Tag Archives: innovate

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!

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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.)

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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.

legal department

2 Steps to Transform Claims, Legal Group

Technology. Innovation. Even in 2016, when “technology” and “innovation” are oftentimes brushed aside as clichéd buzzwords, technology and innovation can still be daunting to many of us. Even more daunting is implementing technology in your insurance company to transform your claims and legal department.

By breaking down innovation into the two simple steps described here, using technology to spur innovation becomes a lot less daunting. In fact, using the technology described here, you can achieve breakthrough improvements in performance while simultaneously decreasing expenses.

  1. Document Automation

Automating legal documents is a simple way to use technology to improve processes and save money. Claims and legal executives at insurance companies know that pleadings and other legal documents full of the same old legalese are par for the course. No matter the case, claims and legal executives see the same pleadings containing the same content time and again. Nevertheless, attorneys continue to charge for each legal document, and insurance companies continue to pay for each legal document. Even more troubling, these documents typically have little to no impact on the pending litigation, and they are impossible to manage.

The solution is legal document automation. Imagine if you had a robust library of hundreds of automated legal documents including pleadings, discovery, letters, notices and motions at your fingertips. These standardized forms allow for stricter quality control and instant access to top-shelf legal documents. Insurers do not pay for the same document twice, leading to huge financial savings. Perhaps most important, a software-based platform aligns with changes in strategy, case law and legislative change to ensure these are captured in every legal document. Taken together, automation allows insurers to take control of legal outcomes.

Legal documents are the toolbox of every legal department and attorney handling a case. If you are not busy and are not trying to profit, go ahead and use a hammer and nail to litigate. But if you looking to innovate and transform your department, why not use a power drill?

  1. Analytics

Insurance company executives handling claims and litigation have data. Lots and lots of data. Turning that data into intelligence is no easy task, but it is crucial in this rapidly changing insurance industry. You must move your business from yesterday’s hard data environment to today’s efficient virtual platform. Real-time intelligence, including descriptive and predictive analytics, will take your claims and legal department into the future.

Descriptive Analytics

Descriptive analytics answer one simple question: “What happened?”

Using software to capture yesterday’s hard data, your claims and legal department can transform latent data into actionable descriptive analytics, allowing you to answer many of the important questions:

  • When is the claims process most likely to break down?
  • Which adjusters and engineers realize the least overall cost, including indemnity and expense?
  • Which attorneys achieve the best combination of results and expenses?
  • What are the emerging issues and how can we mitigate them?

Predictive Analytics

Predictive analytics answer another simple question: “What might happen?”

For example, predictive analytics could provide a range of the number of times an insurance company may be sued next year based on data trends from last year.

Predictive analytics allow a claims and legal department to:

  1. Allocate resources
  2. Reserve
  3. Produce effective and efficient settlement values
  4. Identify potentially fraudulent claims
  5. Identify potentially large losses
  6. Manage expenses
  7. Analyze emerging issue trends to aid the underwriting process

Technology can capture yesterday’s hard data and makes it searchable, sortable and reportable. Further, using a customized collaboration tool with the right fields accessible to the right users, you could automatically collect the most pertinent financial data in real time. This technology allows access to descriptive and predictive analytics and gives insurers the ability to evaluate expenses and outcomes on a real-time basis, as well as obtain efficient resolutions.

By focusing on these two simple steps, insurers can turn claims and litigation expenses into valuable assets. Gone are the days of zero return on investment. Implement these two steps, and your litigation costs will produce countless opportunities to reduce expenses and write better business.

8 Make-or-Break Rules for Innovation

In my last posting, I laid out three reasons for why large companies should out-innovate start-ups to capture the disruptive opportunities that are being enabled by a perfect storm of technological innovations. In this post, I offer eight rules for how they can do so.

Based on research on thousands of innovation efforts—both successes and failures—that went into The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups, corporate innovators should apply these rules to help their companies get out of their own way and leverage their assets. By doing so, they can take better advantage of innovation opportunities than start-ups can. The eight rules fall under three general categories that distinguish winners from losers: Thinking Big, Starting Small and Learning Fast.

Successful innovators “think big” by considering the full range of possible futures. They facilitate innovation by daring to pursue “killer apps”—new products and services that might rewrite the rules of a category.

By contrast, failed innovators tend to “think small.” They assume that change will be a slight variant of the present and just look for incrementally faster, better or cheaper innovations.

Here are three rules designed to help you think big:

Rule 1. Context is worth 80 IQ points. As you start to “think big,” you must understand the information-technology environment in which you are operating. Six technological innovations—combining mobile devices, social media, cameras, sensors, the cloud and what we call emergent knowledge—are reshaping both what is possible and the competitive landscape in every information-intensive industry.

Mary Meeker, the noted business analyst, argues that these technologies are putting more than $36 trillion in market value up for “reimagination.” ($36 trillion is the total market value of the 10 industries most vulnerable to change over the next few years.) You must understand all the traditional forces inside your industry and come to grips with these six technological megatrends, both individually and in combination.

Rule 2Embrace your doomsday scenario. Thinking big is not just about bold aspirations; it also requires understanding the starkest threats facing your organization.

One reason to look for doomsday scenarios is that it helps spot vulnerabilities and spark improvements even if doomsday never comes. Another reason is that it helps to build alignment. Getting beyond vague views and developing detailed, shared views of existential threats and how quickly they might arrive can help management teams develop consensus on timing and move forward in unison. But people tend to avoid thinking about truly worst-case scenarios, so this rule is designed to make sure that they do so.

