{audio:0:00:09} Great to have you with us, today. I think a good place to start would be to provide some context to your role in the founding story of Lemonade.

{audio:0:00:24} I was an insurance guy and have been in insurance for 38 years, and at the time of Lemonade, which was 2015, about 33 years or so, always with big organizations. I was on my own, at that point, operating a one-person insurance consulting firm, after 25 years at AIG, American International Group. I get a phone call from Tel Aviv. I didn’t know it was Tel Aviv at the time, because it was this individual with this nice, British accent. His name was Daniel Schreiber. He wanted to talk to me about this new insurance company that he wanted to create, with another Israeli entrepreneur, named Shai Wininger. These were two technologists; they didn’t know anything about insurance. They were just talking to themselves, for about a month and they had a list of three potential industries that they wanted to disrupt.

{audio:0:02:08} Their criteria were that they wanted the industry to be very, very, very big; they wanted the industry to have extremely bad technology and it would be good if everyone hated the industry. I don’t remember what the other two candidates were, because insurance was, by far, their favorite. They decided that they wanted to completely disrupt the insurance industry, but they knew nothing about insurance.

{audio:0:02:41} So they Googled, from Tel Aviv, insurance and innovation and apparently, even from Tel Aviv, my name was above the fold. My company was Innovation Insurance Group. It’s always good to name your company the obvious thing that you want to do for a living. They called me up and Daniel asked to see me. I had an office in the World Financial Center, in New York at the time. He came in and we talked for a couple of hours and he asked me to go over to Tel Aviv and talk to him and his partner about this new company they wanted to create.

{audio:0:03:32} Why did you think that insurance was so ripe for disruption?

{audio:0:03:44} Insurance, in general, is not very creative, which is one of the reasons I love the idea of being an innovator in insurance. A long time ago, I realized that it’s a good career move to try to find an area with very, very few people doing it. There’s not a lot of people being innovation leaders, in insurance. If you pick something that not a lot of people are doing, you don’t have a lot of competition to be best at it. It’s like banking. There’s just something cultural, about insurance, where people don’t think out of the box.

{audio:0:04:47} There are, of course, exceptions. One of the reasons why AIG was as successful as they were, for so many decades, was that Hank Greenberg thought differently. He wanted to do things that were different from all the other insurance companies. Most of the time, but not all of the time, he was very successful. That’s how I thought; it was in my DNA. If that’s how you think, then you find an area where not a lot of people think that way. I was lucky.

{audio:0:05:36} Insurtech found its place and people like Daniel Schreiber and Shai Wininger, who came from technology, realized that they’d found and industry that was ripe for innovation and was ripe for a need for a different approach towards their customers and a different business model. That’s what intrigued me about Lemonade. It was a different way of conducting insurance.

{audio:0:06:12} What was so different about the business model, for Lemonade?

{audio:0:06:16} Three things. The first thing that intrigued me was that there is a fundamental flaw in the business model of insurance, in that there is a conflict of interest between the supplier of the product and the customer of the product. For every dollar paid in a claim, to the customer, is one dollar less of profit to the insurance company. Said the other way around, for every dollar that an insurance company doesn’t pay in a claim, is another dollar of profit to the insurance company. So the supplier of the product and the receiver of the product is in an inherent conflict of interest. There’s almost no other business that one can think of, where the business person and the customer of that business person are in inherent conflict. It’s crazy, if you think about it. That was the biggest problem that Lemonade sought to change.

{audio:0:07:46} The other issue was that, insurance was meant and was originally created, as a mechanism for society to help themselves. It was a method of sharing the risk between all members of society. When Lloyd’s of London was first created, it was created as a concept between ship captains that were going to the New World and if the ship was damaged, the people who invested in that voyage would lose tremendous amounts of money. If that ship made it to the New World, the investors would make a lot of money. Lloyd’s of London was created by ship captains, coming together and deciding to share that risk, among themselves and among the investors, of those various voyages. If a voyage was successful, many people would share in that successful voyage and if the voyage was not successful, many people would then chip in for the losses. It was about people helping each other.

