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How Basis for Buying Is Changing (Part 2)

How fast is too fast in insurance?

Most insurers would probably say that the recognizable point of an insurance process being “too fast” is the point at which poor decisions are made regarding risk. If the risk is the same either way, then there is no “too fast.”

In my last blog in this series on how buying decisions are changing, we discussed some of our findings from the Majesco Future Trends 2017 report and talked about how a generational shift of market boundaries and technology was creating a culture of impatience.

See also: How Basis for Buying Decisions Is Changing  

In today’s blog, we’ll explore how insurers are coping with the need for speed, without compromising on risk. We’ll look at how product adaptation and a transformed framework will benefit insurers by positioning them to meet needs with immediacy. Because human decisions are being made faster than usual, it places the onus on insurers to create products that can be quickly and easily understood. It also means building a framework that supports quick evidence gathering, rapid data transmission, instant analysis and immediate transactions.

Why is speed filled with potential risk?

There are essentially two reasons why quick decisions can be bad.

  1. If an insurer takes a shortcut to provide quick coverage, it may be missing key information regarding risk. Is the insurer getting the data and information it needs in a timely manner, or is it more concerned with providing a decision in a timely manner?
  2. If the customer is making a poor decision to gain quick coverage or if the customer quickly decides against coverage, the customer could be at greater risk. Does the customer understand the choices, both in terms of insurers and products? Will the choice just cover risk or help the customer monitor and reduce risk?

Behavioral science and rapid decisions

In our last blog, we mentioned Daniel Kahneman’s book, Thinking, Fast and Slow. Kahneman describes human decision making and thinking as a two-part system. System 1 thinking produces reflexive, automatic decisions based on instinct and experiences. These are “gut” reactions. System 2 thinking is slow, deliberate and based on reason and requires cognitive effort.

In an ideal world, insurers would be able to help customers to slow down and make better decisions. That world, however, has rapidly disappeared because of new expectations set based on experience in other markets or industries.  Just consider Amazon continually resetting the bar.

So, it is incumbent upon insurers to rise to the new “speed” bar and create a new model for rapid, yet limited risk insurance decisions. This is a large part of what insurtech has been trying to disrupt. Insurtechs have been borrowing principles of speed, psychology and behavioral economics from other markets and industries to persuade customers to do business with them while they are making quick decisions.

The highest-profile use in 2016 was Lemonade, a startup darling.  The company recently announced national expansion plans and has been widely cited for its disruption of the traditional insurance business model with a new one grounded in outside-in, innovative business processes, sophisticated technology and behavioral economics principles. Dan Ariely, well-known author of Predictably Irrational and other books, has helped the company create a truly different insurance experience through both process and perception.

Lemonade changed the customer experience along the entire value chain, based on Ariely’s insights about people’s decision-making processes. The AI chat-driven application and claims processes use a few simple questions, pulling in data as needed from other sources behind the scenes.  Lemonade claims it takes 90 seconds to complete a purchase and three minutes to get a claim paid (though it has also extensively promoted a recent 3-second claim).  These simple, transparent and fast processes require less System 2 thinking by customers, creating a simplified and engaging experience while ensuring that the data used for underwriting is the most important, credible and accurate, rather than relying on human memory.

Auto enrollment, social proof and honesty pressure

At the macro level, government, academic and corporate efforts have focused on encouraging greater employee participation in saving for retirement by devices like automatic enrollment and default contribution rates for 401k plans, and improving individual health insurance plan decisions by reducing choice overload, among others. The UK government has a Behavioural Insights Team (BIT) nicknamed the “Nudge Unit” whose mission is to “use insights from behavioural science to encourage people to make better choices for themselves and society.”

At the micro level, companies like Geico employ principles like social proof (i.e. “people like you choose…”) to increase shoppers’ confidence and nudge them toward selecting specific products and closing the sale immediately. This kind of evidence is designed to quickly move people off the fence of indecision and into the security of the social community insurance fold.