Rule 3. Start with a clean sheet of paper. A markets change, large companies’ strategic assets too often become liabilities. Success brings with it priorities to juggle, budgets to protect, bonuses to maximize, resources to defend, loyalties to reward, egos to stroke. People have all sorts of incentives in big organizations to slow or halt innovation, and many manage to do so.

That’s why it is important to periodically start with a clean sheet of paper and think about key trends and looming inventions, then envision how everything could come together to transform the business—without worrying about what people, capabilities and other assets have to be added or subtracted to become that perfect version of the business.

Start Small

Successful companies “start small”after thinking big. Rather than jumping on the bandwagon for one potentially big idea, they break the idea down into smaller pieces for testing and take the time to make sure that key stakeholders are working in unison.

By contrast, companies that fail in the face of a disruptive technology tend to swing from complacency to panic. Initially, they not only don’t see the opportunities; they can’t accept that they’re in danger. When they finally see the disruption, they panic. They make a last-chance, massive bet on a single idea—only to have it not pan out. Here are three rules that ensure you are starting small:

Rule 4. First, let’s kill all the finance guys. To start small, make sure you don’t settle on financial projections too soon; they can’t be accurate, and they hamstring innovation. By definition, disruptive innovations deal with future scenarios that are hard to read and where the right strategy is not clear; the right strategy has to emerge over time.

This rule, then, is a reminder to take a more iterative approach to understanding the finances of new businesses. A culture has to be established, beginning at the very top of the organization, that says newborns get to crawl and walk and maybe even start preschool before their talents are evaluated.

Rule 5. Get everyone on the same page. While the tendency is to leap into action as soon as a possible killer app is identified, it is crucial to take the time to step back, assess where the organization is and identify possible impediments to change. One challenge is to understand who wins and who loses if the envisioned innovations succeed. If an innovation has to kill the core business to succeed, it won’t be possible to get everyone to embrace it. Those in the existing business will always try to kill rather than be killed. In some cases, you can delay an uprising by being discreet. In other cases, where those not on the same page can’t cripple you, you can be overt and simply pit a new business against the existing one (while protecting the new efforts sufficiently).

Another challenge is to understand the cultural implications of the desired innovation. Many executives believe they can change a culture to suit a strategy, rather than try to make the strategy fit the culture. That route is possible but usually takes longer than most are willing to admit. Sometimes it is better to work with what you’ve got. The key is to understand that there is no silver bullet to managing change. Instead, you must form a cleared-eye view of the particular circumstances that must be addressed and manage accordingly. Remember Nelson Mandela’s admonition, “Lead from the front but don’t leave your base behind.”

Rule 6Build a basket of killer options. Once you are ready to start building killer apps, make sure to invest only small amounts and test a number of possibilities. At the early stages, any fledgling killer app is more likely to fizzle than sizzle. Do not waste a lot of money plunging toward The Answer. What you really want is a finely nuanced understanding of The Question. Do this by employing the discipline associated with financial options. Rather than investing tens or hundreds of millions of dollars to build out a full-fledged business, invest in iterative experiments that can be expanded as they prove out, or be set aside if they don’t.

It is important to limit the number of options to a handful. Innovations of transformative potential require CEO attention—which is limited—to make sure the efforts are protected from the organizational antibodies; to make sure they do not take on a life of their own; and, to shepherd them to scale if their potential proves viable. (In most organizations, only the CEO can play this role.) Our experience is that the right number is around three “killer options” and no more than five.

Learn Fast

In addition to thinking big and starting small, successful innovators “learn fast.”They take a scientific approach to innovation. They figure out how to gather comprehensive data and quickly analyze both what’s working and what isn’t. They have the institutional discipline to set aside or alter projects based on that analysis. By contrast, companies that fail have neither the time nor the inclination to learn. They fall into the “it’s all about implementation” trap and end up expertly implementing a failed strategy. Here are two rules to make sure you are learning fast.

Rule 7. A demo is worth a thousand pages of a business plan. Too often, early success or optimism about a big idea quickly transforms it into a conventional business development program: a long march where the only acceptable outcome is to get a product to market. As a result, people do all the analysis they can, however imprecise, and the result becomes The Plan. Some of this is due to habit—planning is what big companies do, and business initiatives can’t typically proceed without detailed business plans and reams of confirming spreadsheets.

Our research revealed the need for less planning and more testing. Rather than prematurely building out the new business, keep prototyping to explore key questions, such as whether the technology will work, whether the product concept will meet customer needs and whether customers will prefer it over the competitive alternatives.

Rule 8. Remember the Devil’s Advocate. Setting up the right process for demos, prototypes and scaling is crucial but only half the battle. The other half is making sure you ask the tough questions during the process and remain open to hearing uncomfortable answers. Devil’s advocates are individuals or groups whose role is to stress test critical assumptions, key forecastsand other make-or-break aspects of a potential killer app. The goal is not to interject an abject naysayer into the decision-making process but rather to drive at the answer that best serves the long-term success of the organization. Nor is the goal to relegate the task of critical thinking to the devil’s advocate. Instead, the devil’s advocate process serves as a safety net, and, because everyone knows that tough questions are forthcoming, they’ll be more likely to confront them.

Done right, a devil’s advocate frames the most important questions that need to be answered before moving to the next stage of commitment. The advocate also guides the process along, making sure that the right amount of uncertainty is reduced at each step and that the possibility of a graceful exit is always preserved.

* * *

Following these eight rules won’t guarantee killer-app-level innovation. Business is a contact sport. Some companies win. Some companies lose. That won’t change.

What following these rules will do, however, is help you overcome the biggest barriers to innovation and turn size into an advantage. You’ll do a far better job of sensing what’s really going on in your market and of putting yourself at the forefront of the powerful trends that are transforming our economy.