Ledgers for Reliability
By Maggie McGraw, Abeer Dahiya, Prabhdeep Chawla, & Yuki Mizota
Executive Summary
On Thursday, November 8, 2018, a fire ravaged the small town of Paradise, California, making 2018 the second (only to 2020) most active fire year on record on the West Coast. As global temperatures rise, resulting climate change is expected to increase the frequency of these natural disasters and exacerbate their intensity and damage.
Insurance has never been more important
With that being said, the insurance process, especially after a catastrophe, ends up being an ordeal. The insurance policies tend to be unclear in what they actually cover or what they actually do to protect homeowners. On top of that, the claims process that requires homeowners to list every item lost in the incident makes the entire experience traumatizing. Sadly, losing all your possessions isn’t the most distressing part of the homeowner experience. It is recollecting what you have lost. This is a process deficiency that can be handled easily. All we require is an intent to embed technological advancements.
But a deeper dive into the issue reveals that a large part of this trauma results from people owning too much stuff.
To make a significant impact, we need to reframe our approach and make it holistic: we need to focus on improving everyone’s Financial Wellbeing.
Average financial wellbeing in the United States is an abysmal 52 out of 100--a failing grade.
In line with our goal, we want to create a digital ledger of items that you own so that we can help answer your questions: “What items do I own?” “How much will it cost me to replace them?” But most importantly, we want you as homeowners to answer our question: “Do you really need the item that you own or are looking to purchase?
Why insurance companies should care
As described above, residents’ perception of insurance was often tethered to financial stress and frustration, which resulted in ambivalence and lack of well-informed decision-making. Taking this forward, we can imagine a rapidly approaching world where homeowners will not want to engage with insurance at all. This will mean homeowners are less prepared for disasters, and in the long run, will face more stress and trauma.
As a result, insurance companies will see unhappier users, reduced customer loyalty, and potentially churn as customers explore other options or insurers. This can be particularly harmful to insurance companies’ profitability when “lower risk” customers start jumping ship. It is in the insurer’s interests to counteract these connotations of stressfulness and unreliability.
Our Solution
The digital ledger: as part of purchasing new or renewing their home insurance, owners will be required to upload a video from their phone’s camera with a walk-through of their entire house. The AI system will analyze this video and create a digital ledger of items that you have along with their value. On an ongoing basis, your credit card will be linked to the system. Each time an eligible item is purchased, the system sends a notification to the owner if they would like the item to be added to the ledger.
Millennials are our natural target consumers. They are broadly risk averse, as demonstrated by their growing demand for passive investment products. They are aware of existential risks especially when it comes to phenomena like climate change. Thus, our twin goal of deterring consumerism and increasing security for people living in high-risk areas will also motivate younger generations and millennials to get on board.
Encouraging minimalism: modern consumerism results from biases (mostly created by marketing) that influence our decision. The only way to counter these biases is by making users aware of them before making their decision. We intend to use your digital ledger to highlight the items that are considered essentials to bring some perspective into items that you can live without. For instance, the insurance company would show you an ideal saving pattern for someone in your demographic and calculate where you can improve based on the number of items you already own and what you’re spending compared to someone similar to you.
Conclusion
In order to motivate homeowners to make the behavioral change, the spending pattern would be recognised and translated into a responsible spending score. This score would be a quasi-measure for insurance to measure homeowner’s overall responsible behavior, thereby reducing premiums for other insurance products. For example, someone with a high responsible spending score will be considered as being a “responsible” person and therefore eligible for lower premiums on life insurance.
To create a society that encourages financial wellbeing, we need discipline and a benchmark to gauge what is excessive. While insurance companies cannot solely solve the issue, they can surely create a framework on which other institutions of society can build.
On June 3rd, 2021 the Redesigning Finance students presented their work via Zoom to a panel of experts working in the finance sector.