{audio:0:09:11} Yet, somewhere along the line, insurance became not about people helping each other, but about we versus them. A big building, called insurance, against their customers. So the other concept was, people say, doing well by doing good. Helping the world become a better place.

{audio:0:09:40} Finally, because Daniel and Shai were technologists, they were technology executives, it was crazy that insurance was not using technology as well as it should. But also, when the insurance industry was using technology, it was to benefit the insurance company and not to benefit the customer. It was a way of the insurance company saving money, reducing their expense ratio, without necessarily benefiting the customer, by lowering premium. It was not customer-focused technology. It was all back-office technology.

{audio:0:10:26} We decided to create Lemonade, to solve these three problems. Eliminating the inherent conflict of interest, in the insurance business model. Give back to society, by creating what we called the annual give back, where 100% of the unearned monies were given to charity. Not just any charity, but the charity chosen by the policy holder. We eliminated the conflict of interest, by the way, by creating a SaaS model, software as a service, where we took a percentage of the premium, no matter what. So if there were less losses, we got the same amount of money. We didn’t benefit by not paying claims, because we got the same fee, no matter what. Whether there were a lot of claims, or fewer claims, we didn’t get more fee by not paying out claims. Where there were low claims, the charities made more money, not us.

{audio:0:11:31} Finally, we created a user interface; we used technology to create a sweet and delightful experience for the customer. Yes, we used it to lower our own expenses, but we did that as a way of lowering our premium, not making more profit for ourselves.

{audio:0:11:53} What’s the biggest risk to Lemonade’s business model?

{audio:0:11:58} It’s funny; we had these three new theories and they were new. In addition to that, we were very worried about something that all start-ups are worried about, which is, is anyone going to buy from the new kid on the block? When you’re in insurance, you’re really worried about that. If you think about insurance, it’s about stability, a rock in the middle of the ocean. You’re in good hands; you’re on your side, you have a neighbor. The theory is that you’re protected by someone that’s been around for a long, long time. They’re not going anywhere; they’ve got a lot of money. They’re financially strong.

{audio:0:13:08} Now we have a little company, with a funky name of a summer drink and we’re wanting you to trust us, with insurance. The saying, at the beginning, when we were developing our company and we wanted to disrupt a trillion-dollar industry, that’s been around for hundreds of years was, will the dog eat the dog food? Not that we meant to be insulting to our customers; that was not the point. We were creating a widget; will anybody buy the widget? Will anybody buy into our concept? I remember, on September 15th, 2016, we pressed a button to launch the Lemonade insurance policy. We wait to see if anyone is going to buy, because everything is digital. We don’t have brokers; we don’t have agents. We press a button and we see if anyone goes on their phone and buys the policy.

{audio:0:14:32} You worry that nobody is going to buy. You’ve spent a year making this thing. You took millions and millions of dollars from venture capitalists, in our case, and you worry. I worried. For about 14 seconds, I worried, and then somebody bought. Then somebody else; then somebody else. It was about 70 people in the first week, I think. Then, eventually, within two years, somebody was buying every second of the day. That was pretty good, but we didn’t know that at the time.

{audio:0:15:18} What do you think is the biggest limitation to Lemonade scaling?

{audio:0:15:26} I don’t know if there is. That’s the beauty of technology. You have a big world out there, so you expand geographically. Last time I looked, in the United States, we were in states representing 80% of the population or something like that. Lemonade is already in Europe.

{audio:0:16:01} You’ve got to acquire these users, though?

{audio:0:16:04} Yes, but it’s easier than it is with traditional insurance, where you need people and boots on the ground. Then you develop more products over time. We’ve already announced pet insurance. Eventually, there’s a stopping point but we like to think of ourselves as a technology company, that just happens to be in insurance. Not a technology-enabled insurance company.

{audio:0:16:50} How did you overcome the reinsurance challenge?

