Episode 01: The conflict of interest at the heart of insurance
When my cofounder and I launched our loss prevention technology 18 months ago, we immediately thought that our ideal partners would be the insurers. Imagine a sensor analyzing the water and electricity consumption of their customers, and alerting them to potential disasters. This could prevent the millions of fires and floods that occur every year in our homes! But we didn’t understand the current gap of misunderstanding and the conflict of interest between insurers and policyholders…
A losing winning relationship
The insurance model as we know it was created in the 14th century during the explosion of maritime traffic. Even then, Francesco di Marco Datini, a Florentine merchant, wrote to his wife
“They are very kind to take my money, but conversely, when disaster happens, they save all their backs and do their best not to pay.”
Realizing this, Francesco became rich by selling insurance to his colleagues.
Insurance, however, has a real social utility. It allows everyone to live without worrying about hazards and the victims of a disaster to resume a normal life. So why is it perceived as a necessary evil?
The problems with insurance does not come from the stakeholders but from the model. It is founded upon a direct opposition of the insurer and insured interests. This is because in the current model the less the insurer reimburses you, the more they increase their profits. Every time they reimburse you, the insurer gives you some of the money that they would otherwise keep for profit — they lose money. The insurer is therefore torn between their obligations of short-term financial performance and their need to effectively pay the claims of their best customers to keep them, and they are exacerbated by a high stock market volatility.
The Result: the industry as a whole invests very little in technologies to simplify and accelerate the repayment of its customers (video, artificial intelligence, inventory online …). Due to this, being reimbursed today is always synonymous with slowness and administrative complexity.
Information asymmetry for the benefit of the insurer
Let’s face it, today understanding insurance is complex. And yet, the basic principle is very simple. A mutuality (a group of people) unites and puts money aside to cover future risks. A central actor, the “insurer”, is responsible for collecting premiums, managing accidents (claims) and ensuring that there is always enough money to pay all claims. For this he is paid.
This remuneration is now opaque. When you buy an insurance product, you rarely understand the details of what it is: limits, loopholes, time frame, conditions … And most of all, it often feels like being fooled. Am I really covered? Is the cheapest insurance the best for me, or the most profitable for my insurer? For example, some insurance blue cards achieve more than 70% margin! The same is true for warranty extensions that your home appliance salesman insistently sells, often achieving margins of over 50%.
As a result, Europeans no longer have confidence in their insurer (only 30% of French people are satisfied with their insurance as shown by the European barometer of customer satisfaction achieved by Ipsos). Even mutuals, founded originally in a logic of uniting a community bound by common interests (artisans, teachers, doctors, military …) reach their limits. Some, with whom we have collaborated in the past, are doing a remarkable job today. But many have let themselves go, and charge high management fees for customer service that is outdated.
At Luko, we think there is another way to protect homes. We looked for a model based on transparency to align the interests of the insured and the insurer. We want them to be partners rather than adversaries.
A new insurance model
Our job: manage claims quickly, protect you, and ensure that your claims are always reimbursed. We collect fixed and transparent fees completely online. Our service fees are merely 30% of your premiums, the lowest service charge in the market. Thanks to a fully digital model using Artificial Intelligence, and the absence of agencies and sales representatives, we focus all our efforts on customer service and our loss prevention technology. The remaining 70% of the money from your premium payments are placed in a common fund to quickly compensate your claims. At no point are they integrated into Luko’s profits.
At the end of the year, if there is money left after all the claims have been paid, we will pay it back to the charity of your choice. We call this the Giveback *. Unlike traditional insurance, Luko does not earn anything by not paying you back. The giveback is the end of the conflict of interest. You are reimbursed quickly and simply.
Why this giveback model? We are often asked why we do not pay the remaining balance directly to the insured.
According to various estimates, insurance fraud increases the price of premiums by 5% to 15%. To avoid paying for others and offer insurance at the best price while paying back claims quickly, we have implemented high-performance anti-fraud filters. But we believe that the best way to reduce fraud is to create the conditions for trust through a virtuous model. If you exaggerate a disaster, it is not your faceless insurance agency that suffers, but the association that you have chosen.
The giveback is a way to ensure that you will to be paid quickly and simply in response to your claims, while supporting an association that is dear to you.
☞ Change my insurance
* The principle of Giveback was not invented by Luko but by an American insurance company who have experienced great success with this model. Let us give to Caesar what belongs to Caesar.
💵 Giveback and tax exemption: The giveback is an innovative concept, its tax status is not yet completely decided. We are currently working on a structuring allowing you to benefit from the exemptions either in the form of reduction on your next insurance premium or directly via a tax deduction.
Originally published at https://www.luko.eu on June 22, 2018.
