scope of its operational risk.  We also thought that it was the only way to capture the dynamism of operational risk; we felt this was critical because a snapshot of operational risk would be just about as helpful (i.e not much) as the information in a single annual report or proposal form and because we felt managing operational risk ought to be done in real time, to be effective.  We also thought that, because Basel II was really only interested in the effects of operational losses and broadly uninterested in the causes, any insurance product that aimed to deliver capital mitigating properties had to mirror this approach.  This also meant however, that operational risk could not be transferred in the traditional cause-based silos insurers normally use.  This in turn meant that an alternative framework from which to model operational risk had to be developed, or it couldn't later be sliced and diced - essential to optimising capital.

What does this have to do with the Market Network and my interest in social computing and insurance?

Every buyer of insurance - whether individual or firm - has a portfolio of risks and, like the regulators who conceived the operational risk framework of Basel II, they are more likely to be worried that they might have a loss and its financial consequences than in what might cause the loss.  But when they buy insurance, they have to deal in causes because insurers only sell insurance policies for particular causes - motor, fire or professional indemnity for example.  This means there are inevitable gaps in coverage - to the extent that the coverage is available in the particular policies that fully addresses those risks in the first place.

It seems to me that the hope of 'social insurance' - if such a thing comes into being - will be the ability to transfer the customer's portfolio of risks as a portfolio - without the customer having to think about fitting the pieces of the insurance jig-saw together as is the case now, incomplete as the jig-saw is.  For insurers to prudently accept such a portfolio however, bearing in mind that the basic principles of insurance must still apply, would require the kind of transparency that an individual risk profile based on a social or corporate graph might deliver.

While the concept is theoretically viable, there are clearly enormous practical issues to address - not least concerning privacy - but individuals have already demonstrated they are willing to share information on a scale that would have been inconceivable only a few years ago.  And if the information individuals are already sharing is sufficient to achieve the kinds of aims Deloitte suggests are possible for insurers, transferring the benefit of the information capture to the customer before the insurer might be a benefit worth actively sharing the information for.