{audio:0:16:57} When I was asked to see Daniel and Shai, we spent three days in this office in Jerusalem. We met both in Tel Aviv and Jerusalem. The three days were in Jerusalem; beautiful view of the old city. We started off in a room that was completely empty, with a big white wall, with just one word – Lemonade. There was a table with a whole bunch of yellow and colored stickies. We’d pick up a sticky and write something on it and put it on the wall. After three days it was rows of stickies; claims, underwriting, distribution, each showing a process.

{audio:0:18:04} One was reinsurance. Daniel looked at me and said, what do you think? We’ve created a new insurance company out of yellow stickies. He said, will it work? I looked at him and said, no, this is not going to work. He said, what’s not going to work? We’ll fix it. I said, I have no idea. But something on that wall is not going to work. Something that we think is very important, something that’s core to us, is not going to work. The difference between us being successful and us failing, is our ability to recognize that and give it up, no matter how important it is; no matter how close it is to our heart, to give it up. That is the difference between a successful start-up entrepreneur and an unsuccessful one.

{audio:0:19:22} I didn’t know what wasn’t going to work, but I suspected that it might have been the reinsurance. Because what we were asking for reinsurers, was for them to give up something that was close to their heart, which was the concept of spread of risk. In order for our model to work, they had to divide up their portfolio by individual cohorts. Groups of as little as 100 people, and reinsure each group separately. That’s not how reinsurance works. I wasn’t sure that they were going to go for it.

{audio:0:20:08} As it turned out, that wasn’t the thing that didn’t work. We were able to convince them to do that. It was one of the reasons why Lemonade became as successful as it was, that we were able to convince the reinsurers to do the thing that I wasn’t sure about. Other things didn’t work, but that one actually did work.

{audio:0:20:28} How did you convince the reinsurers?

{audio:0:20:31} A couple of reasons. One is that we were able to persuade them that while that one aspect of the model was different from what they were used to, and it might result in them having more losses than they would normally expect, the other parts of the model were better than they were used to and would reduce losses that they would normally expect. Therefore, on a net basis, they were okay. That was the logical part of the argument. But then there were other parts of the argument, which is finding the right reinsurer. We found XL and it was led, at the time, by two brilliant executives. One was Michael McGavick, who is a great innovator. One time, he said that if we, as the insurance industry does not learn to be more innovative, we will become irrelevant. What a fabulous statement that was. We will become irrelevant if we don’t become more innovative.

{audio:0:21:55} He understood the necessity of thinking out of the box and taking a risk. So did the other senior executive, who was number two at the time, Greg Hendrick, who later succeeded him at XL, which eventually became XL AXA. They were willing to think out of the box. The other thing is that they had the mentality of an investor, as much as a reinsurer. The way investors think is they invest in people, as much as they invest in things. They invested, if you will, in Shai and in Daniel and in me. They realized that if things didn’t quite work out, our bouncing of advantages and disadvantages, in this new type of reinsurance model, they trusted that we would make the changes necessary. We would pivot. That’s how venture capitalists think. That’s how investors think. Reinsurers don’t usually think that way. But if you find the right reinsurer that makes their decisions based upon people and not just things, then you’ll have a winning partnership and we found a winning partnership.

{audio:0:23:24} What are the hypotheses that didn’t work?

{audio:0:23:33} I’ll give you a couple. Lemonade is a technology company. We first thought that we didn’t need a customer service department. If you go on Amazon, it’s very hard to find an 800 number. They have one but it’s hard to find. You’re really supposed to send in all of your questions by text or email or chat. You’re really not supposed to talk to a person. Amazon likes it that way and people who deal with Amazon usually like it that way. We knew our target audience was millennials and we figured that millennials would like it that way, so we were not going to have a customer service department, with people. So we didn’t hire anyone to be a customer service department.

