Essential Protections as a Standard for Insurers and Insurtech

The Essential Protections for Policyholders provide a roadmap for states to follow in regulating homeowners insurance and a scorecard to evaluate states’ current systems of regulation. Although the Essential Protections are directed at regulators, many of the individual items also can be used to measure how well an insurance company measures up to standards that insurers should adhere to.
Of great discussion now in the insurance industry is “insurtech”—the rise of new tools and entities that use big data, artificial intelligence, apps, bots, and websites to service or compete with traditional insurers. One of the most highly publicized is Lemonade, an insurance company that aims to make insurance “delightful.” It’s policies are sold through an app and many claims are handled by a bot.
Lemonade is a good test case to see if it really is “transforming the very business model of insurance” as it claims to be doing. The Essential Protections provide a test in several areas.
Buying Insurance
Homeowners generally don’t know much about the policies they are buying except for the basics—policy limits, deductible, price, maybe a few essential terms. Lemonade has made a start at improving this process; it offers customers a copy of the policy before they pay for it, and the company issues transparency reports with some information about claims. But more is needed, and the Essential Protections suggest further steps that Lemonade can take.
First, Lemonade should post its policies online, with easy-to-understand explanations of key provisions and comparisons to terms in other commonly used policies, like the Summary of Benefits and Coverages under the Affordable Care Act.
Second, Lemonade has made a preliminary report on its claims (only six were filed in 2016). When it accumulates more claims, it should do what no other insurer does and give statistics on those claims: number of claims opened, closed with payment, and closed without payment, including amounts. How many claims were disputed? How long did it take to resolve major claims? Then consumers can begin to evaluate Lemonade on quality as well as price.
Premiums and Renewals
A big problem in homeowners insurance is what policyholder advocates describe as “Use It and Lose It.” A homeowner who has paid premiums for years suffers a loss and files a claim; the insurance company responds by dramatically raising the homeowners’ premium or even refusing to renew the policy altogether.
Is Lemonade’s underwriting algorithm going to employ Use It and Lose It? Lemonade claimed (probably accurately) a world record when its claim bot, A.I. Jim, paid policyholder Brandon’s claim for a lost coat in three seconds. But what happens to Brandon when the policy comes up for renewal? Will Lemonade renew his policy? Will it raise his premium, now $5 a month?
If Lemonade wants to transform insurance, it should commit to the Essential Protections standard by pledging not to non-renew or raise a premium because a policyholder submits a single claim in a three-year period. Some states require adherence to the standard by law, but as Lemonade goes national it can promise to treat all its policyholders at least this well.
Claims Process
Processing a claim for a stolen coat by bot is great, but people mostly buy insurance for protection against major losses. Lemonade hasn’t disclosed how it will process those claims. Does it have a claims staff who will go out and inspect a fire-damaged home or will it hire third-party adjusters? How will those people be compensated? What does their claims manual look like? Lemonade should tell us.
Essential Protections suggest other standards Lemonade should follow. It should provide policyholders a clear explanation of all of their rights and obligations, copies of relevant state laws, and every piece of information that Lemonade uses in evaluating the claim. Their policies should give claimants at least two years to file suit if necessary and advance notice that any deadline is expiring. Policies also should have lots of other details often subject to dispute, including, for example, adequate Additional Living Expense, matching of undamaged to damaged property, and more. (Go to the Essential Protections website for details.)
Lemonade hopes that the claim process will always be problem-free. But often there will be disputes about coverage or scope of loss. Lemonade should provide for fair appraisal, mediation, and arbitration provisions. And if a policyholder is required to sue Lemonade because it has acted unreasonably and the policyholder wins, Lemonade should agree to pay the policyholder’s attorneys fees in addition to damages, so the policyholder is made whole.
If Lemonade does a better job and attracts customers, the market will force other insurers to do the same. So far, though, Lemonade hasn’t succeeded in transforming what policyholders care about most in insurance—having enough information to make good choices in buying insurance, being treated reasonably, and having their claims paid promptly and fairly.
Jay Feinman