Last week, I read this LinkedIn post:
Peer-to-Peer Insurance: A Passing Fad or an Industry Disruption?
(Note: The LinkedIn post has apparently been removed by the author.)
If you examined the linked article, you’ll see that it comes from a college student whose industry experience apparently consists of 3 years majoring in actuarial science. These are my responses to excerpts from that post:
“I am not surprised to see tens of thousands of insurance companies going out of business in the past century.”
Where did you get the idea that “tens of thousands” of insurers have gone out of business? If every P&C insurer in America went bankrupt, it wouldn’t amount to “tens of thousands.” Now, in the future, it’s conceivable that we might see tens of thousands of so-called “disrupters” go out of business and, if so, the carriers that have been around for decades or centuries who know what they’re doing will have to clean up after them via guaranty funds while the founders move on with the money they’ve made to some new venture enabled by another foolish venture capitalist.
“…traditional insurance (which is built on the assumption of human evilness)….”
Sounds like you’ve been drinking the hype and hyperbole Lemonade that’s being ladled out on the internet. The very essence of insurance is that it is a good faith transaction. That’s one aspect that distinguishes the insurance contract from other types of contracts. The insurer relies on the insured’s promise to pay the premium and abide by the policy terms and the insured relies on the insurer’s promise to pay covered losses and abide by the policy terms. Whoever taught you that presumptive premise is lacking in historical perspective and understanding of industry fundamentals. If there is a premise for insurance with a condition, it’s the adage “trust and verify.”
“I believe that a peer-to-peer insurance system is the future of insurance in the USA. Peer groups with same insurance needs, such as homeowners or car owners, gather together to share each other’s risks. Everyone pays premiums to cover other people’s losses. It is cheap because there is no middleman fee. Lemonade Insurance, a B-Corp headquartered in New York, takes a step even further. The leftover money each year goes to charities, which attracts lots of millennial customers. It will also hinder moral hazard, meaning customers will not be dishonest to get coverage.”
As an actuarial student, you should know that this is precisely how insurance works today and has worked for centuries, grouping actuarially homogenous exposure units. What is a “middleman fee”? Are you referring to the 7-10% commission paid to insurance agents for auto insurance and the 10-12% (if that) commission paid for homeowners insurance? Your presumption appears to be that this fee is completely wasted, that the insurance agent provides nothing of value. How does the typical consumer/family/business know what their exposures to loss are and how they can be insured or otherwise risk managed? What happens when a direct insurer denies a claim that should be covered? A good independent insurance agent advocates at claim time for THEIR customer. I know that because I’ve been helping them successfully do it for over 28 years.
By the way, Lemonade’s co-founder Shai Wininger recently said, “If I had to choose one thing that didn’t work as we had hoped, it’s our use of P2P to describe what Lemonade is,” he wrote. “In retrospect, it created a lot of confusion. People seem to read so many different things into this term, so we now described ourselves using phrases like AI and Behavioral Economics.”
“Lemonade Insurance, a B-Corp headquartered in New York, takes a step even further. The leftover money each year goes to charities, which attracts lots of millennial customers. It will also hinder moral hazard, meaning customers will not be dishonest to get coverage.”
What makes you think millennial customer are any more honest than someone who, say, is in his or her 60s or 70s? Incidentally, the charitable aspect is nothing new. [https://www.iicf.org/] And why do you think this angle will hinder moral hazard? In a press release from Lemonade, they tout how they allegedly paid a claim, no questions asked, in 3 seconds. That’s exactly the thing that will attract fraudsters and any belief otherwise is incredibly naive unless their algorithms approach the level of divinity.
“Peer-to-peer insurance is phenomenal, because it is an innovation from the ground up. It disrupts the basic assumption of traditional insurance, which is human evil. Peer-to-peer insurance is like community based support groups. Everyone helps each other out especially for millennials, who are more cooperative than their parents and grandparents.”
There’s nothing innovative about peer-to-peer insurance. Reciprocals, mutuals, captives, and other forms are arguable “peer-to-peer arrangements. Alexandre Dumas (pere) said, “All generalizations are dangerous, even this one.” You seem to generalize a lot about millennials. You know that millennials are “more cooperative” than their parents and grandparents? Other would argue that the more precise term is “gullible” but not me. Generalizations, like stereotyping and bigotry, are dangerous.
“You will not spend several hours filling out personal information sheets, which is what you do for traditional insurance. Again, traditional insurance companies need so much information from you, because they want to make sure that you are not dishonest and not committing ‘stupid’ behavior.”
