Start-ups claim of ‘conflict of interest’ is a misleading claim to consumers

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I’m sure many of you have read statements like the above before.  These are not new, and have been talked and written about many times. (sources of the first & second)

This week’s article is not an attack on the business models of P2P Insurance startups like Pineapple or ‘a tech company doing insurance’ like Lemonade. or Lemonade. (the words in italic are a post-publish edit based on Lemonade’s pivot from P2P to ‘tech company doing insurance’ that I had overlooked).  Next week, I will be writing about P2P Insurance. For this week, I want to talk about how dangerous and misleading statements about “conflict of interest’ are.  These sort of statements are misleading to customers, dangerous for our industry and in my view, can be irresponsible.

What makes these statements misleading and why does it matter?

For starters, if an insurer pays less claims, they should have better profitability (assuming all other variables are equal).   This should be obvious.

Insurers do not deny claims for the sole purpose of making more money.  That would be wrong and regulators wouldn’t allow it.

Disruption in the Insurance space is great and long overdue.  I continually talk about how much I love the advancement in technology related solutions for Insurance.  But statements like the above could have a dire impact on our industry as a whole and have the opposite effect of what the people who made them are trying to achieve.  If there is lack of trust already between customers and Insurance companies, these sort of statements only exacerbate that problem.  Our industry is important and the products we sell are important to the people the purchase them.  As such, the way we educate customers on the benefits and uses of our product is also, very important. 

But Insurers do deny claims, right?

Yes, there are plenty customers out there who have been denied a claim from an Insurance company, which has adversely impacted their lives even more so than before they filed the claim.  They filed the claim in the first place to get monetary replacement for a loss they experienced – and now the Insurance company didn’t pay the claim too…Ouch!  

If you have enough of these stories from customers, then there will be a perception of Insurance being ‘bad’ and Insurance companies trying to ‘screw’ their customers, only for more profit.  

Lemonade and Pineapple have tried to build on that perception, in fact, twisted it, to make it seem that the sole reason that Insurance companies deny claims is to make more profit, thus creating a conflict of interest.

If I am an everyday average customer that doesn’t know in detail how Insurance works, the above make sense and I would believe these statements too.

I mean, we don’t see too many articles about how many times the payout of an Insurance claim actually helped someone, right?  That’s not newsworthy/controversial material.  

So, what sort of risk does a company face as it relates to payment of claims?

Last week, I wrote about investment returns, the low interest rate environment and natural disasters.  The risk mitigation and contingency plans I wrote about there are not just related to Insurtech start-up initiatives, but also our business as a whole.  A huge negative swing in of any of these factors may also impact an incumbent’s reserves, which means more money may be needed for claims rather than investment.  Munich Re and Swiss Re, two of the leaders in Insurtech investment amongst the reinsurers, may have to answer this question sooner than later based on the effects of their business from the recent hurricane season.  

Full stack start-ups may not have to answer this question yet, but it should be on their radars.

What about fraud?

Believe it or not, it’s not just customers that get taken advantage of; insurers can be taken advantage of too!  I’m sure some of us have read an article about fraud as it relates to Insurance claims.  For those of us that have been in the industry sometime, you’ve probably been part of a fraudulent claims investigation or two.

This week, I came across this study from The Journal of the American Medical Association.

While the report below is not exhaustive and the limitations of the report are listed in the article, I would like to highlight one point made in it:

Based on the differences between the ASP (average selling price) and the mean insurance payments, the cumulative differences in payment for patients in this insurance database were estimated at $225.3 million for TKA (Total Knee Arthroplasty and $199.7 million for THA (Total Hip Arthroplasty).

For car Insurance, it’s not only customers who can commit fraud, it can also be repair shops.

For home Insurance, it can be contractors.

For health Insurance, it can be hospitals/doctors.

You get the point.  If fraud is something that Insurers worry about from a risk management point of view (after all, we are in the business of risk management), then it may mean that Insurers need to have processes in place to protect themselves from being taken advantage of too, not just look at claims to make more profit.  These processes may result in the denial of a claim from time to time.   Often times, multiple departments/people need to get involved with the review claims, which are not always black and white decisions.

Summary

A few weeks ago, I wrote ‘that the key inflection point for a customer in the Insurance value chain is at the point of claim’.  

The claim paid to a customer is what makes our industry so powerful.  This helps to restore the customer (to some degree) in a time of loss.  At the same time, the denial of a claim can also have an equally powerful impact on a customer, albeit in the opposite way.

As mentioned earlier, if an insurer pays less claims, they should have better profitability (simple math).   To say that Insurers deny claims for the sole purpose of making more money is wrong.  The bigger an Insurance company is, the more onerous their process may be. When you are processing tens of thousands of claims a month, you have to be careful and need to have processes in place to protect the customer and company.

