How artificial intelligence could help make the insurance industry trustworthy

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With its complex rules, fine print and lengthy processes, it’s little wonder that the $1.2tn insurance industry has a poor reputation for trust and customer service. In a recent global survey from accounting firm EY, consumers ranked insurance below banks, car manufacturers, online shopping sites and supermarkets for trustworthiness.

A newcomer to the field, New York City-based Lemonade hopes to reverse that reputation by using technology and behavioral science to create a faster and more transparent service.

The company is working with Dan Ariely, a professor of psychology and behavioral economics at Duke University, to take antagonism out of its relationship with customers. Lemonade set out to create algorithms that make it easy and quick to sign up and approve claims – in minutes rather than days. By automating the service as much as possible, the company, which sells renters and homeowners insurance, hopes to keep costs low.

“Lemonade is fast and transparent rather than slow and opaque,” said David Charron, a lecturer at the Haas School of Business at the University of California at Berkeley. “Their success here will be interesting to watch and may depend on acquiring dissatisfied customers from big insurance companies.”

Lemonade launched its initial service in New York last September and earlier this month filed for a license to 46 other states and the District of Columbia. It recently raised $34m from investors including GV (formerly Google Ventures) and General Catalysts, bringing the total to $60m.

To demonstrate transparency, and informed by its work with Ariely, the insurance startup publicizes how it divvies up the premiums in running its service. Lemonade makes money by keeping a flat fee of 20% of a customer’s premium. It sets aside 40% mainly for buying reinsurance from firms such as Lloyd’s of London to cover major claims that exceed what the premiums can cover. The remaining 40% will cover claims, with whatever is left going to a charity of the customer’s choice at the end of the year.

The company, which is registered as a public benefit corporation, includes the charity component to show it’s not just about making profits. This practice is unusual because an insurance company usually keeps all the profit or pays dividends to its shareholders or policyholders, said Justin Sydnor, a behavioral economist and associate professor of risk and insurance at the University of Wisconsin-Madison.

The charity component also helps to minimize fraudulent claims, said Lemonade CEO and co-founder Daniel Schreiber.

“When they have a common cause that they’re raising money for, the thinking is that if they make a fraudulent claim, they aren’t hurting the insurance company but rather the charity or organization they have chosen to give back unclaimed money to,” Schreiber said, adding customers could feel extra guilty if they are raising money to benefit their communities, such as a school library or soccer field.

The ease of sign-up appealed to Aviv Gadot, 33, who opted for the company’s basic renters coverage of $5 per month. He didn’t previously buy renters insurance because, he said, dealing with insurance companies required filling out “endless paperwork” and took too much time. He also didn’t trust that insurers would treat him fairly: “Their incentive is to keep my money and prevent me from claiming, since it goes directly to their bottom line.”

Lemonade is part of a trend by insurance companies to improve how they market their services and serve customers online. Berkshire Hathaway, for example, createdAirCare, flight insurance that promises immediate payouts for cancellations, delays and baggage loss. Then there’s UK-based Gaggel, which allows friends and family to put cash aside in the event their loved ones damage or lose their mobile phone.

These more tech-focused insurance companiesraised $2.6bn in funding last year, according to investment bank Financial Technology Partners.

The emphasis on speed and ease of use online also reflects the insurance companies’ desire to attract younger customers. According to a 2014 Swiss Re survey, US consumers under age 44 are more than twice likely to buy life insurance on the internet than those over 65. A similar trend is taking hold in Europe and Latin America. Lemonade declined to disclose the number of customers, but it said that 87% of its customers never bought insurance for their homes before and 81% of them are 25-44 years old.

Lemonade is able to screen applicants or claims quickly because its software can quickly pull data and cross-reference information about a particular home or neighborhood from a variety of sources. This reduces the need for the company to ask a lot of information from customers, Sydnor said.

The startup created two chatbots based on two of its employees, and it expects its algorithms to learn from interactions with customers to improve service over time. The two employees are available to speak with customers by phone and handle more complex cases.

“We only use our claim algorithms to help us reach one single decision: should a claim be handled automatically or not,” said Schreiber. “The algorithms will either pay claims instantly or call in the human to take charge.”

In a quarterly performance reviewposted online, Lemonade noted that five of the six claims from 2016 required human intervention. But it touted a particular claim was handled completely by a chatbot: “The first time ever that a claim was handled solely by artificial intelligence – from triage, through fraud mitigation and down to the actual payment by wire. Start to finish, without involving us humans, all done by AI Jim!”

A big challenge for Lemonade will come when it faces a flurry of claims from a major natural disaster, Sydnor said.

“When you have 100 large claims to process in a town, it may be challenging to meet your customers’ needs with a very small claims-adjuster team,” he added. “On the other hand, there may be ways to improving communications and making initial payments using AI that will make Lemonade faster and more responsive in those times.”