Are there common threads for or against the industry changing customers’ insurance viewpoints among these data points? $82.6 billion spent by insurers in 2018 on tech- U.S. market[i] $1.2 trillion- 2018 premiums, U.S. P&C market[ii] Record cash surplus for U.S. P&C firms- $802 billion as of 9/2019[iii] $3.1 billion in 2018 global InsurTech funding, $8 […]
image TLDR Are the InsurTech advocates/enthusiasts ‘preaching to the choir’ and considering that to be conversion of the masses? Within the orb of InsurTech press, social media, and conferences one would think innovation and migration to adoption of the most clever of tech and innovative practices is de rigueur within insurance- if one […]
TLDR How can an interview with an insurance startup founder go from discussing InsurTech and innovation, and end up focusing on the concept of a Ulysses Contract, Game Theory, Prisoners’ Dilemma, and the Nash Equilibrium? Simple- find some time to talk with Daniel Schreiber, serial entrepreneur and now CEO of Lemonade Insurance. It’s certain that additional perspective would have been added by Daniel’s co-founder, Shai Wininger, but we’ll focus on Daniel’s views for this article.
Lemonade has been under intense scrutiny since its entry into the insurance world in 2016, and Mr. Schreiber has been the guest of many interviews since then. As is expected for any figure that resides in a legacy industry, finances and insurance ‘stuff’ have in general been the main topics of those discussions. It seems all the questions related to insurance accounting and finance had been asked, and those at Lemonade have been rather public in getting out their ideas of what the industry should know about the company, so I was not interested in simply conducting another ping pong contest of convention versus innovation. In planning for this Daily Fintech interview I thought I’d take a different approach- ask others what they would want answered by the CEO of this very public startup- so I crowd-sourced the questions. More questions came than there would be time to ask, but the questions were shared with Daniel ahead of time so we figured we could sort out some key points.
Spring boarding off a recent optimistic posting by the firm’s Chief
Insurance Officer, John Peters (read that here ), Daniel
was asked of his impression of Lemonade in the insurance market- customer
impressions, marketing, industry reaction, any factor that was meaningful.
The primary response- gratification that the insurance incumbency is tolerant but somewhat unimpressed based on ‘backhanded’ compliments, e.g., “they are good at PR,” “have a delightful APP,”, “they don’t ‘get’ insurance,” “Lemonade is not serious,” and the like. Not ‘getting’ insurance is due to the app that is at the core of change in insurance, with invisible to the eye analytics, transformed user experience (UX), and predictive risk tools that are unavailable to traditional broker systems. Not getting it means the firm’s approach is truly different/innovative. And as time passed, the firm’s growth prompted comments such as, “if it grows like a weed it probably is one.”
The discussion led to a general touch on the first of the crowdsourced questions (answers quoted but paraphrased from Daniel’s remarks):
“At the very beginning of Lemonade’s creation, what was the vision, who was the target customer, what value could you add to them?”
DS: This, of course, touched on a primary reason for the firm’s existence- how could insurance be made available to customers in a way that was entirely different than the legacy system that was by some estimation, “A business that involves selling people promises to pay later that are never fulfilled?” (Urban Dictionary) . Early on, per Daniel (and recounted by co-founder Ty Sagalow in his recently published book, “The Making of Lemonade”) , the founders of Lemonade worked to form an insurance company that aligned the interests of the carrier and the customers, in a fashion that was economically viable, applied cutting edge technology, and contributed to a common good. Insurance is a need for most and is not a product that people yearn for, it is as is said, ‘sold, not bought’. The vision was to be a 24/7 insurance company that delighted customers, and not one that irritated them.
“What early action do you regret was handled in the manner in which it was?”
DS: At the initial launch of the company we announced Lemonade as being the ‘world’s first P2P insurance company’, a designation that posed immediate issues. First off, the phrase only made sense within the insurance industry, insurance customers didn’t know what P2P was and didn’t really care. In addition, those within the industry questioned the definition and if Lemonade was truly peer-to-peer. Rather than wrestle with semantics and the distraction we backed off from that marketing.
“An important aspect of the firm’s make-up is the charitable contribution (up to 40% of premiums.) Shouldn’t contribution levels be detached from an arbitrary loss ratio result?