Insurance applicants are asked a lot of questions because a lot of questions must be asked in order to determine what unique exposures to loss every individual, family and business has. Not every purchase can be reduced to an Amazon-like “1-Click purchase” nor should it. If your health or life is at risk, do you choose the doctor who is the cheapest and/or asks the fewest questions or orders the least number of diagnostic tests? American families and businesses can and do suffer catastrophic financial loss. INSURANCE is one mechanism that can protect them from such loss or minimize the consequences. There is a right and proper way to do that. A smart phone app isn’t.
“The real revolution in the insurance industry is coming. In the next decade, I expect to see peer-to-peer insurance obtaining larger and larger market size, while traditional insurance market shrinks. The coming years are going to be full of exciting opportunities and I cannot wait to see disruptions happen in the insurance industry.”
In the meantime, while waiting for the revolution, comrade, I suggest you spend that time educating yourself about what insurance is really all about from people who actually know. Your enthusiasm is admirable and I hope you take this critique as a form of “tough love.” Over 47 years in the industry tell me, with apologies to Inigo Montoya, that you do not know what you think you know.
Readers, what do you think? Scroll down to add your thoughts.
Bill Wilson
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Having spent more than 50 years in the insurance business I can see the technological improvements coming…when claims start coming in on the new programs and litigation begins you will remember Bill Wilson’s comments.
My understanding of the Lemonade Product, is that there IS an agent involved,
THAT agent gets a commission of 20% on the policy premium!
I believe Lemonade takes 20% off the top, essentially as a guarantee. Sure sounds an awful lot like a commission, doesn’t it?
First, thanks for the Princess Bride reference. One of my favorite movies!
Second, thanks for taking up for the industry in response to this person’s comments. I find it hard to imagine a trained actuary harboring such concepts. If genuine, then the educational institution this person graduated from should also be put on radar.
Lastly, I agree there will be changes to our industry in the future. It’s inevitable but as we migrate to this next iteration of our chosen field we ought to endeavor to impress on our “replacements” the strengths which our industry relies upon i.e. the benefits of an advocate such as an well trained, independent insurance agent.
Bravo!
The consumer is already getting a good deal. If there were 5 insurance companies like there are banks and gas companies here in Canada, the consumer would be paying a lot more.
The college student who wrote this has made up and created assumptions, attempting to make them sound like truth and then wanting people to believe them as facts. Sounds like a similar approach that the marketing departments convincing insurers to go direct here in Canada are attempting to pull off.
Insurance is the only product I can think of as to no one knows what the cost will be when it is sold. Plus it could take years to figure that out. As well, it is a legal document being sold like buying shoes off the internet. This college person sounds like many of the same age who think they are “entitled”, and a lot of other self proclaimed know-it-alls peddling the idea of buying online or sucking these millennials into believing something because it is fashionable.
I hope the mindset of the article is not something that will catch on, just because I give a crap about these naïve people who will whine all the way to a lawyer once their make believe world has been shattered by reality.
Well said Mike. I teach insurance and risk management to Millennials and I spend a lot of my time having to debunk false assumptions they have about the world. They seem to insist on evidence to support the way things are and have been for years, but they are quite happy to accept the latest ‘Insuretech babble’ without the least shred of evidence, as to how it will work in practice or how it actually will benefit the consumer/society in the long term.
While reading her article I had another movie quote come to mind: “Everyone in this room is now dumber for having (insert “read it”) listened to it.”. Thank you Bill for your brain cleansing responses.
Good work Bill! I hope she reads your comments and has a change of attitude.
I’ve been hearing a lot about these ‘disrupters’ whether in P&C or affinity health insurance coverage. No one has yet addressed what happens when 1 or a small number of participants have enormous losses (million dollar liability, or long term illness) and their costs start draining the communal pot. For how long do the participants keep their jolly, all for one, we are all getting something great here attitude. I just think human nature being what it is, that will start to be the downfall of these cozy little groups.
Lynda, Lemonade just posted how “profitable” they were after the first 100 days. If that changes, they have reinsurance. If that gets hit hard enough, reinsurance becomes problematic. The ultimate safety net would likely be the states’ guaranty funds. It’s hard to imagine a $60 renters policy being actuarially sound. Their algorithms must be designed by the Amazing Kreskin. My fear is that, in an effort to book business as easily and fast as possible, they don’t properly vet the exposures of their customers such that they experience financially debilitating losses due to uncovered claims that could have been covered by proper and adequate application of a coverage checklist.
I would hope they would be wildly profitable after the first 100 days; they cant have paid much out for claims yet, can they? And yes, I agree with everything else you say. Thanks for your response!
I think I read that they’ve had a half dozen or so claims. One was a $900 coat that was allegedly stolen and their narrative was that they paid the claim in something like 3 seconds, apparently because their algorithms told them it was legitimate.