(Dan Ariely, Chief Behavioral Officer, Lemonade. Source: YouTube.)
In recent years new C-level titles have proliferated, including chief data scientist and chief customer officer. Lemonade (New York), the soon-to-launch peer-to-peer (P2P) insurance startup, is breaking new ground through the appointment of a Chief Behavioral Officer. Touted as another aspect of how Lemonade is seeking to transform the insurance industry, the company has announced the appointment of Dan Ariely to the new post. A professor of Psychology and Behavioral Economics at Duke University, Ariely is also the author of New York Times bestsellers Predictably Irrational, The Upside of Irrationality, and The Honest Truth about Dishonesty.
A System Designed to Bring out the Worst in Humans
Ariely implies the potential of behavioral science to transform insurance through a blunt assessment of the industry today: “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 says (Editor’s note: See video of Ariely below). “We’ve spent recent years deepening our understanding of honesty and trust, and our conclusion is that insurance is crying out for a makeover. With its unique business model and technology, Lemonade aims to reverse the adversarial dynamics that plague the industry, transforming both the economics and experience of insurance.”
Lemonade co-founder and president Shai Wininger comments that Ariely’s “research on dishonesty showcases the leaps science has made in understanding what brings out the best and worst in each of us, and how people’s behavior can be changed for the better.” Wininger asserts that behavioral economics, together with he calls Lemonade’s unique technology, will help decrease fraud, get rid of bureaucracy and lower costs for insurance customers.
Monique Hesseling, a partner at Boston-based research and advisory firm SMA, affirms that Lemonade is on the right track, in as much as behavioral scientists will play a growing role in understanding insurance customers’ experiences.
Next Logical Step in Understanding the Customer
“With this appointment Lemonade is making a big step forward towards better understanding customers’ intentions and experiences,” she comments. “It is nice to see that they focus on the honesty and trust components of insurance, instead of solely jumping on claims fraud analytics.”
The hiring of a behavioral scientist is a logical next step in better understanding the customer, according to Hesseling. Carriers started out with gathering and analyzing mass amounts of data on their customers some time ago, and currently they are gaining actionable insights from these data sets, she observes.
“The next step will be to explain these insights, and answer the ‘why do customers act as they do?’ questions, for which the input of behavioral sciences will be invaluable,” Hesseling elaborates. “Answering these questions will greatly improve true understanding of customers, allowing carriers to service them with better products and services.”
Behavioral Science in Insurance
While the title of Chief Behavioral Officer might be novel, Lemonade’s use of behavioral science is not unique, according to Tom Scales, Research Director—Life, Annuity and Health, at Celent (Boston). “There are other examples of insurance with behavioral components, such as John Hancock’s Vitality program, and the use of telematics in auto insurance—in both cases, the goal is to change the customer’s behavior,” he comments.
Lemonade appears to be aiming at changing the insurance customer’s experience with its provider, Scales notes. In this case Lemonade can claim the unique case of a peer-to-peer model, which is something of a blend of distributor and carrier, according to Scales. “Lemonade’s interest in improving the customers experience in insurance is positive,” he says. “The entire industry can benefit from better understanding what the customers want and need—insurance products can be complex and the opportunity for misunderstanding can be great.”
Intimacy in an Online World
That is particularly the case in an entirely online relationship, according to Scales. “Without the comfort level of a person, such as the agent, working through the complexities of insurance, the carriers need to better understand how to work with their clients,” he explains. “With the introduction of peer-to-peer insurance, the entire concept is complicated and new and the behavioral component could be crucial.”
However, Scales stresses, he fundamentally disagrees with Ariely’s characterization of the entire industry as having low trust and high dishonesty. “The entire foundation of insurance is a trusting relationship between the insurer and the customer, one that has proven to be true for decades, even centuries,” he says.