Poker and the future of insurance

Many poker players will have a natural interest in insurance, which is in some sense the most popular form of gambling we have. On this subject a recent Andreessen Horowitz podcast episode is worth checking out. A few points of particular interest, greatly simplified, are that:

(1) Insurers and the insured have a common interest in promoting the well-being of the insured; the insurer doesn't want to pay out, and the insured doesn't want the bad thing triggering the payout to happen.

(2) Insurers are more able to learn about their clients than they used to be, especially insofar as they can get access to their clients' smartphone data.

(3) We should expect future data-rich and data-savvy insurers to use their data in two ways: First, they will offer different prices and different products to different clients. Less risky clients will no longer have to suffer so much of a penalty by virtue of their not being able to distinguish themselves form more risky clients, and more risky clients will be less able to hide in large, undifferentiated populations. Second, because of (1), they will bundle insurance with various kinds of assistance. There are already examples of this (such as health insurers subsidizing gym memberships), but we will see more diverse, nuanced, and personalized kinds of assistance.

One might think that people will object to handing over data to insurance companies for reasons of privacy. I don't think this would prevent insurance arrangements involving frequent data transfers from coming into being. People seem very willing to trade lots of privacy for a little bit of money, especially when it comes with the prospect of being demonstrated superior to one's neighbors by a big company.

So far, these are mostly hypothetical suggestions, but there are non-hypothetical models that can help us think about these future scenarios and their likelihood. The poker staking marketplace is, I think, one such model. Its evolution seems to me to suggest that (3)-type scenarios are likely to become the status quo.

There are many kinds of staking arrangements, but they generally involve a backer putting up the money for a player (the "horse") to buy in with; in exchange, the backer is entitled to some fraction of the player's winnings over a certain time period. There are many possible benefits to the horse of such an arrangement, and among them is being shielded off from the worst effects of a big downswing; it's not his own money he's lost. In this way, backing arrangements, although they have functions other than insurance, share important features with insurance.

I have been watching these deals play out since 2003 or so, and it's striking to me how much the market has shifted to include arrangements such as are predicted in (3) above. The most common form of this is bundling staking and coaching; many of the biggest and most successful "stables" require horses to take coaching along with the backing. This takes many forms, some of which are semi-personalized (PowerPoint lectures from a teacher to students of a certain type) and others of which are highly personalized (one-on-one hand history reviews, close observation of a horse by a backer, and other kinds of one-on-one coaching).

Stables also tend to track and audit their horses more diligently than was common ten years ago. So, for example, they are more likely to require tournament receipts, submission of online hand histories, or good answers to text-message spot checks. This encourages horses not to get sloppy with their play and not to play drunk, and it makes it harder for them to lose their backers' money at blackjack while pretending they are suffering bad luck at the poker tables.

Different backers do all this differently, of course. For some case studies in modern backing, you can listen to Thinking Poker Podcast interviews with Chad Power, Mike Leah, and Danny Noseworthy.

These arrangements tend to play out in ways that we would predict. First, insuring only horses who are willing to participate in coaching allows backers to keep from insuring the laziest and most stubborn players. Second, the coaching and other monitoring allows backers to get rid of horses who don't improve fast enough or who simply don't play well enough. Third, getting high-quality coaching along with backing induces horses to agree to terms that are otherwise less favorable to them. In this way, both the backers and the horses benefit from economies of scale in offering coaching that are available to the backers.

Fourth, extra data and better record-keeping allow for mutually beneficial dissolutions of staking deals: Occasionally a stable will be able to, with the horse's permission, sell the rights to an underperforming horse's action. This usually happens when there is a risk of moral hazard if the horse continues to play under the current arrangement, when the horse could use a metaphorical change of scenery, or when the environment of a different stable is better for the horse. It seems to me that this sort of thing is more common now than it used to be, and that the increased availability of and reliance on data keeps the horse-transfer market from being a pure "market for lemons."

In this way, the market seems to me to have evolved in ways consistent with what Frank Chen and Mike Paulus's suggestions on the podcast. While I don't have access to backers' results, I strongly suspect that backers who have been innovative about bundling insurance with other products and who have been diligent about collecting and managing data have done very well, compared to their competitors.