{audio:0:24:51} We had to have an 800 number. We didn’t want an 800 number at all, but the regulators and the rating agencies insisted that we did. We got an 800 number and we put a phone in the office and we tried to not tell anyone what the 800 number was, but we had to have it on the website. We figured nobody would ever call it. People started calling it. A lot. So we had to hire someone. Then hire somebody else. Then we quickly realized that, while the largest percentage of our customers didn’t want to talk to people – we were right about that – a small percentage of a large number is still a decent number. We quickly developed a customer service department, that ended up being about one third of our home office in New York. They were, and are, Lemonade employees, with options. They’re not outsourced. They are the true Lemonaders. They are the true makers of Lemonade. We gave up on that notion, which was very heartfelt, to some of our founders.

{audio:0:26:17} The second one that we gave up on – and this really killed me, because this is important to me too – was that we wanted to make the world a better place and part of that notion was helping charitable organizations do very concrete things. We wanted to help schools build gymnasiums. We wanted to help churches and synagogues and temples and mosques, build playgrounds. One example of that is, a PTA that wants to build a gym. The way they do it now, classically, is bake sales. It’s very hard to make a lot of money in a bake sale. We figured they would create their own cohort of the parents, of the school. They would become Lemonade policy holders, the parents, for homeowner’s insurance and the profits of that cohort, if the parents of PS312 in Brooklyn, if they had a good year – and the odds are they would have a good year – maybe not every year, but some of the years, their loss ratio would be good and then they would make a profit and we would give it to the PTA and they would be able to build their gymnasium. It would be a lot better and a lot quicker than what they would make in a bake sale. I really wanted to do this.

{audio:0:28:21} So our distribution department would be knocking on the doors of the PTAs, trying to encourage them to form this group, this cohort, this membership of Lemonade policy holders and we’ll give you the profits, to build the gymnasium. Didn’t work. You cannot get PTAs or churches or synagogues or temples or mosques interested in insurance. They’d rather do the bake sale, no matter how hard we tried.

{audio:0:29:03} It was my favorite distribution channel and I had to give it up. It never worked, not once.

{audio:0:29:14} Why did Lemonade start with renter’s insurance? Maybe you can elaborate slightly on how you view the difference in innovation, in homeowner’s versus renter’s insurance?

{audio:0:29:27} One of the first questions that we had back in Jerusalem, in 2015, when we were with the stickies was, okay, what type of insurance. That’s the first thing that Daniel and Shai said to me. What type of insurance should we do? They didn’t know; they wanted to disrupt the insurance industry. You discuss what you want to accomplish. The first thing we said is, we want to deal with people, not companies. That’s personal lives. One of the other themes that became clear is something that is called behavioral economics, which is that we wanted to change behavior. We believed that if we changed our behavior, if we gave money to charity, instead of ourselves, if we eliminated the conflict of interest, inherent in the insurance model, we would also change the behavior of our policy holders. We would reduce insurance fraud. By changing our behavior, and by changing the behavior of our insurance policy holders, there would be more money at the end of the day, to give to the charities and make the world a better place. This is really what we wanted to accomplish.

{audio:0:31:25} To do that, you need to have an insurance which is called first-party insurance, rather than third-party insurance, because you need to affect the claims that are put in by your policy holders, as opposed to claims put in by third parties, that are suing your policy holders. You can’t affect a third party. This means that, when you are looking at the types of insurance that individuals are buying, there are only two major insurances that individuals buy. Homeowner’s insurance and auto insurance. Homeowner’s is mostly property insurance, which is first-party insurance. They’re putting in a claim for something that happened to them. Auto insurance is mostly third-party, meaning they get sued because they were in an auto accident. Because we wanted to change the behavior of our policy holders, through behavioral economics, we hired the first chief behavioral officer. An absolutely brilliant individual, named Dan Ariely, a professor at Duke University. He was a founding member of Lemonade.

