Tag Archives: Guevara

Insurtech Now Hits Corporate, Specialty

When insurtech sprang to prominence in 2015, most startups focused on personal lines disruption. Our August 2016 infographic showed that 75% of insurtechs were targeting personal lines and that 56% were focusing on distribution. Most corporate and specialty insurers concluded that insurtech presented no threat and only limited opportunity and continued with business as usual.

That was then, and now is now. Insurtech now matters for corporate and specialty insurers.

(Incidentally, we agree with the point Adrian Jones, head of strategy and development at SCOR, makes in this excellent article: it’s a myth that insurtech has been around only since 2015. We do, however, believe that there has been a new thrust since then, harnessing the pace and power of new technologies.)

2015-2017: The first wave of insurtech

It is not surprising that insurtech started as a personal lines disruption play. Entrepreneurs, buoyed by what was happening in fintech and other industries, saw huge opportunities to make insurance more customer-centric based on their own experiences. Entrepreneurs wanted to simplify insurance (e.g. Sherpa), offer more tailored propositions (e.g. Bought By Many) or change the whole insurance paradigm (e.g. Guevara).

But the truth is that insurance has not been disrupted over the last three years, and it’s hard to see that this is about to change. As Adrian illustrates in another article, even the most prominent disruptors in the U.S. (Lemonade, Metromile and Root) are finding the going tough and burning through a lot of capital, whether directly or via  reinsurance.

See also: Digital Playbooks for Insurers (Part 1)  

We argue in our insurtech Impact 25 paper (February 2018, page 7) that many distribution insurtechs are not scratching sufficiently major customer itches to be worth the switching cost for those consumers. As a result, the perceived potential is worrying incumbents far more than their actual performance to date.

2018: The second wave of insurtech

If we were to update our insurtech landscape infographic, supplier insurtechs would feature much more prominently. These companies are developing technology (or, as in the case of German insurtech Kasko, have repurposed consumer propositions) to help incumbent insurers, reinsurers and brokers operate more effectively. Supplier insurtechs have found getting traction in consumer markets tough and are developing technologies or techniques that they can sell to the established insurers.

Many of these companies are targeting corporate and speciality underwriters. This is perhaps not surprising – at least not from the U.K. perspective. U.K. personal lines insurers have been investing in pricing capabilities, efficiency and fraud analytics for years as competition has become cutthroat. They are mostly advanced in many areas.

This is in strong contrast to corporate and specialty classes, where much underwriting is still judgment-based, processes are manual and underwriters and risk managers are resigned to poor data quality. As such, we believe that many of the Impact 25 Members can be valuable for corporate and specialty underwriters in 2018. Some examples are below:

  • Insurdata was set up by ex-RMS executive Jason Futers and helps (re)insurers obtain more accurate building location information. This is helpful for underwriting (e.g. commercial property, reinsurance portfolios), risk management and portfolio reviews.(websiteImpact 25 two-pager)
  • Risk Genius uses AI to read policies and understand coverage. Founder Chris Cheatham noted recently. “[My trip to] London was amazing. It took two days for one very big learning to sink in: Underwriters in Europe are empowered to manuscript with little or no formal approval process.” His business allows corporate insurers to get a better understanding of their exposures.(websitetwo-pager)
  • Flock is an analytics platform currently used to price drone flights dynamically, for example taking into account hyper-local weather conditions and locale of flight. The technology’s ability to process big data quickly could be helpful for commercial IoT propositions, for example. (websitetwo-pager)
  • Cape Analytics and Geospatial Insight generate underwriting or claims insight from aerial imagery. This is useful, for example, in natcat losses when (re)insurers need to assess their exposures quickly. (Cape Analytics: website2-pager; Geospatial Insight: websitetwo-pager)

See also: Have Insurers Lost Track of Purpose?  

What it means for corporate and specialty insurers

Technology is not, of course, a new phenomenon in corporate and speciality insurance. However, the speed of proliferation of new vendors (of both technology solutions and data sources) is arguably unprecedented. It challenges the corporate clock speed of most incumbents and will present opportunities to successful adopters to tilt industry profits in their direction.

