Article

Using technology to help rebuild trustworthiness in the insurance industry

September 25, 2017

By Jagdev Kenth, Director of Risk & Regulatory Strategy, Financial Institutions Group and Grace Watts, Executive, Global Industries, Willis Towers Watson

The two most popular definitions of ‘insurance’ and ‘insurance company’ on the crowdsourced Urban Dictionary are symptomatic of the pervasive lack of trust within the modern insurance sector.

Insurance

  1. Business that involves selling people promises to pay later that are never fulfilled
  2. A way to get free money

Insurance Company

  1. An affiliation of pirate-gamblers who accept bets called premiums. The dollar amounts of the premiums are non-negotiable but the amounts of the claim settlements, should the company lose the bet, are rarely delivered without argument.
  2. Evil multi-billion dollar corporations that earn a profit from your premiums, and then find any loophole they can so they can refuse to live up to their responsibility in order to save money.

Perhaps unsurprisingly, the urban dictionary definition of ‘insurance fraud’ is:

‘A person in need of cash. They will deliberately chuck themselves in front of vehicles just to get compensation. They will use some of their money from the insurance company to pay the health bills to recover and then the rest is pure profit’.

The distrust cycle

So, have the actions of insurance companies eroded trust and pushed consumers towards the notion that defrauding insurance companies is socially and morally acceptable? Or have dishonest consumers who believe fraud is harmless caused insurance companies to question or challenge claims?

According to the FBI, insurance fraud actually costs the average U.S. family between $400 and $700 per year in the form of increased premiums. So for most this ‘free money’ remains elusive. It’s not just individuals and families bearing the brunt of these actions, but societies too.

In Europe fraud is estimated to account for 10% of all claims, in Australia it costs the industry $2 billion per year and in South Africa, $390 million. Fraudulent and unfair health insurance claims alone cost the South Korean government $500 million in 2016. However, the insurance sector is not above criticism.

After Hurricane Katrina, the insurance industry faced a raft of negative publicity for denying claims to policyholders at a time of great human suffering. Elsewhere, a report found that UK car insurance companies were making £1 billion per year by hiding price rises from customers at renewal. Earlier this year insurers received more negative attention when some rejected claims following a London terrorist attack that killed seven and shut down local businesses for 11 days. One restaurant was faced with £50,000 in losses despite having business interruption cover; it excluded terrorism and the claim was not paid ex gratia.

And so, distrust breeds misbehaviour which fuels more distrust. Indeed according to one behavioural economist, ‘If you tried to create a system to bring out the worst in humans, it would look a lot like the insurance of today’.

Why do we even need trust?

Trust – our belief in the reliability, truth or ability of something or someone – is integral to daily life. We trust drivers of public transport to get us to work safely, we trust our favourite lunch spot to serve us edible food, and we are trusted by our employer to carry out our duties in a responsible and legal manner. These simple, everyday activities become laborious in low trust environments.

The inability of societies to develop effective, low-cost enforcement of contracts is the most important source of both historical stagnation and contemporary underdevelopment in the Third World’ – Douglass North, Institutions, Institutional Change and Economic Performance

According to the economist Stephen Knack, ‘If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia’. For Knack trust has wide-ranging economic and social impacts; from reducing transaction costs to strengthening democratic governance. When trust is present, we can enforce contracts quickly and cheaply.

In the insurance industry, the abundance of protocols to tackle distrust can add layers of complication and cost, both for the insurer and the insured. Arguably, like certain societies around the world, the industry is being hampered by such complicated processes.

A trust revolution?

The sharing economy has generated much thought on trust. In its entirety, the industry will be worth $335 billion in 2025, up from $14 billion in 2014. In today’s world people open their homes to strangers (Airbnb), order a ride with an unseen driver (Uber) and entrust their pets to someone they met online (BorrowMyDoggy).

All of this relies, in some part, on trust. Indeed Amsterdam-based Peerby relies entirely on trust; users put household items on loan and borrow the things they need from people in their neighbourhood without any financial transaction.

This business model is not restricted to tangible assets; it’s also being used in insurance. German start-up Friendsurance uses the sharing economy approach to unite groups of similar policyholders who can gain cashback on their premiums if no one in the group makes a claim. Guevara encourages friends and family to join mutual pools. Members trust each other to mitigate risk and not make fraudulent claims, which would decrease the potential group rewards. Any money left at the end of the policy year is used to discount their renewal.