Lemonade tackles the question of customer honesty by employing a social benefit component. The company takes a 20% flat fee off the premium paid, with the balance used only to pay claims, then gives any excess to a charity of the customers’ choice. This sets up a quasi-“moral commitment” for the customer to act in the interests of that organization (by behaving responsibly and not filing a claim that will reduce the benefit to the charity). By explaining the model up front, Lemonade gains the mental assent to honesty during the crucial application phase. An applicant isn’t just buying insurance, she is “buying into” a bigger promise that includes risk protection when needed and support of a worthy cause for every dollar unused for claims.

See also: How We’re Wired to Make Bad Decisions  

All of these efforts help make both fast decisions and good decisions, significantly reducing or eliminating risk to gain speed in the process.

Shifting up to the next gear

Seeing how changes to customer-facing engagement can both improve and speed up decisions, we’re now faced with the impact of those decisions on technology throughout the business. Is it possible for insurers to innovate fast enough to make quick decisions pay off? Because the need for speed touches so many different areas of the business, insurers wanting to rewrite decision methodology may need to act more like startups — innovating from the outside in. In the Future Trends report, Majesco advocates that insurers re-imagine the insurance business by creating a new business model that embraces the demographic, market boundary and technology changes rather than restructuring the old model.

The new ideal is a cycle of continuous insight and improvement that may bear unintentional yet valuable fruit. When an insurer transforms itself to meet the demand for quick decisions on its standard products, it will also be laying the groundwork for systems that will support new product development — products that currently lie outside its realm. Once an insurer is prepared to gather evidence quickly, quote quickly and engage with speed — then every insurable person, event or property becomes a new opportunity for business. It is within today’s fast-paced lifestyles where insurance is likely to find new lodes of business opportunity from unserved or underserved markets and customers. Insurers that understand the nature of good decisions in a time-crunched culture will meet new customer needs without compromising themselves.

For a deeper look at how lifestyle trends are affecting insurance technology decisions, be sure to read Future Trends 2017: The Shift Gains Momentum.

Lemonade: Insurance Is Changed Forever

On Sept. 21, 2016, at 7 a.m. EDT in New York, Lemonade issued a press release. Paraphrased, it said: We’re open for business!

Only time will tell the true impact that Lemonade can have on the insurance industry. Or if we will look back at 2016 in the same way we trace the origins of insurance to 1688 and the birth of underwriting in London.

I’m convinced. The launch of Lemonade will go down as a defining moment in the history of insurance. And, after today, this industry will never be the same! 

This week's article from InsurTech Weekly is Lemonade are here - And Insurance will never be the same again!. Rick Huckstep leads The Digital Insurer in Europe and produces Insurtech Weekly.

I trust you, you trust me.

Insurance didn’t start out badly. When you look back in history, there are many examples of civilizations and societies supporting each other. Looking out for each other is natural behavior.

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 are both chasing the same dollars.

And now, their interests are no longer mutual but are misaligned. The insured wants a helping hand and to be “made whole.” The insurer wants to satisfy its 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 minimize the amount it pays in claims.

See also: Be Afraid of These 4 Startups

It’s an unfair relationship from the customer’s perspective. The customer has paid the premium and yet has to prove a claim to get what is rightfully hers. No amount of technology can obviate this fundamental failing of today’s insurance business model.

And that is why the launch of Lemonade is so significant!

lemonade-screen-shots-1

Insurance reinvented   

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 the reasons for taking the hardest route to get a license 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 the company’s business model and tech. With his 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, take a look at these videos on YouTube:

The thing to know about Lemonade is that it has 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 those people have only ever used a hammer, the chances are their solution will be kind of like a hammer.

See also: The Insurance Renaissance (Part 1)  

This innovation dilemma is not a problem unique to insurance. The incumbents in all industries have shown it’s difficult to innovate from within. That’s 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 on Daily Fintech about the seven acts in the creative destruction play.)

lemonade-screen-shots-2

Lemonade is truly different

Here’s why:

  • It’s a platform.

The way Lemonade has addressed conflict of interest between insured and insurer is inspiring — the company has simply eliminated it! Operating as a platform that enables the insurance engagement, Lemonade doesn’t make any gain from the non-payment of claims. It takes a flat fee for running the platform. It makes its profit from the fee. If Lemonade doesn’t pay any claims, it doesn’t increase its bottom line.