But identifying the correct response is challenging for incumbents and, as we argue in our Impact 25 paper, there is no single, correct course of action. Choices that need to be made broadly fit into three categories:

  • Strategy: Should we focus on customer experience/proposition or efficiency?
  • Technology: Do we build or partner or buy? If we partner, how do we create and protect differentiating IP?
  • Execution: Should we innovate within the business or in dedicated teams? What structures and processes do we need?

These questions – among others – need to be answered to ensure an effective corporate response.

Will Amazon Disrupt Insurance?

In the last months of 2017, I wrote – together with my friend Andrea Silvello – “All the Insurance Players Will Be Insurtech,” and the book was published in the first days of 2018.

See also: Is Insurance Really Ripe for Disruption?  

I included all the foundations of my insurtech thoughts; the elaboration of many discussions I have had since I published my article “Will fintech newcomers disrupt health and home insurance?” in August 2015; and a review of my five insurtech predictions from a year ago. Here is that look back, followed by a prediction on the hottest discussion at the start of this year: whether Amazon will enter the insurance industry:

Prediction: Exit

Not everyone will prosper. Although many amazing insurtech companies are seeing great results and scaling up—and many will continue to enter the field—some will surely leave the game, as well.

Result

I was dreaming of an insurtech unicorn’s exit. Well, dreams become reality sometimes: Well Zong An – the Chinese full stack insurtech – made its IPO with a $10 billion evaluation in fall 2017. Also, Travelers acquired Symply Business for $400 million.

On the other hand, Guevara left the game in the second half of the year. This winnowing down, a Darwinian “survival of the fittest,” should ultimately strengthen our industry.

Prediction: Reconversion

This is the other side of the moon. I saw many initiatives doing a great job putting together a fantastic team and a sexy equity story, and some raised relevant capital, but their business models look (to me) not sustainable from an insurance perspective. I don’t want to claim that no one of them could succeed, and history has already shown how skepticism can be wrong. But I’m expecting to see some players use their great skills and the funding raised to change radically their business models.

Result

In spring 2017, Trov did a round of financing of more than $40 million with a valuation higher than $300 million, but, from what we heard from the CEO at different conferences, the company is focusing its efforts on a back-end system that insurers can use on their customer base rather than on growing its customer base and portfolio of on-demand risks. Also, Zenefits went through a difficult 2017, stepped back from the brokerage business and started to license its technology as an SaaS (software as a service) player.

Prediction: Connected Insurance

My two cents are on any insurance solution that uses sensors for collecting data on the state of an insured risk and on telematics for remote transmission and management of data on the insurance value chain. A crazy prediction: Let’s consider the most mature use case, auto insurance telematics in Italy, which represents one of the best practices globally. In the country, I’m forecasting more than 7.5 million cars connected with an insurance provider by the end of 2017 (compared with 4.8 million cars connected at the end of 2015).

Result

In line with the expectations, Italy’s insurance telematics policies had reached 7 million by the end of third quarter 2017, according to the IoT Insurance Observatory.

Prediction: Culture Shift

Incumbents are becoming always more interested in debating innovation and concretely testing new approaches, including collaboration with startups. I expect to see this new breeze surround old-style insurance institutions, with a growing awareness on how all the players in the insurance arena will be insurtech players.

Result

A board member at one of the largest global reinsurers recently summarized the essence of insurance as assessing, dealing and accepting risks using the latest technologies. That’s one sign that the industry is coming around. We saw 3,800 more signs at InsureTech Connect, the world’s most prestigious insurtech conference. In 2016, the conference had 1,200 participants; in October 2017, it sold out with more than 3,800 attendees. Andrea and I were there on the stage and witnessed the incredible energy of those insurance professionals, regulators and startups.

Prediction: Sustainability

Many value propositions are bundling risk covers and services, thus allowing the insurer to influence behaviors and prevent risk, contributing to the sustainability of the sector. In the next months, I expect to see some insurers becoming more relevant in the life of their clients and act as partners and not only as claim players.

Result

The speeches of top insurance executives show the sector’s ambition to go in this direction. A slide projected on a wall is just that, however: in the field, we see very few examples of implementation.

What will happen in coming years?

Unfortunately, I damaged my laptop a few days ago so my crystal ball for the 2018 predictions is also not working…but I want to provide my middle-term view about the issue most-discussed at the end of 2017: Amazon activity in the insurance sector.

