Lemonade Inc.: Hype, Trust, Transparency, Mutuality

I’ve been excited by the advent of #Lemonade Inc. since I first heard about it early last year. If you’ve had any experience in the insurance biz over the past few years, when insurtech became a thing — or over the last several decades as you’ve watched life insurance in particular become less and less of a standard financial backstop (at the least) and more and more of an endangered financial species — how could you not be excited by a peer-to-peer (P2) insurer with an essential reliance on Artificial Intelligence (AI) — not to mention a boatload of new VC investment? If you follow developments in the insurance biz to any serious degree, you had to be excited by Lemonade (if not perhaps equally optimistic about its disruptive success).

But that’s exactly been my problem with Lemonade. From the rumors first circulating about it to its first official press release, we’ve been victim to an unending cascade of breathless:

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And it’s wearying; it just wears you down after just the first dozen or so articles, blog posts, excited conference talks, social media musings, etc. Some of this, of course, is just your standard hype of anything new, even about the insurance biz, about which, frankly, who gives a damn  except insiders (and that’s more likely to be us pundits than the insurance execs able to actually do anything about it — like, understand it and intelligently assess its true innovativeness and capacity for serious disruption)? Most of it, I believe, however stems from insurance folk with deep-seated inferiority complexes who’ve been captivated by all the greater and more bombastic hype thrown up in the Banking Industry: Hey, bankers and fintech guys, we’ve got some pretty interesting insurtech stuff over here — we’re catching up to you, maybe, you know?

Warning: BIG DIGRESSION here on banking vs. insurance and fintech vs. insuretech. By all means, skip way down if you wish to avoid this. If not… then let me state flat-out: The trope that, in respect to Technological and Digital Transformation, “Banking is years ahead of its overly conservative and cautious and blinkered (or head-in-a-dark-place) Insurance brethren,” well, that’s BS. While it’s repeated endlessly on the insurance side and just arrogantly assumed and not usually worthy of comment on the banking side (beating a dead horse?), it just ain’t true. Yes, the hype in re: banking disruption and innovation is greater, louder, more persistent, and greatly more self-assured than anything you see and hear in the Insurance biz — but it’s still hype and it’s still BS.

Take a look at “These are the top trends that will define the insurance industry in 2017,” a fine and fully representative example of year-on prognostication of “top trends” and “what you need to know” in re: the insurance biz from Business Insider. Since not all these prognostications are directly relevant to my BS accusation, I’ll spare you the entirety, but there are several points that are quite relevant and those I list below.

2. Midsize and larger insurers are making massive investments to transform their businesses into digital service providers. This transformative process is impacting not only legacy systems, but also decisions about which firms—including insurtech vendors—they invest in, partner with, or purchase.

4. Highly skilled advisors that help clients through uncertain times with complex solutions will become more difficult to find and retain…. They are looking for advisors able to consistently execute on being a trusted advisor to client senior management teams while also selling the full product solution set.  

5. Artificial Intelligence (AI) will evolve from a buzzword to a critical capability that helps drive better outcomes for clients (e.g., advice tailored to their specific and complex needs), increases efficiency for insurers, and solves for talent shortfalls in insurer advisory skills…. While low-value clients may receive digital self-service AI advisory interfaces, higher-value clients will still be relationship managed. 

6. Blockchain is moving from prophetic transformational hype 18-24 months ago to a medium-term reality. 

8. To compete against specialist providers, insurers will purchase, license or develop their own smart analytics to suggest appropriate solutions, leverage known data to prepopulate/streamline applications/new product set-ups, and wrap it all together with easy-to-use integrated dashboard analytics.

9. The balance of power will shift, with insurtechs aggressively seeking out insurance partners the same way insurers were aggressively courting insurtechs not long ago. 

11. End users will benefit from the ability to aggregate data across multiple providers. Insurers , meanwhile, face the risk that a insurtech or other provider will become the front-end interface, relegating the insurance providers to commodity processors or utilities.

Now, hold on: Am i saying that any of this isn’t accurate or true of insurers —  that consensus does not exist within the industry that these trends are real and happening? No, not at all: Actually, quite the contrary. All of this is indeed happening in the insurance biz. But here I must admit I’ve played a little trick on you, Dear Reader: The Business Insider article copiously cited from above is actually entitled “These are the top trends that will define the banking industry in 2017.” It never mentions insurers or insurtech at all. I just changed out the words banks for insurance companies/insurers and fintech for insurtech and, what do get but the exact same stuff written every day about the insurance biz?

It would seem, if my little trick holds water, that banking, per Business Intelligence, has been and is currently grappling with many of the same issues and challenges as insurance, experiencing many of the the same “disruptive” trends, and dealing with much of the same kind of VC-financed tech vendors and “solutions” as is insurance. In sum, the banking industry is apparently no further along in dealing with any/all of this than is the insurance industry. Apparently future banking imperatives are largely identical in nature (if not perhaps in scale) to those of the insurance industry, and banking is no further along in realizing them. Meaning no disrespect to the banking industry; no, my point is simply that insurance folk should take a more realistic perspective on their industry’s challenges and the progress being realized.

