Can Insurance Giants Lose Out to Start-ups?
Have you heard of Lemonade, Friendsurance? These are the new insurance companies which are redefining the insurance sector. These companies are using crowd sourcing and social networking to create a shared insurance experience.
How it works is simple, groups of business owners such as car owners, auto owners, absorb each other’s risks by contributing money to insure each other’s losses.
This kind of business model is gaining momentum as consumers worldwide are seeing the old insurance model as cumbersome, boring and unwieldy.Technology companies are encashing this trend to build sleek, smart platforms which cater to this segment. Peer-to-peer (P2P) groups eschew traditional brokers and agents, chipping more off the cost of products.
The trigger factor why customers are turning to P2P is simple. Often, consumers by expensive annual insurance policies for, let us say, their vehicles. They then don’t use it. The money is gone! Next year, the same cycle is repeated. For every single person who actually runs a claim on a vehicle insurance, there are probably several who don’t.
The money from unclaimed insurances goes to the corporations who grow richer. In P2P the risk is covered and if no money is claimed by the group, it is either returned or used to finance the next year’s insurance premium.
Altogether, the concept is considered less expensive than buying insurance from the first dollar of loss up.
“P2P is based on the premise that people pay high premiums each year and get nothing in return, even if they do not suffer any claims or losses,” says Fred Eslami, senior financial analyst at insurance rating agency A.M. Best & Co.
“Through social media, friends and family members can get together, each paying a nominal premium that is pooled together and from which small claims can be paid.”
Insurance as an industry is therefore set for disruption and unless traditional companies review their business strategy then they will soon become redundant. One of the main reasons for the failure lies in the fact that insurance companies have always been in a power of strength. They offer and individuals take.
They dictate and people follow. This has led to dissatisfaction. User experience has also been impacted. You would have heard at least one story of how an individual had to wait for a long time, go through several unnecessary procedures to claim the money.
Along with a loss (because insurance is paid only after a loss), the person also has to go through agonizing waiting and follow-up experiences. All this has led this industry to be seen as a `necessary evil’.
Well, according to Dan Ariely, Lemonade’s Chief Behavioral Officer and a psychology professor at Duke University. “If you tried to create a system to bring out the worst in humans, it would look a lot like the insurance of today,” he stated in a recent company update, which also asserted that Lemonade plans to rebuild insurance as a “social good, rather than a necessary evil.”
Lemonade declined a request for an interview, as did Guevara.