I predict Amazon will not disrupt the insurance sector. I believe it will do something – especially around insurance coverages on the products it sells – but will not be able to touch the core of the insurance profit pool on either commercial lines or personal lines (auto, property, life, health). My view is based on two main beliefs:

  • One of the key elements to be a successful insurer is underwriting discipline, as highlighted by Mario Greco recently or some famous Warren Buffett sentences in the past. Well, I believe that underwriting discipline conflicts with the culture of any tech giant. Amazon could buy an insurance company or hire talented people to close the gap on insurance knowledge, but the corporate culture doesn’t fit with the insurance business fundamentals.
  • In insurance, each market has its particular characteristics. One size doesn’t fit all — the opposite of how things work in social media or in internet businesses. I’m speaking about what the customers want (need) to buy in the different markets and how they want to buy it. In life insurance – the usual push product, which needs to be sold – digital channel at global levels represent less than 1% of new sales. But even look at auto insurance. The U.K. auto insurance market is controlled by online distribution, and, 10 years ago, insurance executives assumed that all Western European markets would follow the U.K. path within a few years. But auto insurance distribution in Europe continues to be dominated by traditional channels. You can argue that local carriers executed poorly, but even branches of U.K. insurance groups, with their great expertise, couldn’t duplicate the success that was had in the U.K.

I don’t think things cannot be changed. In fact, I believe there are a lot of opportunities to do things in a different way. But “one size fits all” doesn’t work, and I’m skeptical about the tech giants’ ability to deal with those local insurance characteristics. A tech giant based in Silicon Valley or with a European hub in Dublin will dirty its boots on insurance distribution (or other steps of the value chain).

It is an interesting time to be in the insurance sector, but I’m pretty confident GAFA (Google, Amazon, Facebook, Apple) and BAT (Baidu, Alibaba, Tencent) will not disrupt this sector.

The Spread of P2P Insurance

The sharing economy is not just a U.S. experience. It is truly a global phenomenon that has infiltrated and influenced multiple industries in both developed and developing countries. Even the ultra-conservative insurance industry has not been immune to these advancements.

While U.S.-based insurer Lemonade has been receiving much of the recent domestic headlines for being an innovator, the insurance sharing model, or peer-to-peer insurance, has, in fact, been in existence in several countries since as early as 2010. Companies such as Friendsurance, PeerCover, Riovic and Guevara have played key roles internationally in the disruption of the traditional insurance model in countries like Germany, South Africa, New Zealand and France — among others. While peer-to-peer insurers shift focus toward technology, automation and social networking, it is apparent that the core concepts of traditional insurance — such as sharing losses through mutual insurance arrangements, avoiding adverse selection and mitigating moral hazards — remain fundamental to its business model and, quite frankly, its survival.

Peer-to-peer insurance, much like traditional mutual insurance, is a group of “peers” who pool their premiums to insure against a risk and across both types of insurance the perils that buyers are insuring against remain homogeneous. It is, in essence, the centuries-old concept of mutual insurance being given a 21st century makeover.

This new peer-to-peer model of insurance adheres to traditional pooling and sharing of losses, but it is now combined with today’s technology, providing a product for increasingly savvy consumers who require transparency in an on-demand economy. Further, peer-to-peer and traditional insurers also group policyholders in similar ways; however, the peer-to-peer model may provide more refined classes because of advances in computer algorithms and artificial intelligence (AI).

Simply, peer-to-peer companies allow participants to insure a common deductible, while large claims are still covered by traditional insurers. When smaller claims occur that fall within the deductible, this loss is shared among a small circle of friends or similar policyholders. Traditionally, when policyholders had a good year and a favorable loss ratio, premiums would be returned in the form of a dividend. This concept has also been adopted by some peer-to-peer insurers, while others have also designated excess premiums be sent to a charity chosen by the policyholder group. So while peer-to-peer insurance may provide more refined methods of grouping policyholders or more options for distributing unused premiums, the underlying core concepts of traditional insurance are still maintained.

See also: Examining Potential of Peer-to-Peer Insurers  

Sharing economy businesses express their desire to reduce costs and increase transparency for consumers. Peer-to-peer companies are working to accomplish this by insuring self-selecting groups. Their philosophy is that they can improve the quality of the risk because of the relationship between the members. The peer-to-peer models strengthen the sense of responsibility within the group, which results in a reduction in both moral and morale hazard. As the two often get confused, we define moral hazard as a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost — in other words, an intentional act. Conversely, morale hazard is an increase in the hazards presented by a risk arising from the indifference of the person insured to loss because of the existence of insurance, which, in comparison, is more unintentional behavior.