And, to add a digression within this digression — which, I promise, will be relevant to the discussion of Lemonade — we should also note the article’s obligatory and blithe assurance that banking is evolving “into more of a tech industry”  — without of course ever explaining how even massive investment in technology makes banking more of a tech industry than, uh, banking. Same of course needs to be explained (because it is also assumed on the insurance side) how even a massive investment in technology will make insurance into more of a tech industry than, uh, what it is and what it does, namely insurance. Banking remains banking no matter how much money you spend on fintech, and insurance remains insurance no matter how much you spend on insurtech.

Okay, now I’ve gotten this off my chest, let’s get back to why you started reading this post in the first place: Lemonade. Here’s how the company has been described in a recent piece on P2P start-ups:

Lemonade is a property and casualty insurance company that offers a fast, affordable and hassle-free insurance experience. Launching gradually in the US during 2017, the company is a licensed insurance carrier, offering homeowners and renters insurance powered by artificial intelligence and behavioral economics. By replacing brokers and bureaucracy with bots and machine learning, Lemonade promises zero paperwork and instant everything.

There is also a good write-up,  “How artificial intelligence could help make the insurance industry trustworthy,” from The Guardian. Notice they did not write “more trustworthy,” the assumption being that the insurance industry simply isn’t trustworthy at all. Sad to say, Lemonade indulges in that rhetoric as well. More on that below.

Clearly the new venture qualifies as insurtech: You could call it AI insurtech and you wouldn’t be wrong, what with its bots and machine learning and undoubtedly other sophisticated technology (instant everything). But you wouldn’t be adequately understanding it, either, if you failed to note its essence as P2P. That, I think, is what really distinguishes Lemonade from a host of other insurtech ventures and investments, and solidifies its status as an insurance company and not (just) a tech company or insurtech. 

If, as I believe, Lemonade is a P2P insurer with AI and Chat bot etc. technology, rather than an AI tech company with a P2P model, what’s the big deal? Well, consider that the description I quoted above came from an article about 31 P2P start-ups. For all the incessant buzz about insurtech, which is certainly real and not at all to be discounted — it’s still the “with” part of P2P with AI — I think it’s the P2P model that really captures the insurance entrepreneurial zeitgeist.

Marshall McLuhan famously said that we march backward into the future. He was not extending a compliment to the human race in saying so, but rather bemoaning the fact that we continually and erroneously interpret the new, which genuinely puzzles us, in terms of the old, with which we are already comfortable. I admit I may well be guilty of that here. Or perhaps I might be onto something in noting that just as often we fail to understand the significance of the new because of our forgetfulness of the old. Maybe we sometimes fail to understand the new precisely because we have forgotten what it may harken back and give new life to. If that’s possible, I’d like to claim that what is really radically “new” about Lemonade (and many other P2P insurance ventures) is not AI nor assorted other nifty technologies but something very old in insurance, and either forgotten or seriously misunderstood, namely Mutuality, the very basis and historical lifeblood of property and casualty and life insurance in the United States.

“The mutual/casualty insurance industry began in the United States in 1752 when Benjamin Franklin established the Philadelphia Contributionship for the Insurance of Houses From Loss by Fire,” according to the article on Mutual Insurance in Wikipedia. Today, discussions of mutuality in insurance almost always reduce it to one thing that it is not, i.e., it is a form of “private” ownership and corporate structure that is not that of public, stockholder insurance companies. While this distinction is true enough in its own way, it is, however, only trivially true of Mutuality. In fact, this type of financial distinction between mutual insurance companies such as State Farm or New York Life, and public stock companies such as MetLife or GEICO is, fatefully, trivial. Consider a more original, more expansive, more (shall we say) exciting understanding of mutuality offered in an article by Maddock Douglas:

When you consider the use of the word “mutual” in the context of insurance, its origins are less about the corporate form (i.e., mutual versus stock company) and more about the nature of how risk is shared among many people. That’s what makes insurance work. It’s about the idea of mutual interests, mutual things in common and mutual agreement that protecting something is more efficiently done with groups of people versus alone.

You would be hard pressed to find this understanding of mutuality offered today by the mutual insurance companies. Nope, no mutual interests, mutual things in common and mutual agreement — nothing about how risk is shared: Rather, the mutuals’ mutuality is all about what we are not: We are not public companies, we are not Wall Street, no, no, we’re, let’s call it Main Street. In fact, at the advent of the Great Recession in 2008, New York Life, to its chagrin, tried to hang its hat on the slogan We’re Main Street, not Wall Street — I say to its chagrin because the company slogan was immediately and roundly greeted with derisive hoots and, in no short time, the threat of a suit from Main Street regional banks!

