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image TLDR Consider: Structure losses– estimated to the nearest square foot or square meter. Plenty of automated tools and techniques, and plenty of auditing for consistency. Contents losses– manual assessment and data entry. Some automated tools for high value, niche cover or pre-inventory. Little consistency in estimation as there is little consistency in what’s being […]
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Traditionally we intend to read more in the summer. Environmental Sustainability and Finance: Poker or Chess? Inspired from the book `The Sustainable Organization` by Miguel R. Brandao, already in its second edition co-creator of the #SORG index and the concept of Dolphin Organization. Don`t confuse People-centric Banking with Customer-centric Banking. Linked to `Emotional Banking : […]
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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 […]
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In early July, Onalytica published an article on Sustainability with a focus in the financial services sector. Comparing the WEF`s Global Risks Reports over the past 10 years[1], they highlight a stunning shift. We are confronted with the reality that Sustainability risks are Business, economy, and Societal risks. All industries are realizing this and the […]
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TLDR Insurance is not complicated, say compared to sending a man to land on the moon, but it’s big, and its current challenges are like finding the proverbial needle in the haystack. Innovation, digitization, virtual sales and service, and so on. Not unlike the elephant in the fable, insurance is perceived differently by each beholder- is it tail, ear, leg, trunk, sales, or underwriting, claims, accounting, actuarial, or customers? What is to be innovated?
The drum beat of innovation is in some part fashion, but a large part reality- insurers need to evolve with their customers. But there’s the rub- what evolution is meaningful, useful, profitable, doable, and able to be integrated into a carrier’s strategy, tactics, and admin superstructure?
This week’s discussion- who is useful to consult when you want to do it, or how to tackle it, innovation idea-wise.
I had a very useful conversation this week with an insurance veteran, Joël Bassani, founder and consultant at jinnbee who is now looking to share his knowledge gained over years with the insurance industry. Our discussion reminded me that there are many aspects to insurance, many lines, covers, regulations, regions, etc. that one must deal with in the globally interconnected insurance world. And how does one determine what path to take from that which one is on to one that leverages innovation or change?
What Joël told me as a foundational message resonates well- it’s not necessarily knowing the tech to apply, but it’s knowing what problem you have and working from that to what innovation has to help you. In his opus of an InsurTech study, Joël notes early on, “An InsurTech is a solution, you need to focus on your Problem!”
And how do you know your problem? Simple- you ask your customers, both external and internal and you strive to #innovatefromthecustomerbackwards .
What jinnbee has compiled for the industry is a compendium of InsurTech purposes:
You have an insurance problem, jinnbee’s analysis can help find an InsurTech solution from organizations that exist, are experts in their fields, and are available. So you don’t have to create the wheel, you simply need to know the makeup of the wheel and jinnbee will help find a fit. Do you make the innovation in house, or connect with an InsurTech? Jinnbee will help lead your decision matrix.
And as comprehensive a study as jinnbee has produced, there are other organizations who have blazed a trail in terms of aggregating InsurTech organizational data, firms’ purposes, an ability to play ‘matchmaker’, and in providing accessible data. The two most prominent examples are Coverager, and Insurance Thought Leadership .