{audio:0:32:51} Because we wanted to change the behavior of our policy holders, we needed first-party insurance, rather than third-party insurance, because we wanted insurance that affected individuals and not companies. We wanted personal insurance, not commercial insurance. All that leads you to homeowner’s and not anything else. So you logically start off with homeowner’s. Once you start off with homeowner’s, you begin to think about who your target audience is. You’re talking about a technology company; who uses technology? Millennials. What type of homeowner’s insurance do millennials buy? Renter’s insurance. So you end up really having a company that begins, mostly with renter’s insurance.

{audio:0:33:40} That’s why, certainly at the beginning, most of our policies were renter’s insurance, although we did do a lot of condos and co-ops and homeowner’s, as well.

{audio:0:33:50} It seems as if one of the biggest lessons you had from your experience as a founding member at Lemonade, was giving up your views or your hypotheses and really embracing the surprises?

{audio:0:34:13} Yes, and that’s an important lesson, not just for Lemonade. The reason why we’re talking about Lemonade is because there are lessons from Lemonade, for all entrepreneurs and all start-ups. This is a masterclass in entrepreneurship and start-ups and lessons even outside of insurance. The Lemonade lessons are lessons in creating start-ups, in and out of the insurance industry. Today, I assist many start-ups. There are whole bunch of reasons why start-ups fail and a whole bunch of reasons why start-ups succeed.

{audio:0:35:02} One of the reasons why start-ups fail is founders don’t want to give up some of their core beliefs. They’ll say, this is why I started the company; this is what it was all about. All right, you can have one or two of those. You can’t have too many. You need to listen to your customers. People talk about pivoting, but it has to be in your heart. It can’t be just a cool phrase you use when you are talking to investors.

{audio:0:35:56} How do you reconcile the changing your mind and being flexible and listening to your customers, versus sticking to values, mission, vision, the essence of why an entrepreneur does what they do?

{audio:0:36:16} Let’s use Lemonade as an example. Our mission was to help the world become a better place. We had to change our distribution business development model, from what I originally wanted, but we are still making the world a better place. We had to tweak the annual give back, tweak the formula, but we still had an annual give back. We had to have people more involved in helping our customer, but we still use technology in ways that are far above and beyond how any other insurance company does. Our basic core was helping our customer. If they wanted us to use people a little bit more than we thought, that wasn’t a violation of our fundamental principle. Our fundamental principle was to help our customers. Over time, we use technology more and more, for that. Again, listening to our customers.

{audio:0:37:30} Sometimes, when you think about violating something that you thought was core, maybe not. Maybe there was something underneath that, that was truly core.

{audio:0:37:45} Looking back now, on the story and the journey, what was the pivotal moment or the biggest challenge that you met, founding Lemonade?

{audio:0:38:06} I think the biggest challenge was resisting the temptation to do too many things at the same time. In other words, our customers were constantly coming up with needs and we wanted to meet all of them, immediately. We announced pet insurance not too long ago but we got requests for pet insurance the first week. A lot of our customers have pets. We were in New York, we were in San Francisco; we were in a lot of cities where people have pets. We wanted to have pet insurance and it took a lot to resist coming out with that product immediately. But we knew we needed to improve our renter’s insurance, our homeowner’s insurance, our condo insurance. If we allowed ourselves to get distracted by meeting every need our customer had, and tried to meet it at the exact time they had it, we wouldn’t be serving our customers.

{audio:0:39:19} We had a lot of creative people, with a lot of creative ideas and we wanted to do everything and we wanted to do everything, immediately. We are technology company; why can’t we do everything immediately? It’s hard to resist. You end up doing a lot, certainly compared to legacy insurance companies.

{audio:0:39:48} I see a lot of entrepreneurs that give in to that and they get distracted. They find themselves being pulled in a whole bunch of different directions. They’re following every shiny ball that hits their desk. They end up not doing what their core mission was, well. Or even well enough. They wake up, a year or two later, and they realize they don’t have a company yet. They’ve just done a whole bunch of interesting things okay, and now they’ve run out of money and they never launched a company. They’re scratching their heads saying, what the hell happened? Now they’ve got to go back into the market and raise more money and they really don’t have anything to show for it. Not good. But it was hard; it’s hard to resist.