DS: We are very proud of the amount of premiums that Lemonade has shared with charitable organizations on behalf of our policyholders. 2018 found the contribution to be approximately 2% of premiums. It’s understood that Lemonade is not the only company to make charitable contributions, but compared with other companies Lemonade’s efforts represent not a bilateral, traditional approach where a portion of a company’s revenues are donated to a charity, Lemonade expresses a trilateral approach- the policyholder, the company, and the designated charity. As discussed, Lemonade’s financial operating model allows for a set percentage of earned premiums to be set aside for operations, a portion for reinsurance backing, and the balance for payment of claims. When claim/loss payments have a favorable performance versus the set aside, the balance is apportioned by group to the respective policyholders’ choice(s) of non-profit. As a B Corporation, or Public Benefit Corporation, Lemonade is proud of its efforts to be a social good that is also an insurance company.
“When it’s said in Lemonade’s press and marketing that traditional insurance companies make money by denying claims, which claims do incumbents deny that Lemonade would pay?”
DS: Lemonade clearly understands that an insurance policy is a contract between the carrier and the policyholder, and the intention is not to say that in handling claims from customers Lemonade will pay claims outside of the policy provisions. What is being said is that for both parties to the contract incentives matter, and alignment of interests matter, and actions follow the incentive structure. If there is a reduced temptation for the carrier to deny claims because the outcome is to do good, and there is a reduced temptation for the insured to embellish claims for the same reason, then the dynamic of denied claims, or incentive structure affecting both sides is reduced and in fact there becomes an even closer alignment of interest to do good. In actuality the principle is a foundation of Lemonade- the Ulysses Contract and Game Theory (author’s note- these concepts will be addressed in more depth in a future article). Just as Ulysses ‘tied his own hands’ to the mast due to his knowing that the sound of the Sirens would tempt even him, Lemonade ties its financial hands by setting a designated amount for operations, reinsurance, and claims, and the remainder is contributed to good. There is not a unilateral financial benefit to denying claims (or arbitrarily not paying claims) because any excess is not the company’s. And, customer knowing that if they embellish claims they are in essence reducing that which goes for the common good. So it’s not that Lemonade is paying or not paying claims, it’s that the company has its own Ulysses Contract to guide its behavior.
“There are fans of the firm’s Instagram vids- How did you come up with the idea, and what else is the company doing like that to propagate your overall message of transparency and social good?”
DS: Those videos with the pink goo and others are from a variety of sources, primarily from Lemonaders within the company. The goo was an idea from a product designer, for example. If you recall the publicity driven by the Banksy art piece that shredded itself in front of an auction audience not long after that a Lemonade quality assurance staffer came up with a quick homage here . We are unafraid to encourage these types of contributions.
“A recent Forbes article and LinkedIn article by Chief Insurance Officer John Peters mentioned Lemonade’s loss ratio tracking in the high 80% range, a significant improvement/trend from the prior year’s results. Is the reported ratio result being ‘subsidized’ by ceding premium and loss cost amounts to the firm’s reinsurers?
DS: Lemonade are the guardians of the insurance ecosystem as established by the company, and operations are to the benefit of all stakeholders. there is no financial ‘game playing’ to meet an arbitrary result. The firm’s reinsurance agreement sets excess limits where the reinsurer accepts responsibility for claim costs above the set threshold. There is recognition that traditional measures are what the market sees and holds as comparatives but we figure if the original business model is followed the results will speak for themselves.
“You’ve done great stuff, is there one thing of which you are most proud?”
DS: The ability to create an insurance system that delights customers, allows growth, and generates data sets where the system begins to feed off the customer and claim experience. Seeing the loop succeed gives us great pride. 90% of FNOL processed by Bot, and 100% of sales? Validates our founding thesis.
So many questions, and not enough time for them all.
As I reviewed our conversation, recent results/articles, and Mr. Sagalow’s book several things were apparent:
The company is ‘all in’ on allowing the data
analysis approach to continue its development,
Growth within markets is driven as much by
external forces, e.g., requests from European countries, as it is by internal
The firm’s start and development benefitted greatly
from the founders’ past experience in startups and connections developed
Lemonade is impatient- that in itself is
innovative in the insurance industry.
