Are insurers facing a “Wikipedia moment?” The short answer to this intriguing question, Lemonade Co-founder and CEO Daniel Schreiber recently told a rapt audience, is that elements of their business model are indeed at a turning point. And this could have huge implications for an industry that technology is increasingly transforming.
Schreiber, who presented the closing keynote address at National Underwriter’s Annual Insurance Executive Conference, held in New York City, posed this query to the session’s attendees as a warning. His message: If they don’t revamp their customer-facing web portals and mobile apps, and their adversarial relationship with customers, then they stand to lose business to competitors. Not least among them are tech-savvy, millennial-attuned, peer-to-peer companies like Lemonade, which is spearheading an innovative approach to the delivery of homeowners’ and renters’ insurance.
To the ramparts!
Or perhaps a revolution. That’s how Schreiber described the heavily trafficked reference source that he’s seeking to emulate in impact: Wikipedia, a “free-as-in-freedom” online encyclopedia to which anyone can contribute entries. Since the non-profit’s launch in 2001, legions of encyclopedia buffs have.
Fifteen years later, it is Wikipedia — not Encyclopædia Britannica, the reigning reference source of the last century on all branches of knowledge — that now owns the space. The world’s 6th most highly visited website, Wikipedia boasts on a monthly basis 18 billion page views and 117 million unique visitors in the U.S. alone.
The Wikipedia effect, an exponential improvement on the dissemination of knowledge — content revised 15 times per second, available instantaneously and at no cost to the reader — was achieved not by tinkering with existing methods, but through a top-to-bottom rethinking of knowledge flow. And it’s this order-of-magnitude gain that next-generation carriers like Lemonade aspire to achieve in the insurance space.
“At Lemonade, if we set out to do 10 percent better than the incumbent carriers, we’d fail because they’re so much better at what they do,” said Schreiber (pictured above at the NU keynote. Click on image to enlarge). “Paradoxically, it’s less crazy to try to do something 10 times better than the incumbents. That’s because a 10X improvement forces you to go back to first principles and to think about radically different ways of doing things.”
Schreiber invoked a hypothetical game that, though initially profitable for all has, after several rounds, yielded zero dollars for each participant because of mutual distrust among the players. (Photo: iStock)
From lemons to Lemonade
Radically different is an apt description. When people apply for insurance from Lemonade, they are asked to pick a charity to contribute to. Lemonade takes its cut on premium payments, a 20 percent management fee. Half of the remaining 80 percent buys a mix of internal and external reinsurance (from Lloyd’s of London, among other companies) to help cover claims. At the close of a policy period, funds not needed to satisfy claims (on average, less than 40 percent of premiums dollars) are disbursed from a “Giveback” pool to policyholders’ designated charities.
Why not keep the funds for the company’s benefit?
“I don’t want the money,” said Schreiber. “It’s the root cause of the adversarial relationship between the insurer and policy owner. When you make a claim, I don’t want ever to be in a position of doubting whether I should pay.”
Elaborating, Schreiber noted that the interests of the policy owner and insurer are fundamentally at odds: One has an interest in securing the contract benefit, the other in denying claims. This misalignment of aims leads to distrust between the parties — and bad behavior.
Often, the policy owner will “embellish” a claim or engage in outright fraud to secure a larger than justified payout. Conversely, the insurer may impose unreasonable conditions before agreeing to distribute policy proceeds.
“Twenty-five percent of Americans tell people that it’s okay to embellish claims,” said Schreiber. “That’s shocking. Fraud is a huge problem in all sectors of industry. People defrauding insurance companies are not hackers from Ukraine. They’re us — upstanding, law-abiding citizens — people who in other situations would not be tempted into acting dishonestly.”
To illustrate the tenuous relationship between insurers and policyholders, Schreiber invoked a hypothetical game. Ten people seated at a table are asked to contribute $10 each to a shared envelope, taking care to ensure that no other participant can see how much he or she contributes. The game’s organizer then matches each person’s contribution, tallies the total, then redistributes the now doubled amount evenly to each participant.
Initially, all goes well; each player receives $20 back. In subsequent rounds, progressively fewer people contribute to the pool with a view to “gaming the system,” i.e. securing their share of the combined proceeds, while also pocketing the amount they were asked to contribute.
The result: A game that was once profitable for all has, after several rounds, yielded zero dollars for each. This is the game’s “point of equilibrium,” because of mutual distrust among the players.
And so it is in the world of insurance. Quoting Lemonade collaborator Dan Ariely, a Duke University professor of psychology and behavioral economics and author of “The Honest Truth about Dishonesty,” Schreiber said: “‘If you tried to create a system to bring out the worst in humans, it would look a lot like the insurance of today.’”
When the marginal cost of establishing a new group drops to zero, as it does in the digital economy, affinity becomes a propellant of growth, said Lemonade’s Schreiber. (Photo: Thinkstock)
All together now
Hence the charitable component. By donating to a favorite cause or institution — a college alumni association, a center engaging in cancer research or other area of focus — policy owners align their interests with others in the insurance pool (the “peers” in Lemonade’s peer-to-peer insurance model) also contributing to the same institutions. And their interests dovetail with Lemonade’s, which has sacrificed extra profit so as to fulfill policyholders’ charitable intent.
Underscoring the point, Schreiber noted that Lemonade registered in New York State last May as a public-benefit corporation, thus making public service a central mission of the company. In so doing, Lemonade has joined other technology start-ups — Techweek, Kickstarter, Wefunder and others — that are embracing a dual social impact and for-profit mandate.
Complementing its fashionably contemporary business structure is an element of the ancient. Invoking “The Odyssey,” Schreiber said Lemonade has created a “Ulysses Contract” with policyholders. Like the Greek epic poem’s mythical ship captain, Lemonade has “tied its hands” to a figurative mast; the insurer cannot take more than its contractually stipulated fee from policy premiums.
This self-restraint, said Schreiber, engenders among policyholders confidence that Lemonade will make good on claims. The trust created, and the mutually aligned interest of participants in the pool, discourage fraudulent activity among policyholders.
The philanthropic aspect of Lemonade’s business model, Schreiber insisted, bridges a statistical gap that insurers have long grappled with:
The “Dunbar number,” a theoretical cognitive limit as to the maximum number of people with whom individuals can sustain stable, meaningful and trusting social relationships (generally pegged at 150); and
The “law of large numbers,” a probability theory that insurers use to determine policy rates.
The more policyholders you add to an insurance pool (as theory 2 dictates) the more accurate an insurer’s claims estimates will be. But the level of distrust among participants in the pool also will increase after you exceed the Dunbar limit (named after the British evolutionary psychologist and anthropologist Robin Dunbar).
Schreiber acknowledged that he’s not alone in leveraging the “affinity group” idea. Other insurers, such as GEICO (which originally served only federal government employees and their families), USAA (an insurer for members of the armed services), and fraternal benefit societies (think Thrivent Financial for Lutherans) have also successfully built businesses by aligning the interests of policyholders and the companies.
But, he said, the concept has been “trampled on” in pursuit of profit in the “traditional economy.” In a digital economy, he added, there need not be a trade-off between growth objectives and building trusting relationships on which such growth depends. Companies can scale affinity groups to “infinity,” as the technology behemoth Facebook has successfully demonstrated.