The insurance industry as we know it is undergoing a huge change - representing perhaps the biggest transformation in over a century - and that change will affect you. Here is what you need to know:

A New Firm Arrives With A Totally New Model, New Offerings, And Lower Costs

A young firm called Lemonade entered the insurance market last year with a totally different business model than all other insurance companies. From every policy that it sells, Lemonade takes a flat fee towards its operations and profit, and deposits the remaining premium funds into an account that is used to pay claims. Any money that is left in the claims account at the end of the year is given to charities chosen by policy holders - not taken by the insurance company as additional profit; Lemonade's business model thereby dramatically reduces the conflict of interest normally present between insurance carriers and their policyholders.

All of Lemonade's processes are digital, and most are automated using artificial intelligence (AI) and chatbots - leading to performance that is, at times, orders of magnitude faster than most carriers can deliver: you can literally buy a homeowner's or renter's insurance policy in under a minute (and usually at a lower cost than is available elsewhere), and about a third of Lemonade's claims are paid within 3 seconds of being filed. 3 seconds. You read that correctly.

It is no surprise, therefore, that Lemonade is growing rapidly. According to its CEO, Daniel Schreiber, the company has already sold over 70,000 policies, and doubles its customer base every 10 weeks. Lemonade reports that Google, an investor in the firm, surveyed the rental insurance market in Manhattan just 6 months after Lemonade's launch, and found that Lemonade already had 4% market share, and, that, of the people who bought their first policy ever during those same 6 months, Lemonade had 26% market share. Remember, that's 4% and 26% for a 6-month old company competing with firms that have been around for decades, and, in some cases, for centuries.

Lemonade has been able to achieve tremendous growth because the changes that it introduced are not simply cosmetic or about how people interact with insurance companies; they are transformative, totally changing how insurance is sold, what types of policies people can buy, and how claims are paid.

For example:

1. It is not a secret that otherwise honest people often feel no guilt in cheating insurance companies because they feel that insurance companies cheat them by denying valid claims; because Lemonade makes essentially the same amount of profit per policy whether one makes a claim or not, and policyholders know that the only party that loses significant money on a fraudulent claim is a charity of the policyholder's choosing, policyholders make far fewer fraudulent claims - lowering both the cost of paying out claims and of processing them.

2. Because insurance companies typically incur a significant cost to process a claim - there are people and paperwork involved - they tend to issue nearly all of their policies with some sort of copay or deductible in order to discourage (or eliminate entirely) common, small claims. Because Lemonade uses AI and bots to process claims, it can process common claims with little overhead while spending significantly less on claim processing than do its competitors. In fact, the types of policies that other firms must avoid selling (because of their cost of claim processing) but that so many younger insurance buyers want to purchase - for example, policies that cover small ticket items such as laptops and that offer low or no deductibles - are an ideal type of policy for highly-automated Lemonade to sell. These new policies are attractive to a sizeable market - and, at least as of today, few, if any, other firms can offer them without losing significant money.

3. For many years, one of the primary assets of insurance companies was their massive network of agents - agents provided tentacles into the consumer market that allowed firms to reach large numbers of people in many different areas. But, today, with ubiquitous Internet access around the industrialized world, a middleman is quickly becoming an unnecessary cost; a carrier can directly reach nearly every potential insurance buyer online. Because agents are expensive - in addition to the overhead of managing agent networks insurance companies often pay 15-20% commissions to agents for the sales of policies - Lemonade starts with a much lower cost of selling policies than do most insurance companies.

Older Insurance Companies Are Evolving In Order To Compete

Of course, legacy insurance companies are not sitting by idly; they are also investing in technology to reduce costs, improve efficiency, and facilitate the offering of new forms of insurance.

Among the answers to Lemonade, for example, are technology companies like  Reply.AI which offers chatbots with AI capabilities for insurance companies. Reply's bots automate insurance company communication with customers to, among other things, answer questions about insurance, qualify leads for the insurance company, accept premium payments, process claims, and provide status updates about existing claims; technology of this sort can also dramatically improve a firm's reach into potential customer markets of younger people. According to Reply. AI, for example, LifeNet Insurance increased its qualified leads by 300% after deploying Reply.AI chatbots. And, of course, the bots don't only help older insurance companies reach a Millennial audience, but also reduce costs compared with older methods of communication, as well as give firms the capability to offer new insurance products that require automation in order to be viable (as I discussed above vis-à-vis Lemonade).

Of course, over the long term, for older insurance companies to compete with Lemonade they will also need to entirely revamp their processes and procedures, and to replace arduous paperwork-intensive processes with digital automation, AI, and other technologies. Addressing the negative impact of the conflict of interest problem that Lemonade solved by almost entirely eliminating its incentive not to pay claims will also be a significant challenge for older firms - but one that if not addressed is likely to eventually render their rates non-competitive as they are forced to continue paying out disproportionate numbers of fraudulent claims.

Time will tell if they are successful. Either way - whether through Lemonade, though technologies that bring older insurance companies into the modern era, or via both - it is clear that the insurance industry is undergoing massive change. People demand, and will increasingly expect to see, new kinds of policy offerings, will exhibit new attitudes towards insurance companies and fraudulent claims, and will have much more aggressive expectations in terms of acceptable timeframes for processing and paying out claims. Policy buyers will expect to be able to purchase zero-deductible policies, to be able to obtain insurance in a minute rather than in hours or days, and will expect claims to be paid immediately upon submission. Paper-and-people intensive processes will disappear - likely along with those insurance companies that attempt to maintain them.

Published on: Dec 11, 2017