I trust you, you trust me
Insurance didn’t start out bad. When you look back in history, there are many examples of civilisations and societies supporting each other. Looking out for each other is natural behaviour.
This is what insurance is meant to be. Mutuality in the pooling of shared risk.
Sadly, the industry has lost its way with the evolution of mass scale personal lines in the 20th century. The profit motive has gotten in the way of trust. The insured and the insurer both chasing the same $.
And now, their interests are no longer mutual but misaligned. The insured wants a helping hand and to be “made whole”. The insurer wants to satisfy their duty to shareholders.
With a very high cost of sale and administration overhead (and little that can be done to reduce it), the insurer is motivated to minimise the amount they pay out in claims.
It’s an unfair relationship from the customer’s perspective. They’ve paid their premium and yet have to prove their innocence if they want to get what is rightfully theirs.
No amount of technology can obviate this fundamental failing of today’s insurance business model.
Which is why the launch of Lemonade is so significant!
About a month ago it was my privilege to have some time with Daniel Schreiber, the CEO and co-founder of Lemonade. We talked about the launch of Lemonade and their reasons for taking the hardest route to get a licence in New York. We discussed the things that needed to change in the industry and Daniel explained the philosophy and motivation behind Lemonade.
Next month, I plan to write a longer piece with Daniel on their business model and tech. With their permission, I will share some of the detail behind Lemonade, which is, quite frankly, awesome, mind-blowing and game-changing!
And if that doesn’t whet your appetite, then take a look at these videos on YouTube.
Lemonade in 60 Seconds – https://youtu.be/flSLI2JmWVE
Lemonade App Demo – https://www.youtube.com/watch?v=27iGfQvQfrE
The Science Behind Lemonade – https://www.youtube.com/watch?v=6U08uhV8c6Y
The thing to know about Lemonade is that they have built a full-stack insurance model from the ground up.
This is NOT a mobile app sitting on top of traditional insurance. That’s what you get when you ask a bunch of people to find a new way to drive a nail into a piece of wood. If they’ve only ever used a hammer, then the chances are their solution will be kinda like a hammer.
This innovation dilemma is not a problem unique to insurance. The incumbents in all industries have shown that it’s difficult to innovate from within. Which is why it took an Amazon to reinvent shopping, PayPal to change the game on payments, and AirBnB and Uber to disrupt in their respective markets. (See this great article from earlier this week on Daily Fintech about the 7 Acts in the Creative Destruction Play.)
Lemonade is truly different
- It’s a platform
The way Lemonade has addressed conflict of interest between insured and insurer is inspiring. They’ve simply eliminated it! Operating as a platform that enables the insurance engagement, Lemonade don’t make any gain from the non-payment of claims. They take a flat fee for running the platform. They make their profit from the fee. If they don’t pay any claims, it doesn’t increase their bottom line.
Lemonade have taken out the Winners and Losers dynamic that today’s insurance model is built around. Like all great ideas, it’s simple and bleeding obvious.
- It’s peer-to-peer insurance
Unspent premiums are put to good use. As a signed up member of B-Corp, Lemonade group their customers by affinity to good causes. This means that, for example, everyone who cares passionately about local youth development or finding a cure for cancer, are grouped together. Unspent premiums from the risk pool are donated to the good cause at the end of each term.
When a customer makes a claim, they know that any embellishment will be taking money away from the good cause they support, not the so-called “fat-cat insurers”.
This is pure genius. Now you have a dynamic where the insurer’s job is to pay claims and the insured’s motivation is to help others.
- It’s a pureplay tech stack
The tech behind Lemonade is pretty special. It’s a 21st century platform built on 2016 technology. It uses Artificial Intelligence to communicate through a mobile platform with its customers. From quote and buy to making a claim, the customer journey is simple and automated and immediate. Real life humans talking with real life computers.
Underwriting is quick and easy and automated. Lemonade are more likely to ask how many friends you have than how your roof is constructed! Claims are the same. You tell the app what you’ve lost, make a short video testimonial and then they pay out. Immediately. There is no claims submission. There is no approval process. You state your loss and they pay you what you’ve asked for.
- It’s all about trust and behaviour
Their secret sauce is Dan Ariely, Lemonade’s Chief Behavioural Scientist. Ariely studies behavioural economics and has written a series of books including “The (Honest) Truth About Dishonesty”.
Daniel explained to me why Trust and Behaviour are so important to the fabric of Lemonade. “People are generally honest. We all have a trust self-image that we might push from time to time. It’s like speeding; that doesn’t make us feel like bad person when we do it. The same goes for insurance. People don’t feel aligned to the insurer, but they do feel the relationship is adversarial. This gives people a sense of entitlement and leads to embellishment and even fraud.”
A great example of how trust can positively influence human behaviour can be seen at Grameen Bank in Bangladesh. This is a bank for poor people. They are trusted to repay unsecured loans without reliance on credit scores or enforcement through debt recovery agencies. And their repayment rates are higher than those of the traditional lenders who wont lend into these mass markets for fear of default.
- It’s about the greater good
Lemonade are a Public Benefit Corporation. This means they balance the needs of shareholders with a social responsibility to make decisions for the greater good. Like a government department, Lemonade has a corporate duty to make decisions that do not put profit and returns to shareholders first.
InsurTech comes of Age
Out of all these characteristics, it is this last one that I think will be the most enduring and the most significant. It fundamentally cements the alignment of Trust between the insured and the insurer. This is not paying lip-service to satisfy a corporate social PR agenda. Lemonade are putting their money where their mouth is.
In the age of the 4th Industrial Revolution, Trust is the defining characteristic of the modern era.
Now, for the first time in the InsurTech era, we are about to see a true game-changer come into the market. Of course, a lot will depend on consumer adoption. Will they “get-it”? Do they want it?
But one thing is for sure, up until now, no one has come this close to addressing the fundamental issues in personal lines. And if Lemonade succeed (and I think they will), we will look back to 2016 and New York as the birthplace of 21st insurance.
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The author, Rick Huckstep, is an InsurTech thought leader and editor of InsurTech Weekly for The Digital Insurer.