Allowing policyholders to actively choose the members of their policy group could foster a greater sense of belonging, responsibility and duty to others. Groups in which close-knit friends or family share in losses tend to manifest a stronger aversion to risk with the knowledge that your actions will have a direct impact on your family’s pocketbook. That family vacation everyone was planning — and paying for with the year-end dividend payment — could be put on hold because of a recent insurance claim. Similarly, if any proceeds from premiums were designated for a specific charity (i.e. pediatric cancer research in honor of a niece stricken with the disease), a member of a close-knit group may engage in better driving habits to avoid being the person responsible for a drag racing accident that could result in the loss of that donation. With more at stake, pooling participants are more likely to engage in responsible behavior — better for them and the insurer.

For peer-to-peer models where groups can unconditionally decide on their members, there can be even greater benefits — for both the group and insurer. One such advantage is the reduction of adverse selection. Typically, it can be very difficult for insurers to assess the full nature and habits of applicants at the time of an underwriting review. The insured is typically in a position to palliate their risk, often without making material misrepresentations. However, in peer-to-peer models that rely on referrals from other group members, the likelihood that the complete risk exposure of a potential insured is revealed is much greater. For example, perhaps several family members have decided to submit an application for shared automobile insurance with a peer-to-peer insurer. While most of the members have superior driving history and habits, they all know to never drive with Aunt Susie. She’s known to them as a speeder, tailgater and road-rage extraordinaire; however, she has been lucky enough to avoid any serious accidents, which has kept her record looking clean. Though she may appear to be a good risk for a half-sighted insurer, her relatives know better and, in preservation of their premium and potential dividend, deliberately do not ask her to join their group.

See also: An Overview of VC Investment in Insurtech  

Although peer-to-peer insurance models have promoted their new-age benefits with the introduction of digital platforms, AI and cost transparency, their business model is built on the foundation on traditional insurance, and their ability to succeed will be based on how well they can deliver the best of both worlds. Peer-to-peer insurers will continue to develop their models and philosophies on distribution channels, return-of-premium programs and scope of coverage.

While it is too early to calculate how much market share they can siphon from traditional insurance companies, it is clear they have many valuable attributes both operationally and philosophically that will assist them entrench their business among mainstream competitors.

Asia Will Be Focus of Insurtech in 2017

Asia will be the key pillar in the coming revolution of insurance and in all likelihood will become the hottest market for insurance technology (insurtech) globally. It’s no longer just a pipe dream, as this time all the stars are aligning. Take the sheer population size and rapidly emerging tech-savvy middle class, together with low effectiveness of traditional insurance distribution. Combine that with a destabilizing wave of political populism, making its rounds across much of the developed world, and you’ve got most of the ingredients for a region that will take on a leading global role for insurtech.

So what, if anything, is missing to really ignite insurtech in Asia? It turns out that while the region is ripe for insurtech, the actual quantity and quality of startups in Asia is nowhere near that of other regions… at least not yet.

Share of investments in insurance startups can be used as a good proxy to the overall level of insurtech activity around the world. According to the figures, the U.S. takes 63%, with Germany (6%), U.K. (5%) and France (3%). China is at 4% – which doesn’t account for Zhong An’s massive investment in 2015 — and India at 5% (Source: CB Insights).

See also: The Future of Insurance Is Insurtech  

So the logical question is, why aren’t there more startups in Asia, considering the substantial opportunity and funding that exists in the region? Is it due to a shortage of experienced entrepreneurs, difficulty of starting a business, lack of access to investment or something else? The answer is that it’s likely a combination of a few factors, including a weaker early-stage entrepreneurial ecosystem, which doesn’t yet effectively support startups, and a cultural aspect of lesser tolerance for failure. Both of these are changing fast, though, and entrepreneurs across Asia are starting to identify and test innovative insurtech solutions.

The following are just a few recent notable insurtech startup examples across Asia that have already reached beyond Series A funding: Zhong An (an $8 billion Chinese insurtech startup), Connexions Asia (Singaporean flexible employee benefits platform with a U.S.$100 million valuation), and two large insurance aggregators out of India– Policybazaar and Cover Fox.