{audio:0:40:50} Can we move on to discuss the P&C industry and the market structure of property and casualty? How do you view this huge industry evolving, over the next decade?

{audio:0:41:05} I think there are going to be massive changes in the property and casualty industry, over the next decade. First, people say, what do you think they are going to call insurtech, five or 10 years from now? The answer is, insurance. That’s what they’re going to call insurtech in five or 10 years. There will be a number of pretty big changes that will rise out of the connection between technology and insurance, over the next 10 years. Use of artificial intelligence and machine learning, both in underwriting, as well as claims. Again, I remember the early days of Lemonade, where I was going over, with Daniel, people that we were going to hire. I said, we’re going to need to hire a chief underwriting officer. He said, what’s a chief underwriting officer? I said, that’s a person who underwrites the risk of the home or the rental property and so on. He said, I have a computer that does all that. I said, I know, but sometimes, there will be a referral to an individual person. He asked why we would need to do that. I explained that, sometimes, things get kicked out of the algorithm that the computer uses to generate the premium and it needs to be referred to a person, to review. He asked why that would ever happen.

{audio:0:43:32} It’s like you were in the room with a seven-year-old who kept saying, why, why, why? Here I am; I’ve been in the business for 30 years and no one has ever asked me those questions before. Increasingly, I was having a difficult time giving a cogent answer. The reality of it was that every answer that I gave, his response was, yes, but I could just code the machine to do that. Just tell me what I need to do and I’ll tell the coders to make that change. Finally, I said to him, we’re not that smart, Daniel. I don’t know what to tell the coders, to make that change. Finally, he said to me, I understand; we need an individual underwriter because people are too stupid, but one day they will be less stupid and then I can get rid of them. I said, yes. It’s the defect in the human nature that requires individuals. But one day, we’ll get rid of them. He said, now I’ve got it.

{audio:0:44:46} Eventually, we’ll need people to do something, but the lesson is there, which is that underwriting will become more and more a result of use of artificial intelligence and machine learning and that’s already happening in Lemonade and it’s happening elsewhere. It’s not just in underwriting; it’s claims, as well. A significant percentage of our claims are done without any human intervention. That’s happening everywhere in the insurance industry.

{audio:0:45:22} That should help the margin of the insurer?

{audio:0:45:32} Sure, the expense ratio goes down. The question is, what do you do with the money? Do you keep it, as additional profit? Do you lower premium and give it back to the insured? Do you increase charity and give it back to society, which is another trend? What’s going to happen with this conflict of interest? Is insurance going to go back to what it used to be, with people helping people? Is insurance going to benefit society, as a whole? Or are we going to continue with this us versus them mentality? I think that the Lemonade model, and maybe not exactly the way it is now, but the concept, I think is only going to grow. It cannot keep the way it is.

{audio:0:46:20} What about the distribution of insurance products?

{audio:0:46:24} That’s going to be fascinating. Look what happened to the travel industry. Travel agents; poor travel agents. Your heart goes out to them. 10 years ago, what did the travel agent do? They just gave you a ticket, really. The job wasn’t that hard. You told them where you wanted to go, they went into a computer or something, put in the name, a ticket came out and they gave you a ticket. Nobody does that anymore. All those guys are out of business, because of Expedia and Travelocity. For travel agents to survive, and most of them haven’t survived, they have to give real service. You go into a travel agent, the ones that have survived, because they can talk about hotels that they’ve been to, where they know the general manager and they can give real value.

{audio:0:47:44} That, I think, is what’s going to happen to the insurance brokerage community, over time. The ones that don’t give true value, they’ll be replaced. Nobody is going to need them. Technology will take care of the purchase of insurance. The only ones that will survive will be the ones that give real value. In fact, there will be areas where you don’t need that value.

