Tag Archives: behavioral economics

Lemonade: Interview With CEO

Lemonade is currently the most talked-about disruptor. That’s why we’re pleased that, for the first time in Europe, Lemonade will present at DIA Munich what the pioneering concept is all about in a keynote presentation. As a special DIA Munich appetizer, we spoke to Lemonade CEO and co-founder Daniel Schreiber recently, exactly one year after the company launched.

DIA: Daniel, congratulations on Lemonade’s first anniversary. It must have been a roller coaster ride. Thanks for being willing to share some of the experiences and learnings. Did the first year meet your expectations?

Daniel: “Yes, it has been quite a ride. But it is great to see that we’re striking the right chord. We already sold ten thousands of policies. Our portfolio doubles every 10 weeks.”

DIA: If you had to name just one thing, what would you say is the key success factor so far?

Daniel: “Our renters insurance is 80% cheaper than what competitors offer and takes less than 90 seconds to purchase.”

DIA: 80% cheaper is almost unbelievable …

Daniel: “Many industry insiders think so, too. [They think that] at least 40% of what insurance carriers receive in premiums is paid out in claims. So if Lemonade is 80% cheaper it must lose money on every policy. That is not true. Renters insurance covers personal property, not real estate. The expected loss is therefore significantly lower and so should the corresponding premium be. Unfortunately, the enormous overheads incumbents have make low-premium products impossible. Their minimum premium reflects their high costs rather than your low claims.”

See also: Lemonade’s New Push: Zero Everything  

DIA: We can imagine that such a price difference attracts a specific segment …

Daniel: “Yes, indeed. We offer a good price, especially at entry levels. No less than 87% of our customers are first-time buyers. Lemonade is the preferred insurance brand among first-time insurance buyers. In the state of New York, where we first launched Lemonade, we now have a market share of 27% among first-time buyers.”

DIA: Was this the target segment you planned to focus on initially?

Daniel: “Not really, at least not to this extent. This was definitely not planned or expected. It appears our proposition is attracting people who did not think of such an insurance before; because it was too expensive, too much hassle, or because they had little trust in the added value. So it turns out we actually opened up an underserved, untapped market. This was really a surprise for us, as well. It just shows that with really new propositions there is only so much that you can plan.”

DIA: This suggests the Lemonade concept is about solving frictions that customers experience when dealing with a traditional insurance incumbent. Aren’t you selling yourself short here?

Daniel: “True. It is not just about solving frictions; being faster, better or cheaper. That wouldn’t be sufficient in the long run. When we started conceiving Lemonade, we immediately realized there is no way you can beat insurers at their own game. We needed to think beyond that. We decided to foster trust, not suspicion. Our business model is built on two very distinctive pillars: behavioral economics and artificial intelligence.”

DIA: The pillar that is often highlighted is behavioral economics, one of the reasons we like Lemonade so much. Insurers could benefit much more from psychology and social sciences.

Daniel: “The vast knowledge and experience of our Chief Behavioral Officer Dan Ariely (professor of psychology and behavioral economics at Duke University) is instrumental in this. We apply behavioral economics to neutralize the adversarial relationship, the conflict of interest, between customers and their insurance provider. We take 20%, and the rest (80%) goes to paying claims, and this includes our reinsurance. If less than the 80% is used to pay out claims, for instance 75%, the 5% unclaimed money is donated to charities chosen by customers. The maximum amount that can be given back is 40%. Lemonade gains nothing by refusing a claim. This way we are reinventing insurance from a necessary evil to a social good.”

DIA: Can you explain how behavioral economics reflects in Lemonade’s daily customer experience?

Daniel: “Not just our business model but also the whole product flow is informed by behavioral economics. For example, we ask people to sign on the top of the form, not at the bottom. Behavioral research shows that asking people to pledge honesty first results in forms that are actually more accurate.”

DIA: How does this affect the combined ratio?

Daniel: “Multiple ways. For example, we also apply behavioral economics to reduce fraud. In the onboarding process, customers are asked which charity they want the money that is not used for claims to go to, let’s say the Red Cross. Now, when at some point in time a customer files a claim, we first remind the customer of the charity he or she selected before diving into the claim. We do that on purpose. To many people, insurance fraud is considered a victimless crime; you’re not really hurting someone, at least that is the perception. Research shows that 24% say it’s okay to pad an insurance claim. We’re changing that by immediately creating the presence of a victim. Making it crystal clear that a claim harms a charity someone cares about inhibits misuse.”

