Emulating Wikipedia, Facebook and Uber: can insurgents transform banking and insurance?
Is the insurance industry facing “a Wikipedia moment”? That was the question posed by Daniel Schreiber, Co-Founder and CEO of Lemonade, a new peer-to-peer insurance company, at a World Economic Forum event on ‘Mitigating Risks in the Innovation Economy’ in Munich last week.
Consider, he said, the story of the Encyclopaedia Britannica. Founded in Edinburgh in the mid-18th century, the Encyclopaedia was, for more than 200 years, a seemingly unstoppable juggernaut. It was the repository of human knowledge — an indispensable resource for vast swathes of society.
Then along came Wikipedia, combining a new technology (the internet) and a new model (crowdsourcing). Practically overnight, what had once been indispensable was rendered irrelevant. Since 1768, there have been 15 editions of the Encyclopaedia; Wikipedia gets updated 15 times a second. It doesn’t just do what the Encyclopaedia did cheaper — it’s also more comprehensive, accurate and convenient than a traditional encyclopaedia could ever hope to be.
Hence, a Wikipedia moment. Could something similar happen in insurance?
Schreiber’s answer was a partial yes. Change is undoubtedly coming to the industry — earlier in the day the CFO of a major incumbent had gloomily predicted a 30% workforce reduction across banking and insurance — but it’s unlikely to be an “overnight” transformation. Insurance is a more complex and multifaceted business than publishing encyclopaedias.
In any case, Lemonade, which launched in New York in September and which is backed by the legendary venture capital firm Sequoia Capital, is modelling itself not on Wikipedia but on Facebook. How can you create something with the potential to reach enormous scale whilst maintaining a close-knit community feel for users? That’s what Facebook has done so successfully — despite having almost 1.8 billion users worldwide, each individual user only interacts with their circle of friends.
Lemonade hopes to translate this model to insurance. It organises its customers into groups who share an attachment to a charitable cause. Claims are paid out of a collective pot made up of a group’s premiums (minus Lemonade’s flat-rate management fee). And if there’s money left over at the end of the year, it goes to the group’s selected charity.
Schreiber calls Lemonade a “technology first” company. But, crucially, it’s also incorporated insights from behavioural psychology into its business model. Fraud costs the insurance industry billions of dollars a year — and 90% of insurance fraud is committed by customers. Many people who wouldn’t dream of committing fraud in any other context think it’s OK to over-claim on insurance.
Rather than accepting this as part of the cost of doing business, Lemonade decided to address the root of the problem: trust. By charging a flat-rate management fee, they remove the conflict of interest at the heart of insurance. The company gains nothing from paying out less. Only the customers’ chosen charity stands to gain from lower payouts and, unsurprisingly, this fact encourages greater honesty from claimants.
It’s early days yet, but Lemonade is confident that its model will enable it to improve performance — as compared with a traditional insurance company — not just by 10%, but by 10X. It aims to achieve an average claims processing time of under 5 seconds — perfectly plausible when the whole process is digitalised. As Volans’ most recent report highlighted, this kind of exponential thinking — 10X rather than 10% — underpins a whole raft of breakthrough business models that are currently emerging.
Former Barclays boss Antony Jenkins thinks something similar is possible in banking. Since last November, he’s been publicly warning his former colleagues in the banking sector that they could face an “Uber moment”. Last month, he put his money where his mouth is, launching a start-up called 10X Future Technologies that is working on a cloud-based core banking system.
Lemonade and 10X Future Technologies are both insurgents to watch in industries that have long been described as ripe for disruption. It remains to be seen, though, whether they can become the Uber or Wikipedia of banking and insurance. Market transformation — particularly in highly complex industries such as these — is often harder to achieve than we imagine.
What makes it so tough? And what makes a company more or less likely to succeed in transforming an industry? With these questions buzzing around my head, I travelled from Munich to Cambridge for our Breakthrough Symposium (co-hosted with the UN Global Compact and ARM Holdings). There, I listened as Richard Northcote, CSO of Covestro — another company that has set its sights on market transformation — expounded on precisely these points.
Innovation alone isn’t enough, he argued. “We could remove 60% of the weight of a car and reduce fuel consumption by 30% today. But the incentives aren’t there.” Covestro sells its high-tech polymers — some of which have the potential to radically reduce environmental impacts — to a range of industrial consumers. But many of these consumers are resistant to change.
The key now — and not just for Covestro — is to bridge the gap between sustainable innovations and markets. That will require more than just clever use of technology. Market transformations — Wikipedia moments — are as much about stories, mindsets and emotions as they are about technological breakthroughs. In that context, Lemonade’s decision to harness insights from behavioural psychology may well prove to be its smartest move of all.