Could 'Lloyd's Of London 2.0' Compete Online With Traditional Carriers For Risks?

Techies with an affinity for creating Web-based networking communities could soon replace insurance companies, especially those that are secretive about their pricing models for hard-to-place specialty risks, two tech experts suggest.

Drawing a parallel to a Web-based lending model--an example of a user-powered community now part of an expanding Internet environment known as Web 2.0--the technology experts extemporaneously brainstormed the creation of "Lloyd's 2.0."

The on-the-spot conceptualization took place at a session of the Professional Liability Underwriting Society's recent International Conference, titled "Web 2.0: Is The Future Of The Internet Insurable?"

"What is Web 2.0? It's MySpace. It's Facebook. It's YouTube. It's blogging sites," said the panel's moderator, Adam Sills, lead underwriter for Darwin Professional Underwriters in Farmington, Conn.

Giving a more formal definition from a Web 2.0 site--Wikipedia--Mr. Sills said: "Web 2.0 refers to a perceived second generation of Web-based communities and hosted services--such as social-networking sites, wikis and folksonomies--which aim to facilitate creativity, collaboration and sharing between users."

Throughout most of the session, insurance and legal experts delved into the emerging exposures for developers and facilitators of Web 2.0 services, comparing and contrasting them with known risks for other types of media and Internet firms.

Toward the end of the session, however, Luis Derechin, chief executive officer and founder of JackBe--a company that develops software applications for social networking communities--suggested the possibility that insurers could be replaced by Web 2.0 strategies by first describing a Web 2.0 site he did not create known as Prosper.com.

He explained that Prosper.com attempts to open up the "black box process" through which banks authorize loans for prospective borrowers. People seeking loans go to the Web site and post descriptive information about themselves, also explaining why they need loans and for how much--say, $1,000. In response, others go to the site to offer partial loans, in small increments like $50 and $100, Mr. Derechin explained.

"All of a sudden you, me and everyone else are becoming bankers to people who were previously unbankable," he said.

"Is that going to happen in the insurance industry?" he asked, challenging insurers to open their own underwriting "black boxes." "Let people understand what's going on in your industry in those cubby holes where a lot of things are happening that we don't understand."

Mr. Sills led off the session, which was mainly focused on the insurability of "this exploding part of the tech sector," noting that even in the soft insurance market, insurers are still not comfortable providing limits to creators of Web 2.0 strategies.

Attorney Ian Ballon of Greenberg Traurig LLP in Los Angeles said that, for the most part, exposures for Web 2.0 pioneers are similar to those typically associated with media and Internet risks--such as those related to copyright and trade secret infringements.

He added that many technology companies in recent years have been insulated from liability for infringements by notice-and-takedown provisions of the Digital Millennium Copyright Act.

Countering the good news, however, he noted that such protections are increasingly being challenged in the Web 2.0 world.

Mr. Derechin later revealed a real-life potential infringement claim. He said he had just received a letter with the threat of a lawsuit for his company's use of the term "Mashup Bootcamp" for a Webcast series about one the firm's main activities (mashing together one or more Web applications in a single tool). The threat came from an unrelated company involved in something called "Mashup Camp."

"Do you carry insurance? Did you put your carrier on notice?" prodded Caren Braun, a broker panelist who is a managing director at AH&T Insurance in Leesburg, Va.

This should be "good news to you, because with increased risk, people need coverage," Mr. Derechin said.

Mr. Sills then asked Mr. Derechin and Jeremy Epstein, senior partner community manager for Microsoft, what the insurance industry could do to reach them and help them recognize potential exposures.

Mr. Epstein said the insurance industry first needs to work toward transparency, explaining that openness is valued by participants in Web 2.0 environments.

Calling the Progressive auto insurance campaign offering price comparisons to competitors a "Web 1.0 example" of transparency, he suggested that insurers need to go further to give customers insight into how they arrive at their conclusions.

A second path of opportunity for insurers is to use the Web 2.0 environment for blogging, suggested Mr. Epstein, a blog author. Giving an example of a lawyer who specializes in pharmaceutical companies that developed a blog, Mr. Epstein noted that while the lawyer's blog gets only 350 readers per month, "it's the right 350 readers. It's the only blog that talks about the pharmaceutical/Washington regulation/legal niche."

"That's the beauty of the Internet. You can be a niche publisher for 350 people for basically zero cost," he said, urging specialty underwriters to share their expertise on blogs about niches they serve.

Sharing anecdotes like one about Mr. Derechin's Mashup Camp problem and its solution will help "build out your reputation, your client base--and most importantly build out your trust" if insurers are "open, honest and authentic" in their communications. "You don't need...huge marketing departments anymore."

Mr. Derechin added that "the power of openness--the power of the people and their collaboration--is changing a lot of industries," going on to launch into his Prosper.com example.

Mr. Epstein, who revealed that he's a frequent lender on Prosper.com, said his average rate of return is over 15 percent. "The guy paying 15 percent is winning. Credit card companies charging 19 percent are losing. We're disintermediating the banks and we're diversifying risk," he said.

"Theoretically, you can turn the whole thing on its head and say I'll insure someone" the same way, he added.

Mr. Derechin quickly chimed in to dub the concept "Lloyd's of London 2-dot-0."

Mr. Sills, returning to the main theme of the session, asked insurers to assess this type of risk from an underwriting standpoint.

"It scares the hell out of me," responded Mark Hutchins, vice president of Euclid Managers, an underwriting manager and claims administrator for Internet, technology, media, manufacturing and miscellaneous professional liability based in Kansas City, Mo.

"Disintermediating the banks? Is that going to make them happy?" Mr. Hutchins asked, suggesting impetuses for potential legal actions. He added that regulators might also come down on the folks facilitating loans, and Mr. Sills worried aloud about the fact that the money was not secured.

Mr. Epstein dismissed these concerns, noting that folks like him were willing to shoulder the personal risk.

"It's not secured. If someone doesn't pay a loan, I don't get my money back. But if I put $1,000 in across 50 people, and 49 pay and one doesn't--that's the way banks and credit cards operate anyway," he said, noting that he's making money on his loan activity.

These are the kinds of issues "we have to try and deal with," Mr. Hutchins said. "We have to figure out what these new business models are that are going to create potential claims....That's our underwriting problem."

"We as the professional underwriters have to do that [because] this is already happening," he said, referring generally to the development of Web 2.0 strategies.

Mr. Derechin again urged insurers to think about using Web 2.0 approaches for their own businesses. "I'm convinced one of the industries that could take the best advantage of this it is the insurance industry, [because] it's the sector that has evolved the least" in terms of technology, he said.

"The good news is that the insurance industry can now leapfrog if you start thinking about these things," he added.

While Euclid Managers has the type of blog that Mr. Epstein recommended for insurers (http://blog.euclidmanagers.com), Mr. Hutchins wasn't ready to leap at the prospect of providing insurance to his fellow blogger after learning that Microsoft allows employees to "do whatever they want" on their blogs, according to Mr. Epstein.

"Seek another underwriter," he said, prompting Mr. Epstein to reveal that Microsoft is big enough to shoulder its own exposures with self-insurance.