I would like to suggest that what’s really exciting about Lemonade is this new old understanding of mutuality: how it doesn’t just underwrite but shares risk with its customers, how it has things in common and mutual agreement with its customers. Consider this statement from Lemonade’s chief underwriting officer, John Peters, in the third of the new company’s Transparency Chronicles:

We have the good fortune of having a strong, rapidly growing base of customers who trust us, and whom we trust too. Together, we are building a company for the long haul, and the early metrics make me feel like we are on the right path.

I’ll summarize those metrics shortly but I’d be remiss not to note the importance of the periodic Transparency Chronicles themselves, three issued within the first 100 days of the company’s operation: Name me a mutual or stock insurance company willing to try anything beyond the issuance of their standard and usually obfuscating Annual Report.

Metrics: For now, Lemonade sells renters insurance — what my good friend and industry expert Terry Golesworthy of CRG once called the start-up “crack cocaine” drug of the insurance industry — and also homeowners policies. Active Policy Count from 263 in  its first month of operation (September 2016, New York State only) to 2,223 in January 2017; “The majority of customers insured with Lemonade are actually new to insurance. They had never found an insurance company that they liked, trusted or interacted with, the way they wanted.”; 53% of premium dollars are from renter’s insurance and 47% are from homeowners’ policies; “We celebrate claims when they come in. We’ve had a few (six in 2016, to be precise) – exactly the number we expected based on industry statistics. What is different is that our claims have all been small – way smaller than industry averages.”; 25% of people who solicit a price, buy — “high by any standard and actually increasing”; the quality of risks runs from 42%, excellent; 38% very good; 10% average; 10% below average.

This is really very early days, as Lemonade itself points out, but, hype aside, it seems quite promising. (And please note that having secured approval for these products from the New York State regulators, the company has filed for licensing in 46 states and the District of Columbia: Lemonade Aims to Offer Insurance for 97 Percent of Americans in 2017.) Moreover, as I noted above, just revealing this info is promising from the transparency and trust points of view. So the AI part of the business would in fact seem to be performing well, and should in fact be continually improving. (See Lemonade Reports Insurance Claim Paid in 3 Seconds with No Paperwork, a “world record” already over-hyped.)  As for getting customers new to insurance (the established industry’s holy grail), it seems the P2P structure, it mutuality philosophy, is understood and paying off as well. Here’s a good description from the Guardian article quoted previously:

To demonstrate transparency… the insurance startup publicizes how it divvies up the premiums in running its service. Lemonade makes money by keeping a flat fee of 20% of a customer’s premium. It sets aside 40% mainly for buying reinsurance from firms such as Lloyd’s of London to cover major claims that exceed what the premiums can cover. The remaining 40% will cover claims, with whatever is left going to a charity of the customer’s choice at the end of the year. The company, which is registered as a public benefit corporation, includes the charity component to show it’s not just about making profits.

The charity component also helps to minimize fraudulent claims, said Lemonade CEO and co-founder Daniel Schreiber. “When they have a common cause that they’re raising money for, the thinking is that if they make a fraudulent claim, they aren’t hurting the insurance company but rather the charity or organization they have chosen to give back unclaimed money to,” Schreiber said, adding customers could feel extra guilty if they are raising money to benefit their communities, such as a school library or soccer field.

So, let me stop at that. By all means read the three Transparency Chronicles on the Lemonade Blog. Read Insurance as a Social Good there, as well. Yes, it’s very early days for Lemonade, very early days for P2P insurers (and insurtech). But old times also, at least in Lemonade’s reinvigorated understanding of Mutuality and, just quite possibly, too, the tiniest beginning of a new blossoming of trust and transparency in the insurance industry — should the established players in the industry choose to learn from all this.

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3 Responses to Lemonade Inc.: Hype, Trust, Transparency, Mutuality

  1. Gerry Goldsholle says:

    Ken,

    I had not heard of Lemonade before I read your piece.

    Interesting yet it raises a series of issues that are bound to crop up after it gets going –including discrimination, redlining, assigned risk pools, adverse selection and vulnerability to scams.

    I like the apparent transparency and see where it could appeal to idealistic younger applicants.

    Thanks!.

    Gerry (please excuse iPhone 7 typos)

    >

    Like

    • khittel says:

      As always, Gerry, thanks much for your attention. (Hey, it’s an Attention Economy, isn’t it?) Yes, there are lots of issues here in these early days of Lemonade, including how it wants to see itself. Just a couple days after I wrote this piece, coming down rather decisively on the company as P2P w/ AI razzle-dazzle, the CEO went public w/ an emphasis on the razzle-dazzle, and pooh-poohed the P2P. So go figure. I can’t change my opinion on the company because of that, although I suppose it gives me a great opportunity for “I told you so” if/when they flop. I don’t wish for that; I would like to see an insurance company embracing idealism and mutuality and, yeah, employing the latest & greatest AI — but I don’t see any such company flourishing b/c of AI!

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  2. Pingback: Lemonade, Inc.: Part Deux | Socratic Observer

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