Coverager
I asked Coverage founder Shefi Ben-Hutta what synopsizes Coverager’s business model, what is the ‘elevator pitch’ that would best describe her firm’s approach:
If the reader has yet to access the Coverage website (or better yet, subscribe to Coverager’s daily email), rest assured you will not be disappointed by a simple blast of information. Coverager approaches information sharing with a wry tongue in cheek, occasional snark, but always best in class, topical information. The firm’s web splash page gives an indication of the depth of coverage and information:
Everything from an encyclopedic source of insurance company information, a searchable database of InsurTechs, hosting of industry events, and to the latest marketing scheme or the scoop on a company that has gone off path. As Shefi recounted, their purpose is:
Insurance Though Leadership
Take Coverager’s avant-garde approach to InsurTech assistance and look to a somewhat organizational opposite, and one finds Insurance Thought Leadership (ITL). ITL approaches InsurTech advisory services with more of a formal suit, but with no less breadth of information as Coverager. ITL has developed through the efforts of its founder, Dave Dias into a premier source of innovation source/need connections, and a premier host of innovation education. And the firm is the home of the man with a knowledgeable grasp on the innovation world, Guy Fraker, AKA the man with a thousand sneakers (runners, athletic shoes). Insurance company C-Suites are encouraged to subscribe to the matchmaking service, and the organization’s excellent editorial staff keeps the industry appraised of the latest concepts. A look at the Innovator’s Edge page of ITL website provides the searcher an idea of what the firm can offer:
Three very good sources to search and consider, and there are other InsurTech informational resources, e.g., GR Capital’s recent summary article, Why Next Year Can Be a Turning Point for Global Insurance Innovation, and industry influencers who can make connections from personal experience, including those in this list, or this one, or even this one (companies).
But it still requires the asker to know what innovation problem needs to be solved, what the customers are expecting (maybe it’s no change?), and how efforts are to be focused. Innovation is not fashion, it’s strategic application of resources and there are good resources at hand. And in most cases it’s not part of the elephant, but consideration of the whole beast.
Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
Subscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).
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TLDR The volume and variety of insurance/InsurTech news is almost too much to keep track of, even if one tries to keep focus on one insurance line, one region, one company, legacy vs. innovation, etc. And of course, I like to keep up with all. Foolishly, because a jack of all trades remains a master of none, even in the digitally aware environment.
In any case here’s a sampling of what caught my attention during the past week:
Auto telematics help inform driving decisions for the elderly (and maybe create a sales opportunity for scooter sales What was rolled out originally as an app to measure driving habits for taxis and fleets by Orix Auto Corp evolved into a clever tool for the elderly and their families to broach the subject of safe driving, and whether a person has requisite driving skills. In turn, many who choose to surrender their auto driving rights have found a measure of freedom using motorized wheelchairs or scooters, e.g., devices rented by Whill, Inc. Japan Today Thanks, Robert Collins
InsurTech builds a market for a complementary product.
Equipment breakdown claims grow in a booming economy
“Equipment breakdown now rivals fire loss in both frequency and severity of claims, driven by the booming economy and human influence, according to an FM Global analysis of large property-related losses greater than $3 million released Tuesday.”
Sure, it’s one firm, but what??? Rivals fire losses for frequency and severity???
“Lack of maintenance was a factor in two-thirds of equipment breakdown losses in 2018, while nearly half had a significant human element impact or influence, FM Global said.”
InsurTech opportunity– IoT devices to monitor equipment performance, maintenance, automated repair, and controlled shut down. Keep in mind equipment failure equates directly to loss of use and profitability issues. This speaks to changes in underwriting, policy forms/exclusions, changes in indemnity paired with parametric for a new sort of indexed parameter. Business Insurance
AIG unit off the hook for non-property damage arising from flood
“A flood sublimit in a property policy applied to all losses arising out of a flood, not just property damage, a federal appeals court ruled, reversing a lower court’s ruling against an American International Group Inc. unit.”
An AIG insured filed suit for loss of use (time element) claims, a contention the appeal court said was unfounded as the policy sublimit was deemed to include all claimed losses, not just direct property losses. Policy provision/endorsement wording and existing case law- insureds need to understand and/or ensure their broker does. While this is an insurance ‘due diligence’ issue that is not new, this is another innovation opportunity- policy language/unstructured data analysis. Chris Cheatham of RiskGenius has done yeoman’s work in providing a service to allow companies to “better understand policy language and create more efficient underwriting workflows,” but that does not force a company to understand what coverage applies. Business Insurance
InsurTech opportunity- automated learning from denials of coverage– this flows both from the insured to the carrier, and vice versa. Same principle applies to analysis of litigation- learnings for all.
