Daniel Schreiber, CEO of Sequoia-backed insurance startup Lemonade, opened his remarks on stage at the CB Insights Future of Fintech Conference with: “It’s almost self-evident that there’s something profoundly broken in the world of insurance.”
Is he right? According to Schreiber, “There’s a reservoir of ill will towards insurance” and Americans by and large see it as “a necessary evil instead of a social good.” This leads to survey results like “25% of Americans…[saying] it’s okay to defraud insurance company.”
“The other 75%,” Schreiber said, “were brought up better than to admit that sort of thing to strangers.”
He believes it’s difficult for the traditional insurance system to change given its scale and deep roots in old ways of doing things.
“In the US, almost 10% of the Fortune 500 [are] insurance companies.” he explained. “Their average age is 95 years old…[their] corporate structure is a byproduct of the industrial revolution.” The best practices from that era, he said, no longer hold true today in the modern economy, where sharing, on-demand, and online solutions are the order of the day.
State Farm, for example, has 18,000 brokers, which makes creating a modern, direct-to-consumer solution a huge obstacle. These are sprawling institutions with thousands of employees that are used to doing things the way they’ve been doing them for years. It’s worth noting that those employees are aging out and may be reluctant to training and process changes. And, to make matters worse, young people aren’t stepping in to fill their shoes (who wants to go into insurance and be an agent?).
The business model issue, Schreiber said, is more subtle. “This is a big part of what we’re trying to take a run at [by making Lemonade an insurance carrier] … Insurance makes money by denying claims. There is a profound conflict of interest at the very core of the insurance business model … Every dollar I pay you is a dollar less to my bottom line.”
Customers sense this conflict of interest and the adversarial relationship that they are being set up for with traditional insurance. This creates a vicious cycle: insurance companies can’t be too free with payouts, so they put in place draconian claims processes, which makes customers distrust the insurance companies and can lead them to embellish claims. This embellishment makes the insurance company feel justified in creating harsh claims policies. This lack of trust has even led most Americans to say that they do not believe that insurance companies will pay them when the times comes to make a claim.
It’s this lose-lose situation that Schreiber and company are aiming to resolve with technology.