The firm remains too new to have financial
trends that aren’t subject to variance from reporting period to reporting
period. 86% loss ratio can be celebrated
today but the vagaries of growth in a new carrier and claim volume can produce
unexpected results, and some interesting ceding to reinsurers. (keeping things grounded with ongoing
analysis by Adrian Jones
and Matteo Carbone, interesting
summary here )
Customers who have provided service surveys like
the insurance products and service they receive from Lemonade, see Clearsurance’s survey
There’s pride in how charitable contributions
have been an important piece of the firm’s entry into the market
The entry into the industry is not a sprint- a
carefully run marathon is what the firm needs.
The P&C business is a trillion-dollar (US) business and Lemonade
holds a very small part of that; its operating premise is still fragile
There is strength and opportunity in the firm’s
digital approach to operations
The original intention was to interview a CEO and produce a summary of the
firm through crowd-sourced questions.
The interview came off well, the questions were presented in volume,
where the problem arose was in the expansiveness of the firm’s concepts, the
great interest in the entry and growth of the firm, and the author’s inability
to distill the available information into one column. The discussion with Daniel Schreiber did not
change my status of being a pragmatic optimist where Lemonade is concerned, but
many questions were answered.
I look forward to further examination of the Game Theory concepts as applied by Lemonade in a future column/posting.
My thanks to those who provided questions in addition to my own (and
apologies that not all could be addressed in this article):
Financial Services has traditionally been a game of numbers, aggressive product (mis)selling, big bonuses and as a result too many “too big to fail”s. The rise of regulations and technology innovation within the industry has resulted in a course correction. The customer is now getting some attention. And more recently customers’ behaviour is.
Applying behavioural sciences to study how customers make their financial decisions has seen some recent traction. It is critical to bring together cognitive biases and behavioural anomalies and understand how these affect financial decisions. Add to that the impact these financial decisions have on an organisation’s PnL. An executive in a bank capable of doing that would be an ideal fit to as the Chief Behavioural Officer.
The rise of Fintech was accompanied and facilitated by the rise of friendly customer journeys. Today I spend so much, not realising how much money has gone out of my bank account with just a touch. The process is so frictionless that, the act of paying someone is invisible. When it is out of sight, it is out of mind. That’s the simplest way to make people spend more.
That is an example of how an existing process has been made less of a touchpoint. Recently, Merill Lynch conducted an experiment where they asked users to upload their photos. They would run a program to show what the users would look like in 30-40 years. That made the users more conscious of their retirement planning, and shifted their financial behaviour.
Another instance is where the Commonwealth bank of Australia launched an app for customers to set goals. The tool prompts customers to set personalised savings goals and breaks them down to smaller milestones. Since February 2019, users have created more than 250,000 savings goals – 27% of the goals being towards a holiday and 19% towards a property.
Human beings are irrational when it comes to financial decisions. An understanding of behavioural sciences is not just important to win over customers. It is critical to understand the biases that affect existing business decisions that are made within a firm. Leading valuations expert Ashwath Damodaran calls for the need to study these biases as much as the valuation principles used within investment banks.
All valuations are contaminated by bias, because we, as human beings, bring in ourpreconceptions and priors into the valuations. When you are paid to do valuations, that bias multiplies and in some cases, drowns out the purpose of valuation
Professor Ashwath Damodaran
We (my firm Green Shores Capital), recently did an event to identify top financial inclusion firms to invest/track for investments. One of the firms Confirmu, based out of Israel, study the psychological responses from a potential borrower to assess if they were trust worthy or not.
It is one thing going through the borrowers bank account, business plan and reasons for the loan. While all that could be genuine, a borrower might still not have a genuine intention to repay. Especially in countries where there are no credit bureaus, a system to predict the future behaviour of a borrower could be very handy.
While there are several tools to assess the ability to repay, there are very few to assess the intention to repay a loan.
Confirmu’s customer journey takes the users through a chat process, where the customers answer a few basic lifestyle questions, then choose their favourite between a bunch of images, and finally leave a voice answer to a question. Their machine learning powered algorithm gives a rating indicating the customer’s intention to repay.
Banks have started to focus on technology much more than they have ever done. However, as Steve Jobs puts it – ” it’s technology married with liberal arts, married with the humanities, that yields us the results that make our heart sing”
I’ve noted in the past that InsurTech is not dissimilar to the fable of six blind men describing an elephant solely on touch- each man ‘sees’ the elephant from the perspective of his narrow exposure to a very large creature. One sees a rope because he has grabbed the tail, another a tree because he’s grabbed a leg, another a snake due to the feel of the trunk, and so on.
