Why Insurance Carriers Should (and shouldn’t) Be Worried About Lemonade
Stale industries with entrenched players who fail to innovate will continually be disrupted by forward-thinking industry entrants.
We’ve seen it with cable, retail, transportation, you name it.
Monopolies make great investments until the competitive moat is breached. Failing to pay attention to the customer and instead focusing solely on the bottom line is why companies like Amazon, Netflix, and Uber have risen to fame.
But while these Goliaths continue to dominate their respective industries and dismiss incoming threats, the Davids of the world quietly load up their slingshots.
Insurance carriers, take note because the pebble that could ultimately serve as the industry kill shot may already have been loosed.
A Failing Business Model
When your business model is inherently working against your customer’s best interests, there is an opportunity for disruption.
This notion dawned on Lemonade founders Daniel Schreiber and Shai Wininger when they examined the nuances of the insurance industry.
Doesn’t the very nature of the insurance business model, which makes a considerable amount of its profit from having a profitable loss ratio and combined ratio, create a conflict of interest between the company and its customers?
When a customer gives an insurer money with the expectation that they’ll be protected in the event of an incident, they should feel safe.
So why do studies from both EY and Accenture indicate that many customers don’t trust their insurance to pay claims?
Well, if Company A collects $10 in premiums and only pays out $8, that $2 remaining goes straight to their bottom line. Carriers have been traditionally valued based on their ‘loss ratio’ or the ratio of claims paid by the carrier divided by the premiums they earned. In this case $8/$10 = 80%. (Note: anything under 100% is considered profitable).
The very nature of the business model creates a conflict of interest. Every dollar an insurance carrier does NOT payout, they get to keep as profit. In other words, the more claims they reject, the more money they make, often resulting in lots of paperwork, scrutiny, policy manipulation and delayed (or rejected) payouts for claims.
That’s why people don’t trust them.
Old Age vs. New Age
Dan and Shai thought “what if we start a new insurance company that doesn’t have that conflict of interest? Customers will switch to a product they can trust.” And with that, they decided to combine their technical expertise and insurance naivety to create Lemonade.
Given a blank slate (or a literal whiteboard) – they thought “Let’s target the next wave of first-time insurance buyers…millennials and Gen Z and their current Rent and soon to be Homeowner’s policies.”
Now, if you were charged with creating a business to attract millennial buyers in an industry that hasn’t been upgraded in years – where would you start? Probably by following in Uber’s footsteps and changing the whole business model.
I imagine the thought process went something like this…
One. Let’s give our customers upfront and transparent pricing. We will charge them a simple transaction fee and eliminate the ‘loss-ratio’ metric by donating any leftover funds to a charity of their choice. Millennials love social causes, and I’d bet they’d be less likely to commit fraud if they’re ‘stealing’ from a charity, not some ‘greedy corporation.’
Two, no phone calls. Millennials hate being on the phone, especially with salespeople. Let’s make it text-based. Better yet – let’s automate that and make everything run with Chatbots.
Three, no paper, definitely no paper, where do you even find a fax machine these days? Guess we’re making it app-based.
Four, speaking of salespeople, let’s eliminate them altogether. Heck, even Uber hasn’t been able to do that yet. All that money saved will help us drastically reduce prices for customers, fending off more expensive incumbents, and eliminate the annoying minimums many traditional players put in place.
Five, since we’ll never actually see our customers, we’ll need to use behavioral analytics to measure their digital body language to ensure we’re offering a world-class experience without sacrificing risk controls.
Six, instant gratification is big with this demographic, so let’s make everything from policy approval to claims payout as close to instant as possible. That means automated underwriting & claims.
And seven, let’s obviously use artificial intelligence, machine learning, and predictive analytics throughout the entire process.
For instance, with behavioral analytics, we’ll be able to analyze the user experience down to the keystroke, mouse hover, and correction so we can pinpoint exactly where customers are experiencing friction and dropping off. This will transform insurance applications from a necessary evil to a seamless application & claims customer experience.
In addition, if we use behavioral analytics to study the actions of our customers and correlate those actions to their eventual outcome, we’ll be able to start predicting their intent at the point of submission. This will help significantly improve underwriting precision and premium pricing accuracy. If we can do that, we will lower claims cost by predicting and reducing risk and fraud.
Lemonade’s Behavioral Analytics and Automated Underwriting Strategy
The magic is in combining big data and behavioral analytics to predict risks and quantify losses by placing the customer in a risk group and thereby quoting the relevant premium. Lemonade’s behavioral analytics software has allowed them to collect thousands of additional data points on their customers, which their machine learning algorithms use to underwrite more accurately.
These groups of “uniform insurers” share similar risk behaviors and are compiled by AI algorithms that gather extensive customer data and monitor loss ratios. The more data accumulates, the more recursive risk patterns emerge enabling more precise assessments.
…two years, 400,000+ customers, $480mm in funding, and a $2B+ valuation later, Lemonade is catching the attention of everyone in the industry.
Note: Lemonade’s behavioral analytics strategy has become a key differentiator and huge growth driver.
But are they ready to take over the world? Not so fast…
If Insurance carriers are smart, they’ll look back at history and try to learn from other company’s failures.