Which P&C Insurers Made the 2019 Fortune 500?
Let’s not consider the 500, let’s consider the top 100 companies on the list, of which 7 are P&C insurers. Why care for this article? Well, the seven firms represent $535 Bn in annual revenues, and employ in total 658,000 insurance professionals (not including those populating tens of thousands of agencies). That’s a lot of financial clout, and 658K pros (estimated one million with all carriers included)? Innovation opportunity– Think what the input from an informed constituency of that size could contribute to insurance innovation and the industry’s future but are in whole discouraged from doing so. (roll this up to the global top ten- $917 Bn capitalization, hundreds of thousands of staff)
Unleash the innovation Kraken, P&C industry, free the staff! – the only real problem that would be had will be what to do with all the great ideas. PropertyCasualty360
GetSafe CEO Predicts Lemonade Will ‘Struggle’ In Germany
“Lemonade will have to struggle in Germany,” GetSafe co-founder and CEO Christian Wiens told Carrier Management vie email. “The market is regulated and complex, and the domestic InsurTechs are in no way inferior compared with Lemonade.”
“While Lemonade is a fantastic storyteller, they concentrated on their brand and not so much on their product and technology,” Wiens said. “Germans, on the other hand, prefer to do it the other way around.”
First sentence- seems the industry cognati agree- plenty of DE innovators already in play across all covers.
Second sentence- not so sure. Lemonade has been a mostly transparent sharer of the principles behind its policy form, and certainly speaks a lot of its favorite bot, Maya. GetSafe is no technological slouch as its easy app and MGA-based operation has brought together backing (Munich Re) and leverage of changing customer needs in its property insurance platform.
InsurTech opportunity- harken back to business school– what are your market threats, and who is manifesting a potential competitor’s novelty, and can you iterate more effectively based on what new entrants are bringing to your base? Lemonade’s substantial financial backing can help them bring a ‘square peg’ to a DE ‘round hole’, so why not shamelessly and fashionably imitate? Don’t denigrate the disruptor of the disruptors- re-disrupt (is that a word?) Carrier Management
Plenty to see here, as they say, but don’t rest too long on one news feed- too much of one good thing could cause info-indigestion.
Best approaches I have found- watch what your respected connections watch and watch what smart persons in tangential industries watch- there are bound to be meaningful overlaps. Don’t limit yourself to one region’s news, don’t limit yourself to one line of thought. Read the contrarian’s point of view. And understand that the next best thought may come from an unexpected source/country/post/medium/neophyte/expert/anything.
Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
Subscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).
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“When in the Course of financial operations it becomes necessary for people to disrupt the legacy bonds which have connected them with insurance and to assume among the powers of the industry, the separate and equal station to which the technology and innovation entitle them, a decent respect to the opinions of mankind requires that they should declare the cause(s) which impel them to the separation.”
No, Thomas Jefferson and his peers did not declare insurance innovation as a cause in 1776, and his well-known version of the United States Declaration of Independence is far more articulate than the paraphrased paragraph noted above. But it’s July 4th, the U.S. Independence Day, and it seemed fitting to have a topic that tips its tricorn hat to the day.
It’s easy to declare a need for separation from the bonds of a multi trillion-dollar legacy industry, but as with any long-standing governance or tradition the declaring is much easier to accomplish than the doing.
Insurance innovation is a heavy lift of a heavy industry. Insurance is many things, many covers, many types of service, many jurisdictions, many carriers, and of course- billions of customers. As the Insurance Elephant has previously noted in “The Blind Men and the Elephant, InsurTech and its Many Perspectives” , insurance innovation is comprised of many disparate parts that make the whole beast, yet each person who has motive to adopt a ‘separate and equal insurance station’ perceives the beast as the activity in which the respective ‘each’ is involved.