So why am I convinced that Asia insurtech startups will not end up dominating their regional home turf ?

Probability and “Survival of the Fittest”

The lack of critical mass of startups in the region means that they will not enjoy the same quality filters and network effects of the larger entrepreneurial ecosystems of the U.S., Europe and to a somewhat lesser degree China.

“Surviving” U.S. and European startups have to fight their way across a lot more competition to reach scale in their home markets. Hence, where a weaker startup in Asia could get repeated life support simply because there aren’t that many others to invest in, natural selection weeds out the weaker models in EU/U.S. much quicker in favor of more robust ones. Stronger startups then get to attract the best talent from the entrepreneurial ecosystem, including talented entrepreneurs whose models didn’t work as well, further reinforcing successful EU/U.S. startups.

Home Market Advantage

Success in a large home market like the U.K., Germany or a few U.S. states gives a substantial boost to any startup. It provides both credibility and cash flow to allow a much more aggressive expansion into other regions. This also gives a startup flexibility to develop the necessary adjustments to the business model to adapt it for Asia.

The U.S. and EU have a deep domain level of insurance expertise, which gives EU/U.S. startups from those regions a further edge to tap advisory expertise locally, because most of the largest global insurers are based in these two regions.

Lastly, considering that most startups adopt a collaborative approach with insurance companies, having a relationship that originates close to the top decision maker at headquarters gives an added advantage to EU/U.S. startups when they are looking at expanding to new regions. I’ve personally experienced examples of relationships developed in Europe that later carried over in creating a pre-warmed partnership with the insurer’s operations in Asia.

Regulatory Complexity

Asia is made up of a large number of countries, where each has its own insurance regulator, who possess views on how things should be run. This means an additional potential growth hurdle for Asian startups.

For example, a startup out of Singapore will need to figure out how to navigate the neighboring Asian country regulatory regimes pretty early in its growth cycle. Thailand, Malaysia, Indonesia and Vietnam markets all have diverse regulatory requirements. This lands the Singaporean startup at a disadvantage vs. a more mature startup out of EU/U.S. – which not only has experience dealing with regulators in its home market but also possesses a proven track record and a larger resource pool that it can use to overcome any regulatory issues.

Meet Future Leaders of Asia InsurTech

Here are  35 insurance startups from across the U.S., Europe and China that have a real shot at collaboratively shaping the future of Asia’s insurance . Granted that not all of these startups will successfully adapt their models for Asia, a few would and will go on to successfully dominate Asia’s insurtech landscape in the foreseeable future.

Credit: George Kesselman

Credit: George Kesselman

The future of insurance in Asia is coming fast, and it’s looking pretty exciting!

See also: Insurtech Has Found Right Question to Ask  

Below are links/brief description of each of these 35 ventures.

U.K.

  • Guevara – People-to-people car insurance
  • Bought by Many – Insurance made social
  • Cuvva – Hourly car insurance on-demand
  • SPIXII– AI insurance agent
  • Gaggel – A better alternative to mobile phone insurance.
  • ClientDesk – Digitizing the insurance industry
  • Insly – Insurance broker software

Germany

  • SimpleSurance – World’s leading e-commerce provider for product insurances
  • Friendsurance – The future of insurance (P2P)
  • Getsafe – One-stop digital solution for all your insurance matters
  • Finanz-chef24 – Germany’s largest digital insurance for entrepreneurs and self-employed
  • Money-Meets – Save money and improve finances
  • Clark – Insurance as easy as never before
  • MassUP – White-labeled platform for online insurance sales
  • FinanceFox – Your insurance hero

USA

  • Metromile – Pay-per-mile insurance (usage-based auto insurance)
  • Oscar – Smart, simple health insurance.
  • Zenefits – Online HR Software | Payroll | Benefits – All-In-One (EB distribution)
  • Policy Genius – Insurance advice, quoting and shopping made easy
  • Embroker – Business insurance in the digital age
  • Slice – On-demand insurance for the on-demand economy.
  • Trov – On-Demand insurance for your things
  • Cover Hound – Compare car insurance quotes from top carriers
  • Insureon – Small-business insurance
  • Bunker – The marketplace for contract-related insurance
  • Lemonade – Peer-to-peer renters and homeowners insurance
  • Cyence – Comprehensive platform for the economic modeling of cyber risk

China

The Story Behind the Lemonade Hype

I am a sucker for new stuff. I bet many of you are, as well. If news of the iPhone 7’s release date caused you to immediately organize your camping gear for a week-long sidewalk holiday at your local Apple store, then you know what I am talking about. Beyond our excitement for the next iPhone or Tesla, apparently we also get all giddy for new insurance, as well.

