“Everyone has a plan, until they get punched in the mouth,” Mike Tyson – world famous boxer.
The internet was lit up last month when insurance history was shaken to its roots by a nondescript New York based startup called Lemonade. The urban legend is quoted thus:
“At seven seconds past 5:47pm on December 23, 2016, Brandon Pham, a Lemonade customer, hit ‘Submit’ on a claim for a $979 Canada Goose Langford Parka. By ten seconds past the minute, A.I. Jim, Lemonade’s claims bot, had reviewed the claim, cross-referenced it with the policy, ran 18 anti-fraud algorithms on it, approved the claim, sent wiring instructions to the bank, and informed Brandon the claim was closed.”
In Kenyan-speak, Brandon lost his fairly expensive winter jacket valued at about Kshs 98,000 two days before Christmas. He submitted a claim on his phone using his insurance company’s app. Within 3 seconds, a robot had reviewed and approved the claim, sent EFT instructions to his bank and closed the whole unpleasant maneno. Brandon breathlessly gave his side of the story thus:
“I signed up for Lemonade because it was no frills, the most affordable option, and took no more than two minutes on my couch. I try to avoid making claims but the process with Lemonade was so simple. I already assumed there was no way that I’d recover my losses: other insurers either pile paperwork or deduct tons of charges that I don’t understand. But this time was different. I signed an honesty pledge, answered a few questions, and Lemonade reimbursed me in a matter of seconds! Their service is amazing and I am so happy that I signed up!”
I see my insurance industry friends rolling their eyes as they read this. I would too if I worked for an industry that had more gobbledygook than an advanced fluid mechanics class in Swedish. “We provide WIBA cover with a minimal excess payable”. How in the name of logic does that sentence make sense to the ordinary man on the Rongai matatu? And no matter how many times you speak to insurance industry managers and tell them to communicate simpler to customers, you’re more likely to get an underwritten, indemnified ode to jargon.
Lemonade is a young company, set up less than two years ago and funded with $13 million (About Kshs 1.3 billion) of seed capital. Its premise is peer-to-peer insurance (P2P) aiming at reducing costs by cutting out the middle fat made up of brokers and agents and issuing policies directly to clients. It donates unclaimed money to good causes. Yes: it gives away what the ordinary insurer on the Syokimau train would deem as profit. According to Paul Sawyer writing on the Venture Beat blog, clients select a cause that they care about through the app that they use to sign up. Clients who select similar causes are bundled into peer groups. Premiums from this group cover any claims by individuals and any money left over is sent to the common cause. Lemonade makes money by taking a 20 percent flat fee from monthly policy payments. The whole premise of the Lemonade model is understanding human behavior so they hired the renowned behavioural economist Dan Ariely as the company’s Chief Behavioral Officer. “Since we don’t pocket unclaimed money, we can be trusted to pay claims fast and hassle free,” says Ariely. “As for our customers, knowing fraud harms a cause they believe in, rather than an insurance company they don’t, brings out their better nature too. Everyone wins.” The policy that Brandon had cost him $5 (Kshs 500) per month and, according to the Lemonade website, was 5.6 times less than what a similar policy from a legacy insurer cost. Unlike many other insurance start-ups, which have focused on distribution, Lemonade has become a fully-fledged insurance company. It takes on the risk from the policies it writes, but also has reinsurance deals at Lloyd’s and with Berkshire Hathaway.
Look, we are not there. Yet. But Kenya is on the global map of fintech innovation and has demonstrated a population that is inarguably made up of large-scale early adopters across a wide spectrum of age groups. Shifting to insure-tech, particularly in matters that are pertinent to Kenyans and inexorably linked such as road transportation and health is simply a matter of when, not if. The number of road accidents caused by the public transport industry be it via matatu or bodaboda transport lends itself to short term, bite sized policies that are cheap and fit well into our “kadogo” economic model. One insurance company has already began to pilot this. However the problem in the Kenyan insurance industry today is the middleman legacy system made up of brokers and agents that create a fairly healthy cost layer that tags onto the fractious margins. Add to that the high level of frauds as well as increasing regulation and you see an industry that has to die and be cremated before any practical innovative solutions can ever emerge that make sustainable financial sense to Victorian age balance sheets.
Before 1954, the athletic world did not believe that a man could run a mile in under 4 minutes. However, on 6th May of that year, Roger Bannister broke that psychological barrier by running a mile in 3:59:4. I call it a psychological barrier because within a year of Bannister’s achievement, 24 other people had followed suit in running the sub-four minute mile. What Lemonade has done is to break the psychological barrier where a claim is paid out without filling in reams and reams of paper, and answering all manner of questions short of what color underwear one was wearing when the event leading up to the claim occurred. I don’t think legacy insurers will fall over themselves to copy this new model. But new insuretechs can and will. The barriers to entry for insuretech are fairly low. And that would be a resounding blow to the old school insurers. To be precise, it would be a punch in the mouth for even the best laid strategic plans.