The industry functions and provides the foundation upon which ownership and finance can rely, yet in its entirety the industry is held captive by the tyranny of technical, organizational and process fealty. Process inertia and associated data management are ingrained within every aspect of the insurance system with which all are required to comply, and innovation must expend valuable energy in convincing incumbent management hierarchies of its worth.
And there are plenty of data that need to be processed- one by one, by ten, by one hundred, by one thousand, million, billion, trillion forms. The industry employs millions globally to handle the volume of paperwork/data/forms. Customers (for the most part), vendors, providers, service persons, agencies, and regulators are accustomed to the paper chase- but will that ensure an enduring, effective industry going forward?
These truths are self-evident- insurance must free itself from the shackles of legacy complacency.
There are many ‘patriots’ resisting the tyranny- companies that have developed clever methods to structure data that exists in native unstructured form, e.g. ExB Labs whose Cognitive Workbench can “search texts and images for content,…also classify, interpret, summarize and evaluate” unstructured data. Or RhinoDox, whose document management innovations make captured, unstructured data easier to find and use (yes, it’s clear that for now that firm’s focus is on manufacturing innovation, but their heart remains available for insurers). And insurance process management platforms that have developed- These are, however, just tools to mitigate the overburden of legacy systems, not the inertia-busting change that is suggested for the long-term health of the industry and its participants.
Consider- there are a whole lot of persons employed in the legacy insurance industry, persons who understand what customers need, how processes function (or don’t), how to workaround systems that are obsolete, ensure customers have the appropriate cover, adjust claims within a patchwork of old and new systems, are subject to operating priorities that vary by the quarter, and are witness to the loss of intellectual capital due to attrition and retirement of tenured colleagues.
Yet despite those self-evident factors these millions are not encouraged to participate in the active dialog of innovation and InsurTech. Not only is that wealth of staff knowledge generally unavailable, outside of participation in conferences most of those who are putative industry leaders are reluctant to be or missing in the discourse. The drum beat of innovation is heard in the town square but remains surprisingly mute in many parts of the industry. In the absence of the light of discourse, the tyranny of legacy insurance prevails!
As with established global governance two hundred and forty some years ago and the onset of the nascent United States, there is optimism for change. Perhaps it is time to examine if the current indemnity model that exists for many covers has been outpaced by data availability and alternate means of claim reimbursement, e.g., modified parametric plans. There are plenty of vested interests holding indemnity contracts near, but is a rebellion in the offing?
There are markets that have avoided the need to innovate- those are the digital native markets such as China, or India, or South America, where insurance products have taken hold for hundreds of millions of customers by working from innovation backwards- what does the product need to be to serve the delivery channel the customers expect. There are niche customer segments that have been found and are being served by new products and new players, but these unique markets are an insignificant (statistically speaking) part of the whole.
So let’s talk about the incumbent markets that have the technical, organizational, and process debt that innovation has yet figured out how to amortize, but that is fodder for a declaration of insurance innovation independence. A need to cast off the yoke of what has been and find the what can be.
A very heavy lift, indeed.
A Happy Fourth of July to my U.S. colleagues. And apologies to Thomas Jefferson, et al.
Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
Subscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).
Funny how things can change- one week riding the funding train, next week sitting in the startup exit car. Skinny jeans, Vans and untucked shirts change into a wardrobe that has a descriptor- business casual. Same idea in start-up accounting- paid in option value becomes the eagle flying twice a month and performance bonuses. Evolving from a role that suggests you handle all tasks to the paint drying on the corner cubicle placard that reads, “Chief Marketing Officer.” Startup to post-IPO organization, and in time-incumbency. Welcome to quarterly reports and silo culture. All the same customers, however.
An unexpected tension exists between insurance start-up culture with the unicorn hunt, and the cash flush, ‘we are happy with a combined ratio under 100’ culture of the incumbents- the status of industry legitimacy is pursued but once gained is treated like being in the clique the other players deride. It’s clear that much of insurance innovation is founded in the existing industry being seen as an unresponsive, callous, cash grabbing, seldom paying monolith. A product that is sold, seldom bought, with businesses that hide behind clever spokespersons to craft a façade of ‘hip’.