Recently, an insurer named Lemonade has popped up on the scene and has caused quite a ripple. Here are some recent news headlines:

Wow! Give that publicist a raise. That is some quality publicity.

But it was when I saw this headline, “The Sheer Genius of Lemonade – A Whole New Paradigm for Personal Lines Insurance,” on InsNerds that I knew I had to speak out. Next thing I know, my good friend Tony Canas at InsNerds convinced me to write this response.

To start, this article is NOT a criticism of Lemonade or what it is trying to bring to the consumer. Insurance is in desperate need of heart and soul. No, what this article will do is splash some cold water on the hype inferno that appears to have taken over the sane minds of our industry. Allow me to go point-by-point with my issues:

Is Lemonade really peer-to-peer insurance?

Whether it is called peer-to-peer — or fashionably referred to as P2P — Lemonade ain’t it. Lemonade is a standard insurance company. You pay premiums, and the company pays claims from the general pool of funds. There are no peer groups insuring one another. There is no distribution model of peer invitations or referrals. The only “peer” element of the business model is that you will, as a customer, be grouped with others like you for the sole purpose of dispersing any underwriting profits to a charity of the group’s choosing. Now, there is a reason for this, but, seriously, was anything I just described even remotely connotative of peer-to-peer? Want to know what peer-to-peer looks like, see Friendsurance or Guevara.

Screen Shot 2016-11-17 at 9.31.55 PM

Is Lemonade really insurtech?

Sure, Lemonade is an online-only firm. And, yes, you can buy its insurance products through an app on your phone, where a bot named Maya will help you with your coverage selections, but Lemonade is still just an insurance company with a fancy website. I can buy insurance from other insurance companies where I can choose from dealing with a website, walking into an agent’s office or calling an agent over the phone. Lemonade has eliminated two options and given me a sole option that is little different from what I could have had before. And before you start screaming, “But I don’t want to call anyone or drive to any office,” just keep in mind that having options makes the experience better. Insurance is complicated enough that, occasionally, I would like to call someone or walk into an office and scream my head off. I deserve that option!

See also: Could an Incumbent Act Like Lemonade?  

What about the bot and the machine language? Isn’t that technology? It is technology in the sense that there are computer scientists engineering a robot to replace a human. But if the experience is crummier than just dealing with a human, it is a wasted effort.

In an attempt to play fair, I will reverse my position on this one — if it can be shown that the robot can handle the firestorm that comes when the company is hit with its first major natural catastrophe.

But isn’t it awesome that Lemonade’s underwriting profits go to charity?

One of the big marketing ideas coming from Lemonade is the unique feature of aligning the interests of policyholders and the insurer by taking excess profits and donating them to charity in the name of the peer group. Fraud is a big deal in insurance, and most insurers have systems in place to detect and counteract fraud. The charity angle from Lemonade is an attempt to prevent fraud from happening by linking the monetary loss because of fraud not to the big-bad insurer but to a softer, more sympathetic victim. Fundamentally, if you are a Lemonade policyholder and your claim is fraudulent is any way, you are depriving some charity of much-needed funds.

It is an interesting concept, but I don’t believe it will have much of a financial punch. The first drawback is that property insurance — being exposed to natural catastrophes (CAT) — is subjected to infrequent but occasionally massive losses. What appear to be underwriting profits in the quiet years between CATs are really opportunities to strengthen your balance sheet for the inevitable hit. As Lemonade expands to other states, its inability to build surplus because of the charity and the corporate status (see below), will really hamper the company’s business model. Lemonade is now, and will fully be, reliant on reinsurance to back its entire program. That by itself is not terrible, but, with full reliance on reinsurers, the excessive profits that the company thinks it will avail itself of, in reality, just go to the reinsurer. Think about this: If the reinsurer is taking all the risk, why would Berkshire Hathaway or Lloyds of London (two of the reinsuring entities for Lemonade) not want to profit from the transaction? These excess underwriting profits will simply transfer from insurer to reinsurer. My prediction is that the charitable donations will, in most years, be nonexistent or minuscule in comparison with premiums paid.

