Lemonade is the new New York based insurtech that is 'redefining everything we understand about insurance'. Leon Yan, Actuarial Manager at Cover-more introduces Lemonade and tells us why it works.
Add lots of sugar to make it extra sweet
I've been casually following Lemonade Inc – the New York based insurtech that is redefining everything we understand about insurance – from its expansion into California to it receiving a strategic investment from Allianz. I must admit I really, really enjoy Lemonade.
I may be under the spell of the halo effect (or the tendency to like everything about a person), in this case an insurance organisation, including aspects that have not been observed. I'm only informed by what I read through the media. I'm not acquainted with any Lemonade employees and I've not interacted with Lemonade as a customer but I really, really enjoy Lemonade.
It's hard to dislike Lemonade when even the name is associatively coherent. Our mind connects 'lemonade' to a constellation of positive ideas such as it's delicious, refreshing and quenches one's thirst. It happens unconsciously when ideas are cognitively easy for our minds to process. We've had repeated experiences of lemonade that were pleasing and are primed to enjoy the sweet taste when we're thirsty, so this places us in a good mood.
And this is clever because the ethos of the organisation is to transform the experience of insurance, from what feels like a 'lemon' into 'lemonade'.
The secret ingredients
Lemonade boasts an impressive run sheet of innovative insurance ideas:
1. So long moral hazard
Lemonade unashamedly asserts to never be in conflict with customers nor make money by denying their claims, effectively solving prisoner's dilemma.
They cracked the game theory gridlock, they say, by having their hands 'commercially' tied. Firstly, Lemonade is set up as a Public Benefit Corporation and certified as a B-Corp in what is an insurance industry first. Lemonade does not place the interests of profit and returns to shareholders at a detrimental cost to society.
Secondly, Lemonade will only take a flat fee to pay expenses and reinsurance. They return what’s leftover in the annual 'Giveback' to causes that their customers care about. Lemonade openly use clear, transparent and empathetic language to show they are onside with customers: 'we gain nothing by delaying or denying claims', 'we treat premiums as if they are still your money and return unclaimed remainders'.
Admiration, respect and praise breeds goodwill in the public. The Law of Reciprocity will thus ensure they attract more customers who are socially responsible and who will do the right thing.
2. A clever behavioural scientist
This is a structural fix to the model of insurance, and the grand architect is Lemonade's Chief Behavioural Officer, Dan Ariely. On trust and behaviour he explains:
People are generally honest. We all have a trust self-image that we might push from time to time. It’s like speeding; that doesn’t make us feel like bad person when we do it. The same goes for insurance. People don’t feel aligned to the insurer, but they do feel the relationship is adversarial. This gives people a sense of entitlement and leads to embellishment and even fraud
Lemonade is determined to put trust at the forefront of insurance.
3. Not a fad but a true P2P model
Customers are grouped by their affinity to good causes. Those passionate about medical research or community sports will be grouped as peers. Unspent premiums from the risk pools are subsequently donated to the selected causes. The motivations for both the insurer and insured are thus aligned, and any irresponsibility by either party put this common objective at risk. It is consciously or subconsciously avoided at all cost.
4. Artificial Intelligence
Lemonade is a technology company running insurance. AI is used as the first point of contact with customers, to quote and sell insurance via a mobile app. Next, a series of algorithm runs all the underwriting and a price is served. Prices are quoted as monthly, making the figure look lower than otherwise. This is reduced metering at its best. Our cognitive bias will make it more likely that we compare this lower price to say cups of coffee so the quote is made to feel cheaper.
Claims are also lodged, assessed and paid instantly through the app using a chatbot. There is no Claims Department per se, a series of algorithms will determine exactly what is paid out. Lemonade boasts the fastest pay out, in 3 seconds! Customers sign a digital pledge and also record a short video statement all designed to induce socially responsible behaviours.
When the tyranny of distance and lack of personal connection is replaced by a code of honour, and also the customers record a video that is watched, they are then more likely to do the right thing.
5. Cognitive ease
The Lemonade ecosystem is designed to be extremely easy to navigate. Things that are easy induces happiness and positive feelings. Consistent cartoon like formatting, open and trust building content, and snappy aesthetics all builds familiarity towards the brand. When customers are repeatedly told that Lemonade is there to do good, we're subconsciously primed to feel generous and kind.
When a purchase path is easy and intuitive, we enjoy cognitive ease and are rewarded by the experience.
Spread the word
I introduced earlier the concept of association. We are all hard-wired to associate things we like with happiness. Most people will see the word 'cake' and subconsciously be happy. It's our brains' way of saying 'cake' is a good thing.
So did you notice I repeatedly used the phrase I really, really enjoy Lemonade? Maybe you didn't give it too much thought. But assuming you also enjoy the beverage, you are more inclined to trust what I say. And if I repeat it again and again, it will be more associatively coherent so that if you read the word lemonade you will now think of the company. So if you like lemonade, it's now easy to appreciate why this company is quickly conquering the United States one beverage at a time.
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivatives CC BY-NC-ND Version 3.0 (CC Australia ported licence).
CPD Actuaries Institute Members can claim two CPD points for every hour of reading articles on Actuaries Digital.