And the legacy monolith? Always comfortable riding a train of convention. Think of it- incumbent carriers know the route they traverse, little option to change the route because the route is like a rail track. Hook up the cars, open the throttle of written premiums, hope there aren’t unexpected steep grades that might depress the profitable results of the trip. Not that incumbents don’t occasionally start a string of cars that take a new path, but seldom does the main string of cars slow to allow connection of the cars that tried the new path.
Consider the recent comments cited from the Financial Times attributed to UK-based insurer, Aviva’s former CEO, Mark Wilson:
“(Aviva) took space in an old garage in London’s Hoxton Square to house the digital projects that he believed would transform the insurance company. The idea was that, away from the actuaries and the bureaucrats at head office, trendy millennials with coding skills could let their creativity loose and turn Aviva into an insurer fit for the future.”
Not waiting for that parallel-running train to catch speed, the current CEO for the firm, Maurice Tulloch, suggests the firm’s course remains upon the main track, “and (Aviva) is set to take a more hard-nosed look at the garage and the projects that are housed there.” Seemingly not patient enough for results to take hold, and in probability a disconnect between the ‘garage’ and the existing culture.
Even the Street is discouraging alternate routs for the insurance incumbent. From the same article is found:
“Huge amounts of money were being invested (at Aviva) and it looks like it got out of control,” said Barrie Cornes, analyst at Panmure Gordon. “Reining it in is the right thing to do. They need to look at the costs and it wouldn’t surprise me if they looked to cut some of the expense,” he added. Looks like? Based on what?
It was controversial how much he talked about it. He said that pulling back some of the digital investments could add 5 percent a year to Aviva’s earnings per share. Few people expect the garage to close, at least in the short term. Aviva is not the only insurance company to sharpen the focus of its tech investments in recent years. (thanks, Graham Spriggs for the share of the article)
Five percent per year additional profit by reining in the firm’s potential future. Huh. If “All the Insurance Players will be InsurTech”, by InsurTech influencer, Matteo Carbone voices the insurance industry’s future, a five percent savings to the bottom line might be better spent on maintaining competitive advantage by leveraging tech and process innovation. It’s that tension between quarterly expectations and seeing down the road.
Along the same line, incumbents that take the path of innovation often stray from the InsurTech digital path when results aren’t immediate. A key player in the US P&C market that touts itself as a data company has initiated many digital service changes; same company however reaches for the analog diagnosis methods when unexpected (read as not positive) results are experienced. Digital/AI innovations should be addressed using the same AI if there’s to be an effective feedback loop, right? Not if the quarterly results demon is waiting. No naming names because all are guilty of the method- it’s too hard to change right away.
A recent announcement by Lemonade regarding the firm considering exercising an IPO, further exemplifies how a poster-child insurance start-up may migrate to insurance ‘legitimacy’, and potentially step aside from its game theory approach to serving customer needs. The very basis of the firm’s leading principle supporting its charitable giving approach to claim handling/premiums, the Ulysses Contract, may be preempted post-IPO by the quarterly ratio chase and Daniel Schreiber’s hands will be tied no more, and will become available to take the cash or craft the next opportunity. The firm has traveled far from the day where the first seventy renters’ policies were observed rolling in through the company website.
Not that there aren’t innovating companies/startups that have either migrated to conventional insurance forms through investment exit or by IPO- see German Family Insurance-Deutsche-Familienversicherung, the first European InsurTech IPO, or firms that have made effective partnerships with incumbent carriers, e.g., Lucep PTE that forged an effective working basis with MetLife Portugal . Each of those firms found effective ways to bridge the perceived gap between innovation and incumbency.