DIA: Do you already have proof points that using behavioral economics this way works at a larger scale?

Daniel: “Obviously we’re a young company, so the amount of claims that we receive are still limited. But we already have early indications that this really works. In the last two months, we actually had six customers who claimed and got paid, but later on returned the money. Someone, for instance, thought his laptop was stolen, claimed and got paid. A few weeks later, it turned out he had left the laptop with his mother-in-law. He then decided to return the money, probably because he didn’t want to harm the charity he selected. I would really love to know how many customers of traditional insurers are returning their money.”

DIA: Insurers need to manage the feelings side of financial services much better than they do today. Quite a few tend to forget that when they are going digital. Others are building hybrid solutions of, for instance, chatbots and human experts. How do you secure the human side in a pure play such as Lemonade?

Daniel: “Behavioral economics is one pillar of our business model; artificial intelligence is the other. Thanks to AI, we don’t have to rely on brokers and paperwork. Underwriting and claims handling are taken care of by AI, as well. This makes it even more important to secure that we are recognized as living, breathing people who really care. My co-founder Shai Wininger has a rare talent to marry technology with customer understanding. Our bot has a name. It talks in an approachable manner. It doesn’t say, ‘I don’t understand.’ We know its limits and anticipate the direction in which the conversation is going. Next-level questions are seamlessly moved to our, human, support staff.”

See also: Lemonade: World’s First Live Policy  

DIA: We quite often see that traditional insurance carriers have a strong immune system when it comes to embracing insurtechs. Apparently, different cultures are difficult to match. Sometimes we even see organ rejection. We noticed that the Lemonade team not only incudes tech veterans like yourself but also former executives from AIG and ACE. How do you make that work?

Daniel: “When we started thinking about a new concept in insurance, we just had a rudimental understanding of insurance. We had the advantage of being ignorant. We had no preconceived notion. This helped us to question the basic principles of the industry, such as the conflict of interest.

“Coming from the outside helped us to rethink, reconceptualize in a fundamental way, from scratch, what Lemonade should be about.

“Now, it is only so far you can take that. As soon as you move to execution, you really need to have deeply entrenched insurance knowledge on board. Think of the regulatory maze we have to go through. Then it comes to finding the right people, which was not that easy. We soon realized that we were looking for ‘insiders’ who were ‘outsiders’ at the same time. In our recruitment ad, we actually said it was a requirement to be in the throes of a midlife crisis; not feeling happy in the corner office anymore. They had to buy into our vision.”

DIA: We noticed that your fast growth in an market segment that is so difficult to reach by incumbents has led companies such as GEICO and Liberty Mutual to use “lemonade” in their marketing and promotion activities …

Daniel: “Ha ha, yes, we’ve noticed that as well, of course. GEICO even introduced a ‘lemonade’ TV commercial at the same time as we launched the company. Liberty Mutual, in fact, introduced a new brand, Lulo, and paraphrased everything, from logo to pricing.

“We take it as a compliment that such renowned brands are looking at us, and try to learn and use our ideas. But the examples also show that it is not that easy. Lemonade is more than a logo. You really need to understand the two pillars of our model: behavioral economics and artificial intelligence and how that reflects in the way we operate. And you need to understand that we are really a different kind of company. Obviously, we have duties to our customers, employees and investors. But we’re also a B-Corp, which makes us legally committed to social impact. Our customer base is therefore more like a community of people around a cause – which in turn results in more trust and less fraud. It is about aligning customers and insurer, and giving up underwriting profits. We’re rebranding the insurance sector.”

Where Can You Find Growth (Part 2)?

We are continuing our two-part series on where leaders should focus for growth in a changing world that is full of new technology. This post builds on Part One, which covered major trends, the need for customer insight and what is required to manage your data effectively.

Our attention turns again to your customers — but this time also considering the issue of their irrational behavioral biases. How should this human trait influence your plans or focus for growth?

With irrational customers, what should you do?

With the Financial Conduct Authority (FCA) focused on behavioral economics (BE) and expecting providers to take it into account, the days of assuming customers will act rationally are numbered.

