Transparency and fairness – game-changers in personal insurance?

My house was broken into a few years ago. I'm still haunted by the awful sinking feeling that hit me when I walked through the door to see my home turned upside-down.

To make a bad situation worse, despite having insurance the small print meant I wasn’t reimbursed for a lot of the stolen items. And the process of claiming was drawn-out and painful. I felt as though both the thieves and insurers had got the better of me.

It's all in the game

Emotions run high after a stressful experience. It can feel like insurance is a game in which the dice is loaded against you. Over the years you may have paid an eye-watering amount to the insurer, yet when you need help it feels like they try to wriggle out of compensating you.

And this emotive view is easily rationalised – insurance companies could never be incentivised to pay out, because paying out eats their profit, right? Insurance marketing promises support, but the mechanics make it seem adversarial and evasive. It's not surprising that 50% of British and American people say they wouldn't rule out submitting a false claim – it's all in the game. However this in turn leads to inflated premiums. It just feels broken.

But it wasn't always like this.

Keeping things shipshape

Insurance as we know it can be traced back to the late 1600s when ship owners, meeting in Lloyd’s Coffee House in London, made agreements with one another to pool their risk and pay out to one another’s families should their ship not return. This allowed them to take risks and explore new territory.

Insurance as such was more social in nature and communally beneficial. But at some point along the way the focus became money making rather than having each other’s backs when things went pear-shaped.

A better way?

I'm working on a series of posts to highlight innovative financial services that are succeeding without having to compromise on ethics. First I looked at mobile money, which empowers people who lack access to formal financial services like banks.

Within insurance, one of the interesting players is Lemonade – a startup who are trying to rectify the culture of personal insurance by realigning the incentives of the insurer and the insured.

Re-aligning incentives

Daniel Schreiber and Shai Wininger are New York based tech entrepreneurs with no insurance background. But they saw that the way the insurance industry operates brings out the worst in people, and that there is essentially a conflict of interest.

So they launched Lemonade in the USA in September 2016. Lemonade aims to break the circle of distrust by giving away unclaimed money. Grounded in psychology and behavioural economics, this concept aims to change the game mechanics to bring out the best in people, rather than the worst.

How it works

Consumers purchase premiums and submit claims using Lemonade's smartphone app. It uses AI and chatbots to sell policies and to process claims, making it quicker and cheaper both for the consumer and for Lemonade. Their record time for processing a claim is three seconds – a far cry from the often painfully long process we’ve become accustomed to when claiming from a traditional insurer.

The company is young and their bots still have a lot to learn, so more complex claims are passed onto humans. They hope that one day chatbots will handle 90% of claims.

Lemonade are a ‘full stack’ insurance provider, meaning they are the direct insurer rather than a reseller. As of August this year, their policies are ‘live’ – giving customers the autonomy to do things like modifying their coverage, adding valuable items and cancelling their policy using the app. Traditionally this would require having to phone a support centre and wait for a confirmation letter. This is a win-win – for customers updates are quick and immediate, while Lemonade make huge savings on admin costs.

But what really makes Lemonade interesting isn't the cost, utility or usability of the service.

How it's different

Lemonade are very up-front about how the revenues they take from premiums is used, contributing to the culture of honesty and openness they hope will be reciprocated by their customers.

This is how they break it down:

• From the cost of your premium, Lemonade takes a flat fee of 20% for running costs, paying their staff and for profit.
• 40% is used for reinsurance – to cover any major claims that exceed what the premiums can cover.
• The remaining 40% is set aside to pay for any claims for that year. Here’s where it gets interesting. When you sign up for a policy, you choose a charity or non-profit to support. If you and other supporters of the same cause don’t make too many claims that year, whatever is left over of that 40% is passed on to the non-profit. This is what Lemonade refer to as ‘Giveback’.

Trust and respect should keep premiums low

Behavioural economics indicates that if your chosen cause stands to benefit from your honesty when claiming – rather than the insurance company – then you will be less likely to defraud your insurer. Lemonade doesn’t have to pay out unnecessarily, and your premium therefore stays low.

Lemonade also uses psychology and behavioural economics to prime consumers to be honest when actively making a claim. It asks them to digitally sign an 'honesty pledge’ attesting to the truth of their claim at the start of the claims process, rather than at the end. Claimants must then record a short video explaining what happened to lead them to make the claim.

Continuing the ethos of transparency, Lemonade practices what it preaches by publishing details such as data on customer growth and bank account balances. It is also the first insurer to become a Public Benefit Corporation (B-Corp). This means it includes ‘public benefit’ in their charter alongside profit goals, and has to meet rigorous standards of social and environmental performance, accountability, and transparency.

Lemonade’s aim is to bring insurance back to its original – mutually beneficial – form. It’s a great concept, and I’m looking forward to seeing whether they’re able to change the culture of insurance for the better, or if it’s all just fizz.

Do you know about any other interesting ethical endeavours within FS? If so I’d love to hear about it.