6 ms·

You only make insurance cheaper by charging risky people more. Right now it is mostly laws that protect categories of people that keep insurance companies from

You only make insurance cheaper by charging risky people more. Right now it is mostly laws that protect categories of people that keep insurance companies from charging people more. What’s the plan here, use machine learning in a “hands off” way with a black box algorithm to apply pricing discrimination in a way that a human could not because of regulation?

whyhow 6y ago
Or you could lower overhead by cutting costs, hiring less people, changing commission structures. The nicest business meal I ever had was during a lunch meeting that I tagged along to with a large insurance carrier. They could probably cut out $30 steak lunches to lower costs too.
hkai 6y ago
One interesting approach would be to actually charge less risky people less, and "safe" people more, as a way to equalize various groups in the society. Once this has enough traction, doing it the other way round could be even stigmatized.
- umvi 6y ago
  "subsidize what you want more of, tax what you want less of"
- elpakal 6y ago
  but if you charge 'safe' people more, aren't you encouraging them to not be 'safe'?
hellomyguys 6y ago
Not disagreeing that is part of the strategy, but also it is worth thinking how much overhead there is in the insurance industry. How many offices are there nationwide? How many of the jobs are essentially basic data ingestion? Approving of claims? How much is spent on advertising? Probably a fair amount of fat to trim.
- erichurkman 6y ago
  Does anyone know what an insurance agent makes? If I go to my local State Farm office to get a home owners policy, what is the cut that goes to the local office/agent?
  - gen220 6y ago
    It's generally quite low, but it depends on a large number of factors, and varies a lot market to market. It's generally a couple percentage points of your monthly premium, per month. An agent generally needs a couple hundred paying policies to be in the black.
  - dmurray 6y ago
    You can make a guess based on rent and salaries. Those aren't amazing businesses, probably the median one nets a few grand per month.
  - aianus 6y ago
    $800 commission for a $50/mo life insurance policy. You have to pay the commission back if they cancel within a year. Can’t really offer a source but I heard it from an insurance broker personally.
  - phonon 6y ago
    10% or so to the agent. Everyone makes money on the renewals (your "book").
- twic 6y ago
  Hard to put together VC-sized returns out of trimmed fat.
  - adventured 6y ago
    > Hard to put together VC-sized returns out of trimmed fat. That depends on how large the industry is, what its cost structures look like and how price sensitive it is. A small, persistent cost advantage can be enormous in the insurance industry. You're also saying that in a thread about a company that just produced VC-sized returns and is IPO'ing. Your premise clearly doesn't follow, as most VCs invest early and will exit with an IPO like this. The primary question going forward with Lemonade is for public shareholders and whether the company can get a lot bigger in the future. The VC-sized returns were already generated for the early VCs.
deleted 6y ago
[deleted]
canjoe 6y ago
Insurance can be cheaper if the customers lower their average risk burden. Lemonade tries to explain this, but not clearly: “We seek to encourage good behavior and build a long-term relationship based on mutual trust by endeavoring to decouple our financial incentives from variability in claims. In our model, we minimize any incentive to deny legitimate claims as we aim to give back, rather than pocket, leftover monies. After our customers purchase a policy, we ask them to designate a charitable cause for us to support with the residual premiums from their policy. Despite there being no contractual obligation requiring us to donate leftover premiums to nonprofits, when a customer embellishes a claim, such customer reduces the total amount available that can be contributed to nonprofits. As a result, we believe customers are less inclined to embellish claims as they would be hurting a nonprofit they care about, rather than an insurance company they do not.”
- ianai 6y ago
  Sounds like they’re trying to use an external source of altruism to reinforce altruism from their customers.
- deleted 6y ago
  [deleted]
- forgotmyp77 6y ago
  i think the name for that is hostage?
gen220 6y ago
At most big old and public insurance companies, claims payable represents a significant chunk of expenses, but not even close to 100% (it's closer to 60-70%). The rest is, generally, "administration" (humans processing papers, and managing humans processing papers, in cushy offices). This is where better technology can result in lower costs. It's a volume/unit-cost game. Their unit cost per person is maybe a few cents or a few dollars cheaper, but at huge volumes it makes a big difference.
- ddevault 6y ago
  In addition to increasing efficiency, another way that comes to mind is to lower risk for the population as a whole. For example, investing in safer building codes, local emergency services, mass transit, etc.
  - gen220 6y ago
    Yep! One way that insurance compmanies can achieve this is by providing members of their insured population access to services that reduce their individualized risk. Pre-COVID, many health insurance companies (my industry) were gearing up to offer free Doctor on Call (a service that, if well-implemented from a tech PoV, has near-zero margin costs), because access to such a program reduces the risk of expensive claims later down the line. I'm sure there are equivalents in the kind of insurance that Lemonade provides. For example, they might offer free or heavily subsidized home security installation in certain zip codes with a history of burglaries.
- chimeracoder 6y ago
  > At most big old and public insurance companies, claims payable represents a significant chunk of expenses, but not even close to 100% (it's closer to 60-70%). By law, it's required to be at least 80%.
  - nostromo 6y ago
    Which creates a perverse incentive for insurers not to care about payouts (If you want to increase profits, you have to increase payouts) -- so long as they can compete on costs with other insurers.
winrid 6y ago
Or not taking on risky customers...
deeg 6y ago
I'm tangentially involved in the insurance space and I believe Lemonade is trying to use machine learning to process claims because: - Processing claims with humans is expensive; every step that can be accomplished by a computer will probably be cheaper. - A claim processed via ML will probably be handled fast. A fast response = happy customer, which helps with retention. This is a big one. - A claim that is processed and closed quickly is harder to amend. Some customers slowly realize that adding items to a claim is free money. Others (legitimately) forgot items and want to add them. A quick claim is usually cheaper than one that might take a few days (or weeks) to process. - Younger generations are more used to working with a web pages and will likely look at humans (e.g. agents) as old-fashioned. The big carriers are both scared and dubious of Lemonade. If Lemonade can somehow make it work they could do serious damage to the carriers. But it's hard to see how they'll make the numbers work, as their current losses show. Most of the carriers are trying to implement something similar (which is where I'm slightly involved).
- ianai 6y ago
  It also seems they may see this filing as a way to reinforce their marketing as a “good” company that directs funds where they say they do. I could imagine them telling their customers to buy their stock as a way to be involved with how they operate.
- toomuchtodo 6y ago
  What happens when regulators require disclosure of claim handling ML models, as they already regulate insurance rates?
  - watchyourML 6y ago
    Regulators are starting to lean in on ML rules and requirements. They can't hire data science experts to keep up with competitive demand and salaries, so they are going to require companies to make their ML-based outcomes accessible/auditable. Claims, pricing, risk modeling, underwriting - we're in the early days of companies using ML for these tasks.
kansface 6y ago
> apply pricing discrimination in a way that a human could not because of regulation? I've read several anecdotes of people hard coding hacks into black box algorithms which end up being discriminatory even when stuff like race is not a direct input. I do not think the law cares how discrimination is arrived at.
- hobofan 6y ago
  That's true, and AFAIK know due to this, insurances that are bound to those regulation don't touch black box ML with a 10 foot pole. When we were pitching ideas to an insurance company ~5 years ago they basically said "If it's not human-explainable we can't use it".
deleted 6y ago
[deleted]
hogFeast 6y ago
You don't. The point is to charge based on risk. There is no sense in which you can transfer gains from one set of customers to somewhere else. The profitability of any group of customers depends only on the price you charge them. And btw, lots of insurers specialise in pricing high-risk customers. If another insurer comes in and tries to subsidise low-risk customers using high-risk customers, then a specialist insurer just comes in and undercuts them profitably. Even a low-risk customer becomes a bad risk at the wrong price. It is all about the price.
tharne 6y ago
> Right now it is mostly laws that protect categories of people that keep insurance companies from charging people more. Those laws don't really do anything. You can just use zip code and credit score, and bob's your uncle.