Lemonade is a start-up carrier which also functions as a public benefit corporation. Its mission is to ‘use the power of technology to transform insurance from a necessary evil to a social good’ and its Chief Behavioural Officer Dan Ariely was appointed to ‘make Lemonade trusting and trustworthy’.

Lemonade has disrupted the traditional insurer model in two fundamental ways in a bid to gain its customers’ trust. Firstly, Lemonade has declared it will only ever take 20% of premiums as a flat fee; it does not make money from denying claims.

Secondly, when policyholders sign up to Lemonade they are asked to nominate a charity to benefit from its Giveback program. Each year the company donates any underwriting profit to these nominate causes. According to Ariely this is not just about philanthropy but good business as it ‘neutralizes the conflict of interest at the heart of the insurance industry, lowering fraud, costs and hassle all around’. It functions as a mechanism to foster trust between Lemonade and its customers, because if they try to claim ‘free money’ it will be at the expense of a charity they care about, not Lemonade’s bottom line.

Or is it…

However this idea that trust is integral to business is not a 21st century concept introduced by the sharing economy or technology disruptors. And fundamentally, the concept of an insurance company wanting to pay claims is not a new one.

The motto of Lloyds of London, the world’s largest and oldest insurance marketplace, is fidentia meaning ‘confidence’. The underlying legal principle of London insurance is ‘utmost good faith’, namely all insurance contracts rely on full and complete honesty.

In 1906, a major earthquake hit the American city of San Francisco. The quake and its ensuing fires ravaged the city, killed thousands of people and left half of the population homeless.

As the government was not responsible for financing relief, the insurance industry bore the cost of these losses; $50 million in total, over $1 billion in today’s money. Famously, one of Lloyd’s leading underwriters, Cuthbert Heath, instructed his agent to ‘pay all of our policyholders in full, irrespective of the terms of their policies’.

Heath’s actions were revolutionary at the time and solidified Lloyd’s reputation for the fair and honest payment of claims. It is this same reputation that today’s technology disruptors are hoping to rebuild. Rather than trying to keep up with these new entrants, insurance companies may want to take a step back into their past to find the way forward.

Rebuilding trust versus becoming trustworthy

Insurance companies are not the only organisations caught in cycles of distrust. Even new business models centred on trust have had their trustworthiness questioned in recent times.

In 2016, a study on racial discrimination in the sharing economy found that guests with distinctively African- American names were 16% less likely to be accepted for an Airbnb stay compared to identical guests with typically White names.

Algorithms, which are heavily relied on by low cost InsurTech companies, have also come under scrutiny. Scientists recently found that word embedding algorithms exhibit gender and race biases, such as associating White names with pleasant words and African-American names with unpleasant ones. ‘A lot of people are saying this is showing that AI is prejudiced’ said one of the study’s authors, ‘No, this is showing we’re prejudiced and that AI is learning it’. Algorithms, unlike humans, cannot consciously detect their own biases and redress their behaviour.

New technologies and disruptive business models are not therefore a quick fix for distrust or a proxy for trustworthiness. Indeed, InsurTech start-ups face many of the same problems as traditional insurers; Lemonade has publicly acknowledged how refusing claims to underinsured customers can create distrust.

Trust cannot be taken, it must be earned. Much of the current thinking is around how the insurance and broader financial sector can rebuild trust; the approach has involved increased regulation, more compliance officers and further processes. A better approach would be to rebuild trustworthiness.

By appropriately adapting to a future of work where trustworthiness is at the core of the business model, for example, insurers can instil trustworthy behaviours in their business, employees and customers. Using technology to take the pain and friction out of the claims process allows insurers not only to engender good feeling, but also to redeploy human capital for customer-facing interactions which in turn can demonstrate trustworthiness and develop mutual trust.

The question is not how can we convince our customers to trust us, but what actions do we take to make ourselves worthy of their trust, and vice versa.

Ways to build trustworthiness:

  1. Listen – to your customers and act on their feedback
  2. Culture – embed inclusivity and fairness; from IT development to customer services. Demand the same of partners
  3. Educate – employees through effective training, and clients through ‘plain English’ contracts
  4. Technology – to detect, develop and demonstrate trustworthiness e.g. through swift claims payments

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