It just doesn’t matter which insurance route your organization is following- incumbent or entrant, each customer is dear, all firms need to act with a sense of customer service urgency. Today’s startup chasing seed money is next year’s IPO, and in quick time an incumbent that even newer entrants are focused on disrupting. And there’s no reason skinny jeans can’t be worn at one’s corner cubicle while the wearer peruses the corporate 10-Q or ECOFIN dictates.
Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
Subscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).
TLDR What to do, what to do, in the InsurTech, innovation insurance world? Insurance remains a ‘sold, not bought’, product. Virtual service is not only becoming a demand of customers, but carriers are embracing the concept based on expectations of efficiency and economy. Will there be a disconnect between service efforts and how customers perceive it? As customers change their habits, can insurance change theirs? What is the common thread?
How an insurance carrier performs is typically known only when an adverse situation occurs, i.e., a claim, and service is triggered for the customer, a customer who doesn’t really know what to expect during a claim experience. So of course the industry knows this and has devised many ways of gauging service performance: from internal surveys, JD Power ratings (Customer Service Index), and most recently, by asking claim customers how they would rate the service they received in terms of one question,
The answers to that clever question are the basis of the calculations for a ‘Net Promoter Score’ (NPS), a service (loyalty) measure devised by Fred Reichheld and other clever minds at Bain and Co. How does this tie in with InsurTech principles? Seemingly through another three-letter acronym, IoT (Internet of Things).
What are you talking about, you say- NPS is a survey administered measure made available to but a fraction of insurance customers, is but one question, and disregards the experience of the majority of the customers. IoT speaks to connected devices, ostensibly meant (to many in the insurance world) to detect adverse conditions, track adverse conditions, determine behaviors that might predict adverse circumstances, and by extension reduce carriers’ exposure to claims. One measures experience, and one works to predict experience.
Well, I’m here to say that the two concepts couldn’t be more intertwined, and as innovation within the insurance industry becomes more practical, and as IoT becomes more ubiquitous, the interplay of NPS and IoT will become clearer.
At its root NPS was developed as a means to measure what the folks at Bain found as the key driver of business growth and success- customer loyalty. Loyalty has been a proven factor in business growth and businesses who foster customer loyalty not only retain those customers’ business, but those same customers are motivated to bring other business along. Enhancing customer loyalty, adding value to the customers’ lives, and refuting the contention that “loyalty is dead” (see Mr. Reichheld discussing that here ) is the foundation of NPS. And everyone touts their NPS results, don’t they?
So along comes IoT principles as part of the InsurTech wave, and its primary advocate in the InsurTech world, Matteo Carbone. (In an odd coincidence as with Mr. Reichheld, Mr. Carbone is also a Bain alumnus.) Mr. Carbone has espoused the concept that “all insurers will be InsurTech”, but in addition to that his IoT Observatory has become a central authority regarding insurance effects of connected devices in autos, houses, and to some extent, wearables. And a main principle he covers within his recent article, “Smart Home Insurance Strategy 101”, is loyalty :
“This way of enhancing proximity and interaction frequency with policyholders (connected devices and value addition) – while creating new customer experience and expanding relationships – is one of the reasons for adopting IoT in home insurance. These interactions with customers are one proven way to earn higher loyalty and allow the differentiation from competitors.”
There’s that word- loyalty. In an insurance world where virtual service is becoming the holy grail for carriers, how will loyalty remain a factor that can be influenced by carrier service? Even the InsurTech poster child, Lemonade, has to have concerns that as long as NPS remains an important measure of customer service (Clearsurance may have ideas about that), interactions with insureds must remain focused on maintaining or building loyalty. Can a bot do that?