InsurTech is that similar situation- many firms ‘touching’ the initiative from a narrow perspective. Not blind, surely, but not from a vantage of ‘seeing’ the entire concept. Of course it would be very daunting to try to grasp the industry from all angles, and very expensive too.
there are the individual firms describing their unique parts- underwriting,
pricing, distribution, administration, claims, agencies, customer acquisition,
etc. And designing and/or applying technology- artificial intelligence
(AI), machine learning, IoT, algorithms, data science, actuarial science,
behavioral economics, game theory, and so on. Using technology and new
methods to help them see their part of the beast that is insurance innovation.
We get caught up in the thinking that InsurTech is a discrete concept– because each involved player has his unique approach to defining how change will be effected (and we can’t have multiple terms to describe what the movement is.) In the end each is convinced the efforts being made in their firm are defining the term. A recent article penned by Hans Winterhoff, KPMG Director, 3 Lessons European Insurers can Learn from Ping An, provides suggestions for legacy insurers based on successes Ping An has had in the China insurance market. The author makes three apt points but as with simply grabbing the Beast’s trunk and calling the animal a snake, is Ping An’s approach to insurance innovation the best InsurTech perspective for mature insurance markets?
Can the best innovative methods be applied to incumbent markets if a carrier’s staff are not engaged adequately in the evolution?
Legacy markets are populated with customers who are content with the Beast that is insurance, and in spite of some years of InsurTech efforts the market penetration of innovative companies remains low. Not that these customers don’t deserve the latest and best methods (surely most would trade the bureaucracy and cost of existing health care for the ease of service provided by a Ping An kiosk), but change must also come from within insurance company organizations. If one looks at Fortune magazine’s best large employers by employee survey and finds two of the insurance market’s biggest employers, Allstate and Geico, not in the top 500 firms, one must consider absent employee engagement then innovative change may be inhibited for those major companies and their customers.
every week there is a significant conference of InsurTech enthusiasts,
thousands of attendees per month, all seemingly with an idea of what InsurTech
is, where it’s going, and how they will capture innovation lightning in the
bottle they have designed. There are some very smart persons who are seen
as champions of the effort, and these persons publish/travel/post and remind
the industry of where it has been and where it’s going. They are adept at
describing the beast in terms that most can understand, and in terms that help
the holder of the ropy tail to see that there also is a snaky trunk, and that
the two parts are of the same beast.
is cool about how the InsurTech movement is evolving is that a solid
recognition is being realized by most (not all) that InsurTech is comprised of
multiple, important and integral parts, and even if your firm is not working
with idea A, it can leverage the knowledge in developing idea B. We pick
at the theories others espouse, nay say, comment, maybe even doubt or
criticize, but at the same time all the knowledge is to the common goal-
improving a product for the existing and as yet unidentified insurance
without belaboring the theme, we can be reminded that the elephant is not
InsurTech; the elephant is insurance. InsurTech is the trappings with which the
elephant is enhanced. And the elephant is the contractual agreement that
comprises insurance, and the elephant’s handler must be the customer.
all describe the beast well from our unique perspective, with the understanding
that in the end the elephant’s handler- the customer- must be why we are touching
the beast at all.
It wasn’t long ago that the figurative tools of InsurTech were being sharpened against imperious legacy insurance. In contrast to plans however, effecting insurance change has been found to be significantly more nuanced an effort than that which was foretold to occur within the Roman Senate on the Ides of March. And, as with the limited effects of the Ides on the crowds in the Forum, InsurTech change to date has been primarily a focus within the inner sanctum of insurance that has remained transparent to its customers- and their perception of the industry.
As noted in my last column, InsurTech has proven its worth in theory, and in many ways in practice – developing innovative methods that allow more efficient operations, devising effective methods to underwrite, distribute, engage, sell, service and retain customers and staff. Very cool – but have the innovation efforts had an effect where they need to, customer satisfaction? And, are there indications that InsurTech-founded carriers are economically viable?
There are two primary lines of insurance business to consider regarding customers’ response to InsurTech’s effects:
New business lines, ostensibly where new business methods are simply the only business methods the customers know. Innovation is simply part of the customers’ experience.
Incumbent/legacy business that has in some part been changed in the service provided to the customers. This could be back office changes, underwriting, distribution, sales, claims, after-sale service, etc.
