Startup insurer uses behavioral economics and artificial intelligence to win customer trust and business.
Can an insurtech startup make people feel good about insurance?
Lemonade, a startup insurer that launched its end-to-end digital renters and homeowners insurance product in September 2016 in New York and recently expanded its renters product into Illinois, is betting on it.
The company promises to disrupt the homeowners market by offering three advantages:
- Unprecedented speed in buying insurance and settling claims through its smiling bots, AI Maya and AI Jim.
- Greater transparency into the fees that it collects to manage the platform
- Social benefit through its B-Certified corporation status and the “giveback” donation of excess premium to a not-for-profit organization selected by the customer.
All insurers face the challenge of getting honest, accurate information at both the application and claim stages, but Lemonade’s commitment to speed presents an extra challenge. It promises customers a 90-second application process, where providing a little information and “swiping through” a few questions will result in a personalized policy quote. Behind the smiling face of chat bot “Maya,” 18 anti-fraud algorithms are processing the information.
Property-casualty insurers estimate fraudulent claims at as much as 20% of premiums and most expect it to increase, according to The Coalition Against Insurance Fraud, so paying legitimate claims quickly and avoiding the fraudulent ones are a basic value for the new company. But Lemonade believes it has a special weapon—behavioral economics.
Dr. Dan Ariely, Lemonade’s chief behavioral officer, is widely known for his research into seemingly irrational human behavior and for applying that research to business decision making through MIT and Duke University. He is also the author of popular behavioral economics in books like Predictably Irrational: the hidden forces that shape our decisions andThe (Honest) Truth about Dishonesty.
Dr. Ariely’s hand is evident in the new organization. In fact, Yael Wissner-Levy, blogging on the Lemonade website, writes: “Behavioral economics research is integrated into every element of the Lemonade process. We believe this will bring out the best in our users.”
When a Lemonade policyholder files a claim, he begins by first signing a digital pledge of honesty, rather than signing the pledge after he has provided claim information. This is based on Ariely’s research into “priming”—a psychological term for getting people to think what you want—in order to encourage them to accurately report their claim. In Predictably Irrational, Ariely and his coauthors reported on one of their MIT studies that found students were far less likely to cheat on a math test if they were primed before the test either by being asked to write down the Ten Commandments or reminded of the MIT honor code. (There is no MIT honor code, by the way).
After making the pledge, the claimant records a brief video describing the loss and provides account information for reimbursement. In most cases, when the claim is simple and no red flag appears, the claim can be filed in six seconds and payment wired to the customer’s account within three minutes. More complex or suspicious claims, of course, may require additional information and be handled in a more traditional fashion.
Lemonade is counting on other psychological factors to keep customers engaged and honest. Its straightforward communications and application process help demystify insurance and build trust with customers which may be attractive to first-time home insurance buyers. It attempts to discourage illegitimate claims by pledging to redistribute to a not-for-profit organization selected by the pool of policyholders any premium that is leftover after paying out claims and other expenses, allocating reserves, and of course taking a profit. In doing so, it reinforces the notion of social good – both in terms of insurance’s primary role as helping policyholders in a time of a need as well as Lemonade’s commitment to donating excess profits to charity. The payout is made in June, but only if the customer’s policy is still in effect, providing an additional incentive to remain with Lemonade. Time will tell just how effective these techniques are at discouraging fraud and improving retention.
Lemonade’s product is available in New York and Illinois, but the company plans to extend it to most states by the end of 2017.
Like its product, Lemonade’s progress from concept to launch was fast. Co-founders Daniel Schreiber, CEO, and Shai Wininger, chief lemonade maker, both veteran tech entrepreneurs, attracted more than $13 million in initial seed capital from insurtech giant Sequoia Capital and Israeli venture capital firm Aleph. By the end of 2016, they had raised a total of $60 million. The company’s reinsurance lineup reads like a who’s who of stability: Berkshire Hathaway’s National Indemnity, Everest, Hiscox, Munich, Transatlantic, XL Catlin. To round out its leadership team, Lemonade brought in a quartet of experienced, high-level insurance executives from ACE and AIG, including Chief Insurance Officer Ty Sagalow, a 25-year senior executive with American International Group (AIG).
Insurers, of course, are watching Lemonade carefully to see just how disruptive it will be. Regardless of whether Lemonade succeeds or fails, there will be important lessons to be learned. Learn more:
- Read, “Lemonade’s First Quarter in Market Exposed” by Shai Wininger
- Read, “Lemonade is Using Behavioral Science to Onboard Customers and Keep them Honest” by Ainsley Harris