How Lemonade use transparency to challenge a broken system
Offering complete transparency into its operations, Lemonade has created a new model of reciprocated trust with customers, disrupting an industry long viewed with suspicion.
Insurance is a strange industry. No one really wants insurance. It’s a necessary evil. And as a trade — much like gambling, that is based upon intangibles and hypotheticals, it’s hard to know if and when an exchange has been fair. It’s perhaps no surprise then that there’s little trust in the industry and it’s open to some dubious behaviours.
25% of Americans think it’s OK to fraud their insurance company for instance. Customers know that claims can happen so infrequently, that when a claim comes around, it’s seen as an opportunity. Claimants might round up a little here and there. Suddenly that ASOS dress ruined from an upstairs leak gets a designer upgrade on the claims form.
‘These people aren’t criminal’ says Yael Wissner-Levy, Head of Communications and Content at Lemonade, an insurtech challenger based in New York. ‘They’re people like you and I. ‘We all sometimes feel it's ok to embellish claims - it's a victimless crime.’
Lemonade, founded in 2015, is challenging traditional insurance, not by tweaking its differences compared to other insurers, but by creating an entirely new model of relationship built on reciprocated trust.
‘We've built, we think, a model that will bring out the best in all of us.’ says Wissner-Levy. ‘Part of building a system that brings out the best in people is transparency. And it's a buzzword and you see it everywhere. It's the new ‘disruption.’ Everyone was disrupting a few years ago and now, everyone’s transparent. But we're very thoughtful about transparency, and use it to the fullest.’
So how is Lemonade using transparency?
Instead of making its profit from not paying claims like traditional insurance, Lemonade takes a fixed fee from monthly payments, pays out claims and donates all leftover money to nonprofit causes its policyholders choose. It means Lemonade is not incentivised, like other insurers, to reject claims. Likewise, customers are made aware that making claims means less money in the pool for those good causes so fraudulent claims are not incentivised. ‘You're reminded that if you make this claim, the American Red Cross may not get your unclaimed premium at the end of the year’, says Wissner-Levy. ‘Once you know that, maybe you’ll think twice about making a fraudulent claim or embellishing a claim.’
Lemonade asks claimants to record a video of themselves explaining the incident. Lemonade say that seeing the claimant explain the claim in their own words makes it easier to review the claim but studies also show that people are less likely to demonstrate transgressive behaviour if they are made to feel self-aware. Using video makes fraudulent claims less likely.
Finally, transparency is critical to Lemonade’s communications. Lemonade shares the good, the bad and the ugly on its blog. From long-form articles on the behavioural science and thinking behind Lemonade’s insurance model, to business results (whether positive or not), company decision explainers as well as fun stuff like photos of Henry, Lemonade's Chief Purr Officer (the New York City office cat).
In June 2018, Lemonade published an article called ‘We suck, sometimes’ where its cofounder Shai Wininger admitted some things in the business that weren’t going so well, most notably their ‘loss ratio’ — the percentage of premium that’s paid out in claims — was 60% higher than anticipated (it’s been steadily improving since). Can you imagine any other insurance firm being so open about its shortcomings?
Take a stand
Lemonade has also been very open about its position on issues often considered political and potentially polarising. On guns, Lemonade’s policies limit the amount it pays out for the damage or theft of firearms to $2,500 and excludes assault rifles altogether. On the climate crisis, Lemonade has divested its investments from coal and other major polluters and is encouraging the wider insurance industry to do the same. That’s $100m of investments and none of them in fossil fuels.
It’s an insurance company not just taking a stand, but transparently explaining the thinking and beliefs behind these decisions to its customers. Lemonade’s beliefs attract those who are like-minded in their outlook on the world, whilst those who are not can simply shop elsewhere.
Transparency builds trust
The culmination of this transparency is that customers trust Lemonade. Whereas suspicion and opaqueness were the behaviours synonymous with traditional insurance, Lemonade has used transparency to create an entirely new model based on reciprocated trust — Lemonade trusts its customers and customers trust Lemonade.
So what do customers think? Lemonade has a Net Promoter Score (NPS) of 70, compared to the industry average of under 20. What about investors? Lemonade raised $300m from its Series D round of funding in April, giving the startup a valuation of over $2bn and in June launched in Germany, beginning its expansion into Europe.
‘If you change the system, if you create one that will work to bring the best out of people, you can change people's behaviour,’ says Wissner-Levy, ‘and we've been able to do that because of this level of transparency.’