New business lines
There have been many entrants to multiple lines of insurance since the advent of the ‘InsurTech’ initiative, in essentially all major markets around the globe. There are carriers with explosive growth involving tens to hundreds of millions of customers such as Zhong An , a China market startup whose customers have voted their initial satisfaction with their overwhelming participation in the carrier’s ecosystem approach. Other markets have seen the advent of online auto (motor), renters’ and homeowners’ options, including owner usage-based auto provider Root Insurance , behavioral economics/charitable giveback player Lemonade, proactive homeowners carrier Hippo, and German health insurance ‘hybrid’ start up, DFV_AG (incumbent with a clever tech solution for claims). In each case the firms’ primary customers are in majority digital ‘natives’ whose expectations for performance are not colored by legacy operations’ processes. In great part these firms’ customer experiences comprise not much more than a few written premium/earned premium cycles. Considering that, traditional financial success has been a difficult measure (see assessment work by Adrian Jones and Matteo Carbone, e.g., mo-premium-losses-insurtech-start-ups-get-big ) and service satisfaction is in great part solely the success of getting customers to pay the premiums. Niche carriers such as Dinghy Insurance (cover for freelancers), or Pineapple (peer to peer personal effects cover) are endorsed by participants as being just the right unique item for the respective policyholders. Satisfaction by default.
Global insurance companies have been present in some form for three hundred years (and certainly risk management has been a principle since the days of Hammurabi, and since things have changed a least a little since 1750 B.C.); it can be said that societal innovation carried risk management along for the ride and insurance customers have at least begrudgingly maintained satisfaction with the purpose of the industry during the ensuing 3750 years.
So what about innovation/InsurTech being the dramatic industry change since 2015-16? Have customers embraced and celebrated all the wondrous technical and process improvements that have burst forth from the slide decks of very smart InsurTech folks? It sure is hard to tell.
Not all markets and lines of business solicit and/or maintain customer service responses from their insurance customers, so customer satisfaction changes due to InsurTech advances are not much easier to gauge for incumbents as would be for new entrants. Certainly the P&C markets within the U.S. have more than one authority capturing customer service tendencies: J.D. Power is a recognized provider of service data, and Clearsurance (an InsurTech firm in its own right) is an online aggregater of customer service responses. But can survey tendencies be attributed to tech innovation?
A review of J.D.Power auto insurance customer survey data from 2016 and 2018 find the top players remain at or near the top, that the industry average satisfaction has increased a little, and that the 2018 customers voice approval of having multi-channel access to their policies/carriers. No overt celebration of tech advances but some tech mention is worth something. There has not been a wholesale abandonment of incumbent carriers within the US as the top-ten carriers’ market share in 2016 (71%) and 2018 (72%) has changed little (http://www.naic.org).
Continuing the discussion to Homeowners carriers, J.D. Power data for 2016 and 2018 find some customer tendencies being noted across the two year period, but no actionable changes that can be attributed in the majority to innovation/InsurTech.
As for customer satisfaction data for other global markets- it’s difficult to obtain comprehensive results for insurance lines across national borders, and unified markets such as in India and China do not yet have the tradition of longitudinal study of customer survey data. It can be suggested as those markets ‘homogenize’ with influx of firms that are outside the domestic current growth there may be cross-pollination of survey habits. And in terms of health insurance surveys, the mix of national health programs, private programs, national programs for select portions of populations, it’s an apples and pomegranates situation for customer sat information. As for life products, annuities, etc.- efforts to collect those tendencies mirror the efforts the industry has held for a while – a little underwhelming from the customers’ perspective.
After a lot of blah, blah, blah, it’s difficult to say that InsurTech is a concept that insurance customers embrace as a reason to buy insurance, change who they buy from, or give warm, fuzzy feelings about the product, any more than the change from cuneiform text to Roman/Greek to Arabic writing changed the industry. The overarching point- InsurTech has awakened initiatives that are blending many digital and tech methodologies with finance and insurance, e.g., API integration (thanks, Karl Heinz Passler) but not on a seismic, customer based level- yet. Give the industry a generation and the customers will force the issue by default acceptance of societal tendencies.
Until that wave of change occurs, insurance innovators can better effect change through sharpening skills in understanding what customers indicate they need, innovating from the needs of the figurative forum-first- and helping the firms that hold the bulk of the public’s business- the legacy players- avoid the need to be warned of an Ides of March initiative. InsurTechs might even find that in collaboration there are profits to be made.