That’s where Insurtech solutions come in.  Look at companies like Snapsheet, Shift Technology, and Motionscloud to name a few.  They are trying to help both incumbents and customers to make the customer experience better when making a claim.  This is a step in a positive direction.  Ask a Claims heads of any carrier out there; they will likely admit that the process is not perfect and can definitely use some enhancement.  

For those who have made the statements above, or are thinking about making similar statements, please think of all sides of the equation first.  

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Stephen Goldstein is an experienced Insurance executive and Insurtech dealmaker with a core focus on growing revenue, launching go to market initiatives and advising industry leaders.

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(Disclaimer: I have done some work recently with Shift Technology and Motionscloud in my current role outside of Daily Fintech)

5 comments

  1. The imbalance of an insurer’s legal team and the pages of small writing in contracts, gives insurers a skewed resort to the law. Insurance is mandatory for car ownership and many would argue, for housing. In the floods around the world, insurers have been dreadfully slow at processing claims, leaving many homeless for months. The skewness can only be discovered by a claimant upon a disaster actually happening.Then they can see how good an insurer is. No I don’t buy your argument totally. Yes, Insurtech maybe using poor marketing tactics. But I know, that insurers send in teams of @loss adjusters into claims. so that the final sum is agreed or not, absolving the insurer of the decision. for the small person they do not have the resources to fight a legal claim. Yes there is the Ombudsman and the regulators but at the end of the day how many scandals have there been in insurance with them resorting to “Paragraph 9, subsection X, point 4 ‘ and so on…I also know from experience that like any other business, heads of department in insurance companies are measured like any other business on P and L. If necessary, the legal team is put in motion.

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  2. Kevin,
    Many thanks for your detailed comments, I truly appreciate it. I agree with some of your comments, and would like to address all:
    – I agree with you on your points of claims process being slow, insurance being mandatory for car and home, and all the small writing in the contracts.
    – For claims process being slow, this is because of the assessment that has to be done coupled with the manual process that most incumbents have. For a flood, hurricane, etc – imagine how many claims a company has to process (especially the ones that are over exposed to these events)? That’s where the Insurtech solutions come in…to help with speed, which can help with speed and accuracy of claims. These are very exciting and basic changes to the claims process that need to be made.
    – In terms of the lengthy policy and the small wording in a contract. I want to highlight two things here.
    1) an insurance policy is a contract between a customer and an insurer. As such, this is binding to whatever the terms of the contract are.
    2) when a policyholder receives the contract, they have a free-look period, which is the time that an policyholder and their advisor (if they have one) can review their contract. Unfortunately, not everyone does this, but some do. Back in my financial planning days, I remember delivering numerous policy contracts and prospectus (some in the north of 500 pages). Some of my clients wanted to go word by word (I spent 3 days with one client reviewing an annuity prospectus and on the phone with the company who issued the policy, so we could understand every single word of it!) At the time I thought it was a bit onerous myself, but I’m glad this customer did, as it allowed me to learn a lot too.
    – On the policy wording bit, yes, there are a lot of clauses in contracts. Carriers put these in there as a mechanism of control as well as to substantiate their pricing of the policy contract. I’ve been part of team writing a policy schedule for a life insurance and health insurance contract. It’s not a fun exercise, but as an insurance company, they have to be very careful in terms of making sure their wording aligns with how they priced the product and what features/procedures/claims they will cover, else they will have a policy that does not make economic sense.
    – On the legal teams of big insurers vs. the customer – I agree that an insurer will have more in terms of lawyers too. But the customer must also take the initiative to review their policy in detail when they get it, and if they don’t understand, then ask, clarify and document.

    With that being said, there is more work that can be done in making policy contracts easier to read and a bit more palatable. Risk Genius is making some huge strides in this and their solution will help to tackle this. https://dailyfintech.com/2016/01/28/riskgenius-the-google-of-insurance-policies/

    Cheers,
    Stephen

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  3. Dear Stephen, very nice article. It is sad that in the industry, we like to harp on the statistics of only those claims which are not paid. What about them which are paid? Unfortunately, these sentiments weigh down heavily on insurance consumption and prospective customers deter from buying insurance just because their friends and families thought it was good to retain the money in a savings account than to invest in an insurance plan. As an industry stakeholder, be it a fintech or a large insurer, educating about the quality and the quantum of risk coverage should be the most important goal. That is how one will start building the trust. Thanks.

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    • Thanks Arpita for the comments. I fully agree, education is key. Unfortunately, as you say, the focus is typically on the times that we don’t pay. Now while this is understandable and it is up to all of us to find 1) better ways to educate the customer on how insurance works and 2) better solutions to take care of the process and customer experience. And yes, this will then help to build better trust for all!

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