I’m sure most of you have at least heard of BE. The success of popular books on the subject — from the easy to read “Nudge” to the slightly more challenging “Thinking Fast and Slow” have ensured that there has been plenty of media coverage and social media debate on the implications and appropriateness for policy and action.

See also: How to Take a Bold Approach to Growth  

As with many academic disciplines, different experts use slightly different nomenclature to order the different irrational behavior or biases observed. However, for financial services clients, a good place to start is the list of 10 biases published by the FCA. My own experience in helping clients test communications or design marketing to take irrational biases into account suggests this list covers the bases.

Do you test your communications?

Of course, the focus of FCA regulatory action is ensuring the customers receive positive outcomes through products and services suitable for their needs. Unfortunately, some agencies offer to help businesses understand and act to protect customers from BE biases by seeking to “rubbish” traditional research or the role of customer insight teams. This is so misguided. Most successful BE projects require well-designed research, as well as behavioral analysis, data capture and database marketing skills in experimental design. In other words, it is probably your existing customer insight team that is in best place to take such work forward.

Given that most firms focus first on ensuring their communications could not be accused of manipulating biases, two biases (in particular) are worth considering:

  • Framing, salience and limited attention: Is the bias such that different decisions are made if information is presented/structured differently (as sommeliers know well).
  • Present bias: Is the present over-valued compared with the future (i.e., I would accept a smaller payout now, compared with delayed gratification with better return).

Still, other biases matter and occur from time to time. For a fuller list, see this previous post summarizing all 10 biases.

Conclusion

There are many different and exciting innovations happening, including the use of blockchain, robotics, virtual reality and machine learning. But, having seen those innovators who go on to thrive and those who do not, I am making the case to focus on people — not technology.

Developing a strong customer insight capability that is supported by well-managed data and is used to guide all interactions with customers is a sustainable route to growth. However, to achieve both customer loyalty and the approval of regulators, you will also need to consider irrational customers.

We are practically in a “seller beware” market, so, to truly protect your business, make sure you know (better than your competitors) how to help your customers achieve positive outcomes. Oh, and learn how to tell them what you know in their language.

See also: Does Your Culture Embrace Innovation?  

Such a human-centered-design approach to business is not easy, but it is fulfilling. Focus on understanding and serving your customer better. When you have a compelling story to tell, you will also be able to mobilize one of your biggest weapons. That, of course, is all the people who work in your business.

To modify the oft-quoted line by President Bill Clinton about what matters most: “It’s the people, stupid.”

Time for a ‘Nudge’ on Long-Term Care

For years, the go-to approach with clients for discussing long-term care insurance (LTCi) solutions has been from an educational perspective. The idea was that if we could just get a prospective customer to lower his guard long enough to understand the strong statistical rationale or risk in favor of LTCi, the decision would become clear to him, and coverage would be purchased.

As logical as all that sounds, maybe our logic is flawed? The reality we’re facing in the LTCi industry is that this approach is likely not the most effective way to lead Americans into action on LTCi. What we’ve experienced is that, despite our best efforts and compelling factual arguments in favor of LTCi, adoption rates have consistently hovered around 8%, which corresponds with the percentage of the population that is predisposed to long-term planning by nature.

So why isn’t the traditional approach to planning for LTCi working for the other 92%? The answer, it turns out, might be found in some fascinating recent research into “behavioral economics,” which considers economic decision making from a psychological perspective. Best-selling books such as Nudge (Richard Thaler and Cass Sunstein) and Thinking Fast and Slow (Daniel Kahneman) have explored the ramifications of this fascinating topic.

The idea is that people really don’t act rationally, as classical economics assumes. Instead, people are motivated to act based on their emotions and impulses. Moreover, the choices we make are very dependent on how options are presented to us.

See also: Can Long-Term Care Insurance Survive?

Companies and governments have recently used the findings of behavioral economics to try and “nudge” people to take actions. For example, more companies now auto-enroll employees in 401(k) plans and make them opt-out if they don’t want to join. The result has been a big increase in 401(k) participation. Another finding—that too many choices lead to inaction—has led to a narrowing of investment options. Similarly, “default” choices, such as target date funds, are now part of many 401(k) plans.