My second issue with the charity angle is that I don’t think it will bring the alignment of interest that Lemonade expects. One reason is that, if I am correct about the excess profits not materializing, then just the intermittent scheduling of charitable givings makes the whole exercise uninteresting to the insured, in my opinion. If Lemonade can’t provide a significant charitable donation in most years, the alignment will lose its appeal simply because the policyholders won’t be able to hang their hats on it. Perhaps worse, the charity angle may lose effectiveness because Lemonade is also marketing that it pays claims “super fast.”  Super fast claims handling (which, on Lemonade’s website, the company touts as a check in minutes), invites fraud. I think there is a major conflict of the business model. If your marketing message is that you can get a claims check in a few minutes without having an adjuster or claims rep work the claim, then your message is music to those upon whom the charitable message will have no impact. An an insurance buyer and seller, I know that out of super low prices, super fast claims handling and excess profits to charities, I can only choose one of those angles. More than one seems difficult. Getting all three strikes me as impossible.

Screen Shot 2016-11-17 at 9.32.08 PM

A broker by any other name…

Lemonade is a broker by another name. Another of Lemonade’s selling points is that insurers have a conflict of interest because they make money by denying claims. Lemonade purports to have absolved itself of this conflict by not actively acting like an insurer. Here’s how:

Lemonade is actually two companies. It is a risk-bearing insurance company AND a brokerage firm. When you buy a policy from Lemonade, the 20% fee goes immediately to the brokerage firm. The remaining 80% stays with the insurer. The paper on which the insurer is based is a B-corporation, which essentially makes it a non-profit. So it is the brokerage part of the business that is the money maker. That is the entity that secured all that seed-funding. Sequoia Capital knows a thing or two about making sound investments. It doesn’t do non-profits. And once the fee from the premiums the policyholder pays gets swept into the Lemonade’s brokerage company, it will not be used to pay claims, at all… ever. It is income, free of insurance risk. If the insuring entity ever goes insolvent, all the fees will be protected.

There is nothing wrong with this. The model has already been used successfully by other insurers. But, by acting as a broker, Lemonade has shifted its risk from the risk of loss or damage of the client toward that of a trusted adviser that only has one product to sell and gets a 20% commission for selling that one product. What if its product is NOT the best choice for the client? Will Maya the bot steer the buyer elsewhere like a traditional agent would? No. How forcefully will Maya point out all the flaws and gaps of Lemonade’s ISO style homeowners policy? Will Maya give direction to the insured about the flood or earthquake policy the client really should have but can’t buy through Lemonade? Somehow, I can’t match the hype and excitement of seeing a broker selling an average product, even if it’s sold via a robot.

See also: Why I’m Betting on Lemonade  

Lastly, I want to challenge the major premise of Lemonade — that insurers make money by denying claims. As a professional in the business for 20 years, I find that this is the one selling point that Lemonade and its marketing keeps touting that upsets me the most. It upsets me because it isn’t true. In fact, I have seen the opposite. I have seen emails or communications from senior executives to staff adjusters onsite during a natural disaster that flat out instructed adjusters to move quickly, be fair and, if there is any doubt about the damage, settle IN FAVOR of the policyholder. I am not naive enough to believe insurers never play fast or loose with their claims handling, but, by and large, insurers pay their claims. In the property area in which Lemonade competes, those policies it sells are legal contracts. Many a court battle has been fought to word the contract so that claims can be settled quickly and fairly. Lemonade is implying that it will be different; it is almost implying that it won’t deny claims. Are there really claims that insurers have denied (and acknowledged via the court system) that Lemonade would not have denied? I seriously doubt it.

Look, I like new things. You like new things. Lemonade is the new thing on the 300-year-old block. But the shiny new aspects that Lemonade is bringing to the table don’t appear to be worthy of the hype, in my opinion. I give them an “A” for effort in maximizing the hype to drive attention and sales. But insurance is all about the long game. The real key performance indicators (KPIs) are retention, combined ratios and customer satisfaction. Those will take years to sort out. Is Lemonade truly in it for the customer; does it really want to revolutionize the business model; or is the exit strategy already in place?

The world is watching. I hope it succeeds.