whyhow 6y ago

Or you could lower overhead by cutting costs, hiring less people, changing commission structures. The nicest business meal I ever had was during a lunch meeting that I tagged along to with a large insurance carrier. They could probably cut out $30 steak lunches to lower costs too.

hkai 6y ago

One interesting approach would be to actually charge less risky people less, and "safe" people more, as a way to equalize various groups in the society. Once this has enough traction, doing it the other way round could be even stigmatized.

umvi 6y ago
"subsidize what you want more of, tax what you want less of"
elpakal 6y ago
but if you charge 'safe' people more, aren't you encouraging them to not be 'safe'?

hellomyguys 6y ago

Not disagreeing that is part of the strategy, but also it is worth thinking how much overhead there is in the insurance industry. How many offices are there nationwide? How many of the jobs are essentially basic data ingestion? Approving of claims? How much is spent on advertising? Probably a fair amount of fat to trim.

erichurkman 6y ago
Does anyone know what an insurance agent makes? If I go to my local State Farm office to get a home owners policy, what is the cut that goes to the local office/agent?
- gen220 6y ago
  It's generally quite low, but it depends on a large number of factors, and varies a lot market to market. It's generally a couple percentage points of your monthly premium, per month. An agent generally needs a couple hundred paying policies to be in the black.
- dmurray 6y ago
  You can make a guess based on rent and salaries. Those aren't amazing businesses, probably the median one nets a few grand per month.
- aianus 6y ago
  $800 commission for a $50/mo life insurance policy. You have to pay the commission back if they cancel within a year. Can’t really offer a source but I heard it from an insurance broker personally.
- phonon 6y ago
  10% or so to the agent. Everyone makes money on the renewals (your "book").
twic 6y ago
Hard to put together VC-sized returns out of trimmed fat.
- adventured 6y ago
  > Hard to put together VC-sized returns out of trimmed fat. That depends on how large the industry is, what its cost structures look like and how price sensitive it is. A small, persistent cost advantage can be enormous in the insurance industry. You're also saying that in a thread about a company that just produced VC-sized returns and is IPO'ing. Your premise clearly doesn't follow, as most VCs invest early and will exit with an IPO like this. The primary question going forward with Lemonade is for public shareholders and whether the company can get a lot bigger in the future. The VC-sized returns were already generated for the early VCs.