Here are six ways in which the findings of behavioral economics can help improve your closing rate when doing LTCi planning with clients:

  1. Keeping choices as simple as possible. As an adviser, you may think your job is to give a possible buyer multiple options for planning for care, such as spread sheeting several insurance carriers or comparing standalone and linked products. However, the reality is that consumers don’t want this—they want a recommendation with just a few choices. Share your due diligence, but limit the information to what you consider the best options for them to consider.
  2. Focus on the possible gain LTC will provide instead of the possible loss. Research has shown that, just like gamblers, we all want to win, and we don’t like to think about losing. People who are considering LTCi don’t want to think about loss when planning for care, such as how their retirement savings may be depleted. Instead, focus on the fact that a small LTCi premium gives the policyholder the possibility of a big payoff in benefits. For example, a $2,000 annual premium could result in $300,000 to pay for high-quality care at home.
  3. Use stories, not statistics! Statistics are important for discovering trends and insights, but they are awful when used for discussing LTC planning. People are way too optimistic about their future and think they will be on the winning side of a statistic. Focusing on stories and experience that motivate prospects is much better than using statistics that can destroy empathy when talking about planning for LTC.
  4. Focus on “now” benefits, not the future.  It’s incredibly difficult for people to imagine aging and needing help. Instead, focus on the “now” benefits of LTCi.  The now benefits are more difficult to quantify, but they can include peace of mind, good health underwriting and locking into a lower premium before a birthday.
  5. Help guide heuristics (rules of thumb). For analytical advisers, it’s tempting to use tools such as cost-of-care surveys that project the cost of care 40 years in the future when designing plans. A better approach is to “follow the crowd” and recommend benefits similar to what policyholders are actually buying. You may think people want customized solutions, but most would feel more comfortable picking options similar to other buyers. Recommend they do what most people are doing.
  6. “Nudge” a choice.  When people have to make a decision, such as actively signing off on the fact they have been offered LTCi but declined, they will be more likely to buy. LTC planning is easy to delay, and people need motivations to keep them from delaying the decision forever.

See also: Long Term Care Insurance: Group plan vs Individual

Behavioral economics is a controversial topic, but we think it offers an important critique of the way we have traditionally approached LTCi planning with prospective clients. Employing some of its findings might move us beyond the 8% threshold of highly motivated long-term planners to help the remaining 92% of the population engage in meaningful consideration of their long-term care needs.

What Are Other Marketers Doing?

“Insurance Marketing & Distribution Summit Europe 2015” proved to be a great event.

There were interesting speakers, a range of topics and plenty of opportunity for interaction. Plus, it was a pleasure for me to share with this group, but more on that later.

Following events that were useful for getting close to leaders on whom insight leaders focus less (IT, digitalcustomer experience), I was back with marketing  and sales. Most likely, the primary customer for most insurance insight teams is their marketing leader. So, I hope it’s helpful to hear the thoughts and plans of a number of leaders from the insurance marketing community.

Here are key messages from these insurance marketers:

