InsurTech has reset the bar for operational effeciency
Take Lemonade for example.
For every USD of premium, Lemonade take a 25 cents flat fee to pay all the cost of operations and the profit margin for the business. The remainder goes into the risk pool to fund claims, reinsurance premiums and the give-back, where lemonade return surplus funds to the designated charities of its customers.
This is the essence of the Lemonade business model; keeping a clear split between expense and profit on the one hand, and settlement of claims on the other.
This separation of expense and profit from settlement quite deliberately removes the industry's inherent conflict of interest. As a result, Lemonade do not profit from the non-payment of claims. In the Lemonade model, there is no place for claims optimisation – read the excellent Duncan Minty’s post on this subject here.
And even though Lemonade are still in start-up mode, ie., high costs against low revenue, they are operating at an expense ratio below the industry norm. In the US home insurance market, the expense ratio norm is around 29% excluding profit against Lemonade's 25% fixed rate.
Having your cake and eating it too
The example set by Lemonade is not just that they are running at a lower cost than the incumbents. It's also that they are demonstrating how to be effective. It is this combination of low cost of operations and high customer satisfaction that is the real lesson for the incumbents when it comes to operational efficiency.
When it comes to being effective, the measure of productivity is a good place to start. Measured in terms of Number of Customers/Employee, the norm in the US home market is circa 500 customers/employee. But for Lemonade they are serving around 1800 customers/employee.
As well as being over 3 times more efficient than the incumbents, they are also beating them on customer satisfaction. Lemonade's NPS is around 70 compared to a woeful single digit industry norm.
Finally, and probably the most important measure from the customer's perspective, Lemonade measure the settlement of claims in hours, not days and weeks. As I said in my annual top 10 InsurTech predictions list in December 2016, "Speed to Pay will become the Key Measure in Claims Settlement KPIs". Claims directors take note!
This genie is out of the InsurTech bottle
It's the same story in China where ZhongAn have built a totally digital insurance platform. With around 2000 employees and half a billion customers they have fully digitised the insurance value chain from front to back. Today, 99% of all pricing, underwriting and claims settlement is fully automated.
In Europe, the first mover with a Lemonade type business model was Getsafe. Operating with a flat fee of 20% GWP, Getsafe partner with Munich Re to offer multi-line cover as a single policy.
When I spoke with the CEO and co-founder, Christian Wiens, he told me; “Our platform fee is 20% of the Written Premium for our Non-life products. For Life and Health they will be lower. A big part of being able to significantly reduce the cost of operation is down to our setup with Munich Re. We’ve been able to shorten the whole insurance value chain.
“We have automated most of our processes with a new multi-line policy admin system. This platform runs everything very efficiently in the background. It is a true innovation compared to traditional multi-line carriers who run multiple (outdated) admin systems for different business lines.”
InsurTech Insights from The Digital Insurer
In last month's InsurTech Insights from The Digital Insurer and KPMG, we tackled this theme of Operational Efficiency.
You can read the latest issue of InsurTech Insights here.
In KPMG's feature article, Francis Templing and Mark Wylie get to the heart of the matter when they say the use of technology provides the way for insurers to address both efficiency (in the operation) and effectiveness (meeting customer expectations).
In my article, I identify 5 technology lessons and the leading start-ups that insurance incumbents can learn from across InsurTech;
- Automation and AI
- Platforms and the Cloud
- Self-service customer engagement
- Data science, machine learning and big data
- Blockchain and DLT
Whether you are a start-up or an incumbent, one thing is for sure in the digital economy, you need to be both effective and efficient. The traditional efficiency agenda is not enough on its own.
To find out more on this subject, register for the free to attend webinar here. You can hear the playback even if you cant attend in person.
And sign up for Global Livefest, a 5 day program of virtual conferences on digital innovation in insurance throughout November.
Rick Huckstep is the Chairman of The Digital Insurer, a keynote speaker and social media commentator on InsurTech, and an advisor and investor to technology start-ups.