Lemonade has 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 groups its 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 is 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, he or she knows 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 pure-play 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, automated and immediate. 

Underwriting is quick and easy and automated. Lemonade is 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 the company pays 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 behavior.

Lemonade’s secret sauce is Dan Ariely, the company’s chief behavioral scientist. Dan studies behavioral economics and has written a series of books, including “The (Honest) Truth About Dishonesty.”

Daniel explained to me why trust and behavior are so important to the fabric of Lemonade. He said, “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 improve human behavior can be seen at Grameen Bank in India. This is a bank for poor people. It is trusted to repay unsecured loans without reliance on credit scores or enforcement through debt recovery agencies. And the repayment rates are higher than those of the traditional lenders who won’t lend into these mass markets for fear of default.

  • It’s about the greater good.

Lemonade is a public benefit corporation. This means it balances 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 is putting its money where their mouth is.

In the age of the 4th Industrial Revolution, trust is the defining characteristic of the modern era.

See also: InsurTech: Golden Opportunity to Innovate  

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 succeeds (and I think it will), we will look back to 2016 and New York as the birthplace of 21st century insurance.

The Problem With Telematics

When I attended the Insurance Telematics USA conference in Chicago earlier this month, I expected to see much more enthusiasm. I first wrote about Progressive’s venture into telematics all the way back in the late 1990s, and technology has improved so much since then that the telematics industry would surely be bragging about its breakout into the mainstream or at least predicting that one was imminent. The idea just makes so much sense: being able to track cars so that insurance risks can be determined very precisely for individual drivers, while even providing feedback that improves driving.

While the telematics technology is, in fact, stunning and while there are reasons for great optimism, what I found was not an industry brimming with confidence. I found an industry still searching for the right business model.

Until the industry solves that problem, progress will remain limited.

The Problem

The current approach to telematics is generally to install a device in a customer’s car for six months and have it relay the driver’s actions back to the insurer for evaluation. At the end of the six months, the device is uninstalled, and the insurer tells the driver what sort of discount, if any, she will receive based on her driving habits. A key point is that the issue at hand only concerns discounts; insurers have promised that they won’t raise rates if they find that someone is a worse risk than expected.

Think about the expense that goes into that model: manufacturing the telematics devices; installing and uninstalling them; and transmitting lots of data over a wireless network on which the insurer has to buy bandwidth.

Now think about the benefits. The prospect of a discount has attracted enough good drivers that, if all telematics-based auto policies were rolled into one company, it would be close to being in the top 10 among auto insurers in the U.S. Ptolemus, a strategy consulting firm, said there are 4.4 million cars in the U.S. carrying usage-based insurance (UBI). That’s a lot of cars. But there are 253 million cars and trucks in the U.S., so the market penetration of UBI is just 1.7%. Even in the main ballroom of the conference, full of ardent proponents, only about 5% raised their hands when asked if they had UBI.

Many customers turn out to not be that focused on discounts. They would prefer receiving free access to other services, such as roadside assistance — but what services customers want, how to bundle those services, etc. has yet to be worked out.

Even if some new package of free services drove 10 times as many people to buy UBI auto policies, telematics wouldn’t do much to make roads safer. Insurers are offering incentives to a self-selected group of drivers who are already among the safest on the road but, because insurers have decided they can’t raise rates for bad drivers, won’t be doing anything about the people who cause a huge portion of the accidents and, thus, the costs.

The current business model works — barely. The costs are too high, the offering to consumers isn’t right and the benefits to insurers are too low.

The Potential

Help is on the way from two main sources, which I have seen drive innovation in industry after industry since I started following the world of information technology almost 30 years ago. One source is what I think of as the power of “free.” The other is the power of a platform.

The Power of “Free”

The behavioral economist Dan Ariely has done all sorts of experiments about the power of free and found that it is almost magic. For instance, if someone does volunteer work and you decide to thank him by paying him a little, he will likely cut back on the work he does for you or even stop. Ariely reasons that people evaluate paid work in a hard-nosed way — how many hours do I work, how hard or skilled is the work, how much do others get paid for this work, etc.? — and evaluate volunteer work based on altruistic measures, such as the quality of a cause. If you have people evaluate the return from their free work on a paid scale, you’ll lose them. Similarly, he says, you can get people to do all kinds of uneconomic things if remove a paltry cost and make something free.