While the Taxi industry disruption was likely inevitable, had they taken the threat seriously and partnered with 3rd-party technology companies to add in features like Ratings, GPS hailing, ride tracking, and seamless payments – I’d be willing to bet they could have slowed Uber’s growth significantly.
Heck, it’s happening right before our eyes with Tesla vs. Everybody else in the EV market.
Not that you need another analogy, but I hope that insurance companies take the Walmart path – initially dismissing the eCommerce threat, but eventually accepting it, building a strategy, and executing on it.
For insurance companies, that strategy is behavioral data.
And while Lemonade has the advantage of being a technology company that happens to sell insurance – all is not lost when it comes to playing catch up.
Instagram didn’t invent “Stories,” Snapchat did, Instagram copied them and squashed Snapchat’s growth overnight. Insurance carriers can take that same approach, copy Lemonade’s behavioral analytics strategy, and (maybe) slow their growth considerably.
It would be easy to dismiss them, as Blockbuster did Netflix, Palm did to Apple, and Microsoft did to Google, but I’d caution against it…(see more foot-in-mouth disruptor quote examples here).
Lemonades loss ratio has almost halved from 166% to 86% between 2017 and 2019 and Schreiber predicts it will continue to fall. “What we’re seeing here is something that is going to be very traumatic for the whole insurance space,’’ he says. “Data is overtaking expertise.”
Taken directly from their website, “We’re getting smarter. Lemonade started at a data disadvantage, building up a data set from scratch and collecting information at every customer interaction. We knew it was only a matter of time before we were at a data advantage. If we’re not there yet, we sure are close. Interacting with our customers directly and digitally means we know them really well, even if we’ve never met them face-to-face. That knowledge is translated to a ‘risk score’ that accurately predicts future loss ratios, and can be used across the organization, from marketing to acquisition to policy management and claims. It has not yet impacted our pricing sophistication, but that day will come – just like credit history did and auto telematics may soon.”
Whether you are a competitor or not, you simply cannot ignore this. The tectonic plates are shifting and you need to put yourself on stable ground.
For all the hype, Lemonade still has less than 0.1% of the Home and Renters insurance market, compared with 19% for State Farm and 10% for Allstate to keep things in perspective.
Despite the outward appearance of ‘instant’ and ‘all-bot-everything,’ they still process over two-thirds of their claims manually. (This statistic is likely outdated.) Regardless, they not only need to improve their AI models and infrastructure but need to execute on their plan to expand to new products and geographies.
And the challenges don’t stop there…as they expand geographies and things like Hurricanes and natural disasters occur, will their bots be able to handle these complex claims? The jury is still out.
Yes, they’re collecting lots and lots of data, but their customer base is tiny compared to their competitors so only time will tell.
Fad or Future?
Couldn’t carriers simply copy Lemonade’s behavioral analytics strategy, collect this behavioral and outcome data themselves, and catch up?
We firmly believe the answer is a resounding yes, but even with everyone aligned, it still could take years to build such a system.
Lucky for you, we’ve been building ForMotiv for years so you don’t have to.
With two lines of code, our Behavior-as-a-Service solution will get you in Lemonades behavioral arena instantly.
Typical forms and applications provide you the “final answer data” from roughly 10-40 questions/form fields. With our Behavioral Intelligence solution sitting behind the form, you’ll collect over 100x that.
And if you’re a carrier reading this, guess what, you’re literally sitting on a gold mine of behavioral data already you just need the right pickaxe to mine it.
ForMotiv = Pickaxe. We talk more about that here: (What is Digital Behavioral Intelligence?)
To put the numbers in perspective, some carriers are receiving tens of thousands of applications A MONTH. If they were collecting between 5,000-50,000 per application, they’d surpass Lemonade’s data set in no time.
But every second you wait is a second you’ll never get back. You need to start collecting this data today.
We reached out to Dr. Robin Kiera, Insurance Influencer and Founder of Digitalscouting.de, and he agreed.
“Lemonade Inc. improves existing processes in an amazing way but does not reach a different level. In fact, traditional insurers could catch up by investing wisely in agile, proactive, visionary and hands-on digitalization units, independent of their old corporate core,” says Dr. Robin Kiera.
Well said, Dr. Kiera, we agree.
He continues, “In the long term, this could trigger a discussion about the core role of the combined ratio in the current insurance model. Large insurances may need to change their product lines, refraining from using a positive combined ratio to boost their profitability, because customer behavior and customer demands change. This would put tremendous pressure on the other pillars of profitability: the efficiency of internal processes and the sales channels. Considering the maturity of most insurance markets in the Western world, the loss of profitability probably could not be compensated for with moderate restructuring or uplift of sales, perhaps causing distress in some industry sectors. As Victor Hugo once said, “Nothing is stronger than an idea whose time has come.”
So, we’ll leave you with this question…do you think data-enhanced, tech-enabled insurers, with customer-centric business practices, are a fad or do you think they’re the future?
If you’re in the latter camp, let’s chat. While we can’t help build you a chatbot, if you haven’t conquered the world of predictive analytics and want to compete with Lemonade’s behavioral analytics, we may be able to help.