IoT programs have that opportunity to integrate technology, virtual service, and value addition that can build customer loyalty, for example, value-added services as noted by Mr. Carbone. “But the real opportunity is to solve customer problems by delivering enlarged value propositions for their homes. (Some) services enabled by home IoT are:
Seems any or all of those points would serve to build customer loyalty in the absence of direct service from claim staff. And what of agents? Insurance sales and servicing of policies remain a predominantly agency-driven proposition in the US and Europe- agents/brokers are beginning to recognize the need for provision of more to customers than just quotes. In markets where ecosystems and smart device access are the primary entry for customers to insurance, loyalty may be even more fragile as ecosystem change is simply an app away. In all matters the focus must remain on enriching customers’ lives, on #innovatingfromthecustomerbackwards.
NPS and IoT- the concepts can’t make insurance a more ‘bought, not sold’ proposition, but effectively focusing on IoT in an increasingly virtual insurance world can help maintain or build loyalty, and as the architects of NPS found, that is the foundation of an effective growth strategy. The two principles have previously marked different paths but are now on intersecting courses.
Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).
TLDR As discussed in the prior post Lemonade is many things, per CEO and co-founder, Daniel Schreiber– revolutionary tech platform, charitable giver, P2P service provider (no, strike that), but at its core it is a property insurance company. The hows and whys matter not when the application for license goes before the respective jurisdiction’s regulators. The company must be organized and operated in a manner that is recognized as secure for its policyholders and adequately financed as such, must comply with the same accounting standards as other insurance carriers, and must be ready and able to comply with the agreements, provisions, and conditions its policies include.
Why belabor these points? Because the company leads with its innovation chin, its behavioral economics, and its promises to act as a totally different insurance company than what those crabby octogenarians (who) think we are making too much noise companies do.
One of the foundational points the firm makes at its outset is that there is a recognition by Lemonade’s founders that, “There’s an inherent conflict of interest in the very structure of the insurance industry.” (Chief Behavioral Officer, Prof. Dan Ariely, see around 0:54 of the video). He continues, “Every dollar your insurer pays you is a dollar less for their profits. So when something bad happens to you, their interests are directly conflicted with yours.”
Of course there is conflict between payment of premiums and indemnification- absent the ‘tension’ insurance would not exist, or perhaps would be free! It might be said that Professor Ariely’s perspective has an inherent flaw in not acknowledging that an insurance policy is a contract for risk sharing between an insured and carrier, that a respective policy premium and deductible are the insured’s agreed cost of sharing the risk covered by the policy, and that the carrier promises to indemnify the insured for damages due to causes of loss the policy covers. It’s not a pure quid pro quo financial agreement because the cost of underwriting, selling and administering the policy falls upon the carrier, and the deductible and premium cost falls upon the insured. The use or equality of the costs are only considered upon inception of a claim. In addition, the insured is not involved in devising the terms of the policy, as a contract of adhesion a prospective insured’s sole power is accepting the contract in its entirety or not. Absent optional inclusion of additional contract scope or details (endorsements and/or coverage limits), the insured is powerless in respect to a contract that ostensibly is in equilibrium between the parties- premium on one side, equivalent policy benefits afforded by the other side.
The price of the risk is determined by the carrier and approved by regulators based on volumes of data, actuarial smarts and with an eye to profitability balanced with service. The frequency of CWPs (closed without payment) and paid claims is part of the actuarial machinations (regulators are comforted by carriers whose data are in concert with the industry at large), as such denials of coverage are, if absent, a concern for regulators. Is there an undue conflict of interest for incumbent carriers where policy provisions apply, or is Lemonade leveraging a message based on clever marketing?
Consider the typical property insurance claim pool:
Not every policyholder has a claim each premium period; in fact less than 20% of a typical insurance carrier’s homeowner’s customers experience a claim during a policy year. Of that pool of claims the frequency of denial is on average less than 30% of the total claims closed. Extending the thought process, a carrier with 500,000 policyholders experiences on average 100,000 claims during a year, and of those 100K customers 30,000 may be denied coverage, so one can say approximately 6% of the subject carrier’s customers’ insurance services end in coverage disappointment. Compare that with the carrier’s YOY customer retention rate and it may be clear that denials of coverage are not the only factor in customers’ renewal algorithms. Is that the basis upon which differentiation can reside?