The power of free computing and communication has driven the upheaval of business over the past 30 years, spawning the wide adoption of the Internet, smartphones, etc. and all the business models that have come along with them. (Obviously, we still pay for computers and storage devices, but they are essentially free by comparison with where they were in the 1980s — a gigabyte of memory, which cost $300,000 then, costs about a penny today. Communication costs have gone way down and are headed toward something approaching free, even though telecom and cable companies will fight a rear guard action as long as they can.)

Now the power of free is coming to telematics, because the cost of acquiring information on drivers is heading toward zero.

In the short term, that will be because of smartphone apps. Although some say the data they generate isn’t quite as precise as that from sensors in cars, the apps are good enough for the vast majority of uses, and they cost roughly nothing. There isn’t any need to make a dongle for the car and install and uninstall it. Nor is there a need for the insurer to buy a wireless data plan for the car. The app can do most of the analysis on the phone and just send modest amounts of data back to the insurer, using the driver’s wireless plan.

In the long term, things will get even better as “connected cars” move into the market. These cars, already connected wirelessly to the Internet, will automatically generate the kind of information that insurers need. Insurers will be able to know what kind of a driver someone is at the moment she applies, rather than having to guess and then wait six months to know for sure.

The Power of a Platform

From the 1950s through the early 1980s, when IBM controlled the computer industry, the pace of innovation was glacial by today’s standards. Part of the reason was that the pace let IBM milk maximum profits, but part was also because IBM had to produce what software types would call the “full stack.” IBM had to develop the semiconductor technology that allowed for faster processors; design those processors; manufacture the processors; design and manufacture just about all the support chips, especially memory; assemble the mainframes; code the operating system; and generate the major pieces of application software. Everything had to come together, from one company, before the next step in innovation happened.

When the PC came along in 1981, with its open architecture, innovation became a free-for-all. Intel owned the chip, and Microsoft the operating system, but everything else was fair game. Companies flooded into the market, innovating in all kinds of smart ways, especially with applications such as the spreadsheet, and the market took off.

The telematics market is well on its way to making the transition from the IBM mainframe days to the open days of the PC and beyond. Initially, Progressive had to pull an IBM and invent the whole process for telematics from beginning to end. Now, an ecosystem has developed, and all sorts of companies are free to innovate at any part of the process.

Verisk has announced an exchange, to which car makers and insurers can contribute data on drivers and from which they can pull information. GM has said it will contribute data from its OnStar system, and GM has one million 4G-connected cars on the road in the U.S. So, the need for everyone to generate their own data is going away.

The Weather Channel (represented on the panel I moderated at the conference) has information that can correlate bad weather very precisely with driving behavior — the company is even working to aggregate information on the speed at which cars’ wipers are operating, to understand in a very granular way just how severe a storm is in a certain spot.

Many other companies are innovating in new parts of the ecosystem, rather than just focusing on pricing risks better or acquiring customers. For instance, my friend and colleague Stefan Heck, a former director at McKinsey with whom I wrote a book (along with Matt Rogers) about how innovation can overcome resource scarcity, just unveiled an extremely ambitious approach to improving safety, through a company called Nauto. (A writeup in re/code is here.) Agero made a presentation at the conference about how telematics can speed claims processing and cut costs while making customers happy — essentially, the telematics system notifies the insurer instantly about an accident, so the insurer can provide whatever reassurance and help is necessary, while also sending someone to the scene so fast that it can take control of the process, rather than deferring to, among others, municipal towing companies.

The Future

The power of free and the power of a platform ensure that, before too many years go by, the costs for telematics will drop drastically and the benefits to insurers and customers will increase greatly. That still leaves insurers with the task of figuring out the right offering to customers, but, in my experience, once costs get low enough and lots of innovators get interested, experimentation eventually produces the right business model.

The question to me is: Who will that winner be?