  • Marco Brandt (Agila) shared about Agila’s journey from being a broker-based pet insurer to focusing on the Internet channel. It uses digital capabilities for personalization of communication and pricing. Perhaps the biggest opportunity for the company, though, was to use its digital communication and free content to dramatically increase the number of touch-points with their customers (a recurring theme). Agila has a strong story to tell about growth of customer satisfaction and premium income (which doubled in five years). The company’s next, self-identified challenge is to embrace mobile.
  • Stephan Dequaire (Towergate) provided a review of the growth of price comparison sites in the UK car insurance industry. I was surprised at how much Compare the Market now dominates, above even MSM and Go Compare. It was also interesting to see how much this model varies across the world. By comparison with the U.S., intermediaries (including tied agents) are more the norm across Europe, where there is also a larger share for bancassurers. Some research suggests the shine is coming off them, though, with even consumer advice sites pointing to direct insurers. What was more shocking was to hear how a consumer advice site suggests consumers lie about data to get a better price (“optimizing your job title,” etc). It really brought home the erosion of consumer trust, in the UK market especially.
  • Phil Bayles (Aviva) reminded us that, across Aviva and insurance as a whole, the intermediary channel still provides the largest profit and volume. He provided a nice segue into my later talk because he stressed how more than 25% of management time was now taken up by conduct risk agenda. The challenge with succeeding with your intermediary channel, including independent financial advisers (IFAs), is that they deal with you day in and day out. You can’t persuade an intermediary channel with some catchy or emotive brand advertising. Bayles stressed the need for a focus on adviser satisfaction and ease as well as fixing problems quickly. With a strategy to be “No. 1 for Brokers,” there is nowhere for Aviva to hide if tracking does not match up. Transactional net promoter scores (TNPS) suggest that Aviva is well on its way.
  • Simon Green (The FCA) talked about how FCA’s behavioral economics expertise was influencing policy and reviews, as well as the important role of technology innovation.
  • Pollyanna Deane (Simmons & Simmons) brought legal expertise to our proceedings and talked about increasing regulatory scrutiny, including the likely impact of the Insurance Distribution Directive. She also mentioned the risk of European Insurance & Occupational Pensions Authority (EIOPA) becoming a third regulator for UK insurers!
  • I then presented on customer insight and conduct risk, where I shared a number of the lessons I’ve learned from training insurance marketing teams on using customer insight to mitigate conduct risk. This included briefly covering consumer spotlight, behavioral economics and vulnerable customers. I’m pleased to say there was considerable interest afterward as marketing leaders could see the benefits of more focus on conduct and on embedding insight in their processes.
  • Louis de Broglie (InsPeer) focused on innovation. He explained the interesting concept on which his start-up, InsPeer, is based. Returning to the insurance origin of mutuality and governance in community, his company provides consumers with a way to pool their excesses. Currently, only available in France, this unregulated solution combines the purchase of high-excess cover from an insurer with a community that contracts to cover a proportion of others’ excess in the event of a claim. This results in lower premium and zero excess for each individual, as well as social pressure on claim veracity and lower claims frequency for the insurer. The next stage is intended to be peer-to-peer insurance, akin to the evolving models from Guevara in the UK, as well as others worldwide. Given the explosive growth of Uber and AirBnb, it seems likely some model of peer-to-peer disruption will take off.
  • Monika Schulze (Zurich) returned to the theme of greater engagement through marketing. Her recurrent theme was the importance of emotion, using your brand and an emotionally engaging narrative consistently across channels to provoke positive responses and engagement from consumers. Inspired by “Transmedia Branding,” Schulze really brought this topic to life through a number of videos that made an impact and examples of clever use of social media. Perhaps the most surprising part of this event was a story about Lidl selling milk in Sweden. Through active monitoring of Facebook comments, Lidl spotted a Swede named Bosse who said he didn’t want to buy German milk. Lidl used this as a chance to humanize its brand, and the company renamed its milk “Bosse’s Milk” across Sweden, including a photo of Bosse and an explanation that the milk actually is Swedish milk. This action, in response to an individual, captured the public imagination and boosted sales. For a great example of fleet-of-foot and creative marketers using emotional advertising, check out Zurich’s #SaveThe Snowmen.
  • Gordon Rutherford (Axa) also stressed the importance of emotional communication in brand engagement. Along with warning to not be one of those needy brands that basically use social media to say “please love me,” he highlighted the impact of finding a noble cause to really make a difference and to improve brand sentiment. An example is Axa’s “glass of consciousness” exhibitions in Mexico, which engage the public with the need to change attitudes about drinking and driving. Axa has found a way to humanize its brand and engage its own employees, all the while making a social difference.
  • Edward Rice (AIG) shared AIG’S progress in digital transformation, where the company has gone beyond just using digital as a marketing channel and is using it to reengineer business and customer experience. He noted that the right comparison for customer experience isn’t the low bar currently set by the insurance industry but is, rather, the personalized, digital ease provided by retailers. He  then shared numerous examples of how, once you have the basics delivered consistently, you can surprise and delight your customers with personalization and relevance. One interesting example was marketing done by Boden and easyJet that shows customers that the brands remember past purchases and have an apparent growing understanding. Rice also touched on the power of responding to one individual on social media as a way to humanize your brand and be playful and on the importance of providing timely advice and warnings that help customers reduce risks.