{audio:0:48:12} I’ve helped found a company, called Assurely, and it is a broker, but it automatically provides insurance as part of a digital transaction. It’s invisible to the participants. You just go through this transaction – it happens to be raising money through crowdfunding – so you’re raising money through crowdfunding and as part of that transaction, you automatically get insurance for the raise, in case something goes wrong. It’s like E-ZPass. You’re going down the road and, as you go through a particular point, you automatically go through the E-ZPass channel, without slowing down. You don’t even know it happens. You have that E-ZPass fee that’s paid, so that the road is built, which is what the fees are used for. You don’t slow down; it’s just automatic.

{audio:0:49:22} That’s what insurance should be in many, many cases. Just automatic, as part of the transaction. There are companies, like Assurely, that are doing that. That’s what the future of insurance is going to be, from a distribution channel, except in those areas where you really do need a true risk advisor. Those insurance brokers that can provide that risk advisor function, will survive and provide that function.

{audio:0:50:03} What is the real challenge for distribution moving online, in home and auto? Auto is, obviously, moving over much quicker. What challenges do you see in the industry, in shifting the reduction of typical insurance brokers and the shift of that insurance, online?

{audio:0:50:23} I think the challenge is only a psychological one. There is really very little technology challenge.

{audio:0:50:32} How do you overcome that? These small companies that you’ve never heard of, versus the big brokers or insurers that go direct; how do you overcome that psychological challenge?

{audio:0:50:53} Overcoming the psychological challenge and the cultural challenge is the biggest challenge there is. You can get auto insurance, you can get homeowner’s insurance, purely with technology. The underwriting is not difficult. You can get most of the information you need from third-party sources. With Lemonade, you can buy homeowner’s insurance in 30 seconds. There is very little data we need from you. You do the whole thing on your phone. Auto insurance is similar.

{audio:0:51:41} The challenge for the mom-and-pop agency, at 123 Main Street, is how to accept that you have to do business differently from the way that your father and grandfather did it. It may not be for all your customers. There may be some customers that still want to walk into your shop and have a cup of coffee and share a donut and talk to you about the local baseball team and fill out a form. But there will be fewer and fewer of those. You’re going to have to get used to that or you’re going to have to retire and get out of the way.

{audio:0:52:38} What can the insurers do, to claw back some distribution?

{audio:0:52:46} I think they can do a couple of things. They can certainly assist, financially, where that type of assistance is necessary. They can do training, when that training is needed or desired. Certain carriers will go direct but, I think, that’s going to be very, very difficult. It’s very difficult to do both. You can’t annoy your traditional distribution channel, so I think the large carriers that have a substantial and robust distribution channel are not going to be able to have a large direct department.

{audio:0:53:46} How does that negotiation or discussion go then, with your distribution channel, if you want to claw back some of that?

{audio:0:53:52} It’s tough. At the end of the day, it may not be worth it. If you’re going to do it, my recommendation would be to create an independent subsidiary and create a niche market, which is not in direct competition. It’s very difficult to do it in a way that would be a head to head competition.

{audio:0:54:24} Why? Because the traditional brokers have so much power, because of the distribution they give?

{audio:0:54:29} Correct; they’ll just move to somebody else. Even if they’re captive to you, they’ll find ways around that.

{audio:0:54:37} Do you think this is going to be a big barrier to insurance shifting online?

{audio:0:54:44} No; they’ll just do it as a way of helping their distribution channel. If their distribution channel refuses to go along, then the shift will then happen. They’ll do direct but they’ll do it slowly and over time.

{audio:0:55:01} But who is going to capture that margin between the insurer and the distributor, if it’s still going through the traditional channel?

{audio:0:55:10} The carriers are not going to allow themselves to lose business. What they’ll do is, they’ll develop subsidiaries, with niches, for millennials. Then they’ll market millennials through that alternative subsidiary. Esurance, for example, is a good example of that. There are ways of doing that and trying to keep everybody happy, knowing that, over time, things will work out because, over time, the business will be going through that millennial-based subsidiary.

{audio:0:55:46} When you look at the current insurers, in the US, who do you see as best positioned to lead the way, in this shift in distribution?