There may be a stronger position for the firm to take that the inherent issue may be in pricing losses, confirming losses at FNOL, or sorting out the spurious (read as fraudulent) claims. Per the firm 90% of FNOL reports are through Maya or similar service bots, and since that service entry is tied to the entire suite of AI it can be said that FNOL may be the best vehicle to mitigate the effect of any ‘inherent conflict.’
Why that? The firm (through marketing and per discussion) relies on the position that a ‘Ulysses Contract’ is in place for the firm- a figurative ‘tying of hands’ for Lemonade in focusing on denials of claims since any excess of earned premium over the firm’s flat fee is donated to the policyholders’ charities of choice. No path to the bottom line, no incentive for capricious denials. Is there legitimacy to this position? Insurance is a contract, 90% of Lemonade’s claims are being handled by bots, pricing is established by regulated filings, and claim denial ‘touches’ affect only a small percentage of customers. It’s probable that most denials of coverage are due to contractual reasons, i.e., policy provision reasons including the cause of loss not being a named peril. At this juncture the carrier has primarily renters’ policies as its portfolio, and claims are comprised of unscheduled personal property that has relatively concrete pricing. In addition, claim customers have limited knowledge of what comprises effective claim handling- other than prompt receipt of proceeds into one’s account. If there’s a Nash Equilibrium in place, customers seem to be unaware, and can a bot be adversely subject to the vagaries of Game Theory?
Lemonade must be respected for its InsurTech effect on the property insurance industry- everyone knows of the Lemonade entry and journey. The growth of the firm (while overall PIF is small) continues to engage the attention of all. As Daniel Schreiber said in our discussion and in his recent blog entry Two Years of Lemonade: A Super Transparency Chronicle, “ the fact that our reinsurance agreements protect us from too many claims can’t hide the fact that, since launch, we’ve paid out more in claims than we’ve collected in premiums. Clearly, that can’t continue indefinitely.”
As the carrier evolves into a multi line policy organization (renters’, condos, homeowners) the bot approach to claim handling will be tested. Renters’ claims are personal property tasks- named peril, concrete loss description, concrete valuations. A house claim may involve multiple parties- the insured, emergency services vendors, public adjusters, field adjusters, third party administers, and so on. The Nash Equilibrium will be complicated to affect in that multi-player game, and a Ulysses Contract will be toothless to address the covered damage, partial denials, additional living expense wranglings, and other unknown factors.
Regardless of the company’s cover portfolio, the need to become viable within the framework of insurance accounting looms over the discussion of social good. To quote from a October, 2018, article posted by Coverager, “Lemonade’s Cards“,
“And while Lemonade ‘solved’ this conflict by only taking a flat fee and giving unclaimed money to charity, are they really a conflict-free company? Do they not have a strong desire to improve their loss ratio? Isn’t the loss ratio an important part of their business? Will they be able to attract investors or potential buyers with a high loss ratio?”
The firm will find its data aggregation, analysis, and predictive capabilities invaluable from underwriting to claim settlement, and may find the expected diversity of its claim portfolio meaningful in building its flow of ‘excess’ to charitable organizations. There’s a cadre of claim staff developing their service skills- in other words they are learning to be insurance pros. And at a minimum Lemonade has been patient with the industry placing them under a magnifying glass, watching every step being made- that’s not a bad thing and has added to the collective knowledge of insurance innovation. However, at this juncture having a Ulysses Contract as a mainstay of its business model appears to serve Lemonade’s marketing more than it does its loss ratio.
Patrick Kelahan is
a CX, engineering & insurance professional, working with Insurers,
Attorneys & Owners. He also serves the insurance and Fintech world as the
‘Insurance Elephant’.
I have no positions or commercial relationships with the companies or people
mentioned. I am not receiving compensation for this post.
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