  • Isabelle Conner (Generali) explained the huge cultural transformation that she is leading, changing a 184-year-old business from product-centric to customer-centric. She stressed the importance of emotional brand marketing and reminded everyone that we are in an ideal position to put this into action, with insurance being about protecting what people love and being there when the traumatic happens. But the marketing has to be grounded in changing the customer experience reality and the internal brand reality, not just be about broadcasting a message. Perhaps the part that had the most impact was when she shared videos of Generali’s CEOs from Spain, Switzerland and France calling customers who left detractor net promoter score (NPS) ratings. It is so important to include timely response and resolution in your NPS metric programs, but it has even more of an impact on a company’s culture when CEOs get engaged in the experience.
  • Stephen Ingledew (Standard Life), although not an insurer, has many of the same challenges in the world of retirement savings, investment and income solutions. Ingledew focused on the importance of customer engagement in redesigning improved experiences. He shared some details of co-creation sessions and agile development, the latter being more than just an approach to IT development but also a mindset of continual learning and iteration. Some of his examples of online tools included elements of “gamification,” which is helpful for consumers in the baffling world of pension reform choices. The brand approach of “#ReadyWhenUAre” nicely balances a range of enablers, while avoiding being paternalistic. Another critical customer need is education, but it becomes tricky to do it in a way that is neither boring nor patronizing. Selecting Steph and Dom from the British reality show Gogglebox to host a series of videos to chat in the pub about the issues was inspired choice, and one can see why it has gone viral.
  • Zach Goren (Media Alpha) brought the world of West Coast U.S. innovation to the conference. Media Alpha is helping auto insurers, among others, buy targeted “in market” customer leads in real time, rather than just relying on mass market advertising through Google (where insurance keywords cost a fortune). Media Alpha is basically an innovation on the traditional market of selling unconverted quotes, but the company does this in real time and stays on the insurer’s site. So, the insurer becomes both a seller of insurance as well as a seller of advertising space to competitors, especially where customer details show this person is unlikely to convert. Media Alpha provides real opportunities to offer consumers more choice.
  • James Baker (Vitality) leads the insight team and helps the company’s brand understand how to bring about behavioral change in its customers. The company has an interesting approach, providing health insurance but also helping motivate you to not need it, through rewards for a healthier lifestyle. This approach provides more opportunity for engagement with insurance customers and offers tangible value back on your policy (many insurers would love to achieve either). Vitality’s insight, built on a hybrid segmentation of FSS and behavioral analytics, has identified a number of actions and rewards, under the concepts of “we’ll be there for you” and “we’ll make it more rewarding to be well in the first place,” that have driven significant engagement and behavior change. Ideally placed to exploit wearables and other IoT innovation, given the importance of employers and employee benefit consultants to Vitality’s business, the company can also demonstrate benefits in reduced absenteeism.
  • David Stevens (LV=) brought to life the complex world of automated advice in the pensions/retirement income sector. The company has innovated with so called robo-advice (although the process also includes human interaction). LV=’s innovation with Wealth Wizards (which it acquired) and the fact it has broken down the steps into manageable chunks should really help. With the high cost of advice, too many in the public are not engaging with such an intangible service. A fixed price of £199 for personalized options after automated fact finding is much more accessible, and the offer is communicated in an emotionally warm way. Once again, you can see the influences of both personalization and gamification in the company’s communication. The style of communication and the ease of playing with the tools also contribute to humanizing insurance (as does clear fixed pricing).
  • Adam Kornick (Aviva) heads up the company’s global analytics capability, and he shared how it is using predictive analytics in pricing and risk modeling. Kornick gave an important reminder that price is the primary selection criteria consumers cite with insurance, so personalized pricing matters every bit as much as, if not more than, personalized communication. One of Aviva’s key innovations has been to build on the individual price for quoting (based on captured and average data) that others have done for home insurance and to give customers the price of a product that they are most likely to buy next. It was also interesting to hear of Aviva’s progress in broker analytics, another reminder as to the importance of the intermediary channel and how predictive analytics can help there, too.

Phew. Well done for making it to the end of this post! Key themes I took away are the need for: personalization, emotions, humanizing insurance, more frequent engagement through communication, innovations and continued focus on the intermediary channel.

Hope all those topics and ideas were useful. Please share the insurance marketers’ innovations you are generating from customer insight.

Meanwhile, if you’re interested, you can download a free copy of my presentation here.