{audio:0:55:57} I’m hesitant to use names, certainly in a negative way. I can say that, in general, Munich Re has, traditionally, been ahead of the game in this area, both as an insurer and a reinsurer. I think that ACE certainly has the capability of leading the way, if they want to. I think AIG wants to; I think they’ve been struggling a little bit. I think that other carriers, that I won’t name, have huge cultural barriers.

{audio:0:56:45} What are Munich Re doing so well?

{audio:0:56:51} I think they recognized the insurtech phenomenon, right at the beginning and made a commitment not to lose. They developed a series of subsidiaries and a series of partnerships, both on the investment side, the insurance side and the reinsurance side and they have kept that commitment. For example, Munich is still the only insurance company – or at least one of the few – that has an insurance product for virus business interruption. There are a few companies that have bought that product, an incredibly few, that now find themselves in the situation where they are covered for Covid-19. There are quite a number of companies that were offered that coverage that declined it, that are now kicking themselves.

{audio:0:57:59} Again, another example of the role of product development and how product development is used, as a way of looking at emerging risks – in this case, not so emerging; it’s 17 years old – and how some folks understand the need to buy insurance for emerging risks and how some people, most people, put their head in the sand and then cry when the risk comes out. They don’t blame themselves for not buying; they try to blame other people.

{audio:0:58:44} How do you think insurers will approach the more commoditized lines, auto, home, versus commercial and other more special lines of insurance?

{audio:0:59:01} Commoditized lines are, obviously, more suspect to the use of technology. They’re easier to write, they can go faster and technology can create a more user-friendly experience, a more sweet and delightful experience. More commercial and more complex insurance needs more handholding and more creativity. Again, if you look at some of the emerging risks today, such as crypto theft insurance. Another area that I have been involved in, for a number of years. It’s an interesting type of risk to look at, as an insurance industry. It has elements of traditional crime – theft of money – and also has elements of cyber risk – theft of data. You look at war risk and terrorism risk, today, in the area of cyber-war and cyber-terrorism and what does that mean, for us as society? What does that mean as an insurance industry, grappling with that, as well. I go back to Covid-19; are we going to forget again, that there are pandemic viruses? Is society finally going to start buying that insurance through, hopefully, another public-private partnership. Or are we going to forget and then ask the government to bail us out, for trillions of dollars. When are we going to get smarter on all this?

{audio:1:01:05} Looking a decade out, what would you advise younger working professionals, today, to really focus on, within insurtech?

{audio:1:01:23} I think what I would concentrate on is what I mentioned a few minutes ago, which is the creating of a smooth, seamless experience where insurance simply becomes part of a transaction. Imagine a world where you get a ticket for a ski lift and there’s insurance, as part of the ticket, in case you get hurt whilst you’re skiing. We have it a little bit already, with travel insurance, when you buy a ticket. But certain types of insurance should just be part of the process of living. It goes back to what I was saying to you before. Society needs to spread the risk of bad things happening, among all of the participants of society. It should be done in a smooth and seamless way. We should be taking care of ourselves, in that way. Insurance just happens to be the name that we have for it.

{audio:1:02:48} There are very smart start-ups in the world, existing today, that are being created to do that. It doesn’t work for every type of insurance, but it works for many of them. If I was a young person, those are the technology companies that I would try to become a part of.

{audio:1:03:17} Ty, it’s been a pleasure. Thank you very much for your time.

Lemonade, Inc: Disrupting the Insurance Industry

Why there is a misalignment of incentives between insurers and insured

Core differences in Lemonade's business model versus traditional carriers

Challenges Lemonade faced negotiating reinsurance

Structural changes in insurance distribution and the role of brokers

Challenges for insurers to move away from broker channels

Lemonade, Inc: Disrupting the Insurance Industry

Founding Member at Lemonade, Inc & Former President at AIG

inpractise.com/articles/lemonade-disrupting-insurance

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Ty Sagalow

Founding Member at Lemonade, Inc & Former President at AIG

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