“Most Americans view insurance as a necessary evil, rather than a social good” says Shai Wininger, Schreiber’s co-founder.
It is not floods, fires or earthquakes that insurers should fear the most, but geeks alert to their businesses’ inefficiencies. Daniel Schreiber and Shai Wininger, tech entrepreneurs with no insurance background, spotted that the industry is huge (worth $4.6trn in global premium income a year). The average age of 10 best insurance companies in the world is 104 years, the business model hasn’t changed for decades–and it’s one of the industries consumers tend to despise.
In September 2015, they started Lemonade, a New York-based insurer for homeowners and renters. Lemonade Insurance Company is a licensed insurance carrier, offering homeowners and renters insurance powered by artificial intelligence and behavioral economics. Lemonade promises zero paperwork and instant everything.
Some describe it as a peer-to-peer insurer. Most agree that its app makes insurance a lot easier. This appeal to the digital generation: of 2,000 policies sold in its first 100 days, over 80% were to first-time buyers and millennials.
Like any insurance company, Lemonade (so named for what a person can do when given lemons) collects premiums. The portion of those premiums that the company keeps at the end of the year–for profits, salaries, and other overhead costs–remains fixed at 20 percent. The rest is donated to a charity of the customer’s choosing. “I’m never going to make money by denying your claims,” Schreiber says. “That means you’re bringing out the best behavior in me, because I have no incentive to deny you. Moreover, hopefully it brings out the best behavior in you, because when you are claiming your stolen bike, I am reminding you that you’re not cheating an insurer, you’re cheating kids with cancer, starving seniors or people without clean water somewhere. Charities include Feeding America, Citymeals on Wheels, Teach for America, Make-A-Wish, Win (self-sufficiency for homeless women) and Robin Hood (Ending poverty).
When you file a claim via the app, you must record a video of yourself explaining the loss. Lemonade’s logic: Studies have shown that people are less likely to lie when looking into a mirror. That feature, like many of Lemonade’s other subtle cues, was added at the recommendation of Dan Ariely, a psychologist and the company’s chief behavioral scientist. For instance, the app makes you sign an on-screen pledge of honesty before placing your claim; before you hit Submit, it reminds you explicitly that the money paid for your claim will be taken not from Lemonade, but from the charity you’d previously selected.
The psychological effect at play is called priming, which refers to the way presenting humans with a stimulus can affect their response to a second stimulus. It is the same reasoning behind why witnesses in court must swear to tell nothing but the truth before taking the stand.
Combined with charity, this brings good publicity. However, just as important is how different Lemonade looks behind the scenes. Instead of underwriters, it uses algorithms; and instead of expensive brokers and salespeople, it uses chatbots. It even uses AI and machine learning to handle claims, a job typically seen as needing a human touch.
Late last year a customer called Brandon claimed for a stolen coat. He answered a few questions on the app and recorded a report on his iPhone. Three seconds later his claim was paid—a world record, says Lemonade. In those three seconds “A.I. Jim”, the firm’s claims bot, reviewed the claim, crosschecked it with the policy, ran 18 anti-fraud algorithms, approved it, sent payment instructions to the bank and informed Brandon. The real-life Jim (Hageman), Lemonade’s chief claims officer, was driving home for Christmas at the time.
The entire digital business model of Lemonade is built on main assets of Digital, Value of Information, End-2-End Automation and a customer focused value proposition.
“Technology drives everything at Lemonade, from signing up to submitting a claim, the entire experience is mobile, simple and remarkably fast. What used to take weeks or months now happens in minutes or seconds. It’s what you get when you replace brokers and paperwork with bots and machine learning.” said Shai Wininger, President and co-founder.