deleted 6y ago

[deleted]

canjoe 6y ago

Insurance can be cheaper if the customers lower their average risk burden. Lemonade tries to explain this, but not clearly: “We seek to encourage good behavior and build a long-term relationship based on mutual trust by endeavoring to decouple our financial incentives from variability in claims. In our model, we minimize any incentive to deny legitimate claims as we aim to give back, rather than pocket, leftover monies. After our customers purchase a policy, we ask them to designate a charitable cause for us to support with the residual premiums from their policy. Despite there being no contractual obligation requiring us to donate leftover premiums to nonprofits, when a customer embellishes a claim, such customer reduces the total amount available that can be contributed to nonprofits. As a result, we believe customers are less inclined to embellish claims as they would be hurting a nonprofit they care about, rather than an insurance company they do not.”

ianai 6y ago
Sounds like they’re trying to use an external source of altruism to reinforce altruism from their customers.
deleted 6y ago
[deleted]
forgotmyp77 6y ago
i think the name for that is hostage?

gen220 6y ago

At most big old and public insurance companies, claims payable represents a significant chunk of expenses, but not even close to 100% (it's closer to 60-70%). The rest is, generally, "administration" (humans processing papers, and managing humans processing papers, in cushy offices). This is where better technology can result in lower costs. It's a volume/unit-cost game. Their unit cost per person is maybe a few cents or a few dollars cheaper, but at huge volumes it makes a big difference.

ddevault 6y ago
In addition to increasing efficiency, another way that comes to mind is to lower risk for the population as a whole. For example, investing in safer building codes, local emergency services, mass transit, etc.
- gen220 6y ago
  Yep! One way that insurance compmanies can achieve this is by providing members of their insured population access to services that reduce their individualized risk. Pre-COVID, many health insurance companies (my industry) were gearing up to offer free Doctor on Call (a service that, if well-implemented from a tech PoV, has near-zero margin costs), because access to such a program reduces the risk of expensive claims later down the line. I'm sure there are equivalents in the kind of insurance that Lemonade provides. For example, they might offer free or heavily subsidized home security installation in certain zip codes with a history of burglaries.
chimeracoder 6y ago
> At most big old and public insurance companies, claims payable represents a significant chunk of expenses, but not even close to 100% (it's closer to 60-70%). By law, it's required to be at least 80%.
- nostromo 6y ago
  Which creates a perverse incentive for insurers not to care about payouts (If you want to increase profits, you have to increase payouts) -- so long as they can compete on costs with other insurers.

winrid 6y ago

Or not taking on risky customers...

deeg 6y ago

I'm tangentially involved in the insurance space and I believe Lemonade is trying to use machine learning to process claims because: - Processing claims with humans is expensive; every step that can be accomplished by a computer will probably be cheaper. - A claim processed via ML will probably be handled fast. A fast response = happy customer, which helps with retention. This is a big one. - A claim that is processed and closed quickly is harder to amend. Some customers slowly realize that adding items to a claim is free money. Others (legitimately) forgot items and want to add them. A quick claim is usually cheaper than one that might take a few days (or weeks) to process. - Younger generations are more used to working with a web pages and will likely look at humans (e.g. agents) as old-fashioned. The big carriers are both scared and dubious of Lemonade. If Lemonade can somehow make it work they could do serious damage to the carriers. But it's hard to see how they'll make the numbers work, as their current losses show. Most of the carriers are trying to implement something similar (which is where I'm slightly involved).

ianai 6y ago
It also seems they may see this filing as a way to reinforce their marketing as a “good” company that directs funds where they say they do. I could imagine them telling their customers to buy their stock as a way to be involved with how they operate.
toomuchtodo 6y ago
What happens when regulators require disclosure of claim handling ML models, as they already regulate insurance rates?
- watchyourML 6y ago
  Regulators are starting to lean in on ML rules and requirements. They can't hire data science experts to keep up with competitive demand and salaries, so they are going to require companies to make their ML-based outcomes accessible/auditable. Claims, pricing, risk modeling, underwriting - we're in the early days of companies using ML for these tasks.

kansface 6y ago

> apply pricing discrimination in a way that a human could not because of regulation? I've read several anecdotes of people hard coding hacks into black box algorithms which end up being discriminatory even when stuff like race is not a direct input. I do not think the law cares how discrimination is arrived at.

hobofan 6y ago
That's true, and AFAIK know due to this, insurances that are bound to those regulation don't touch black box ML with a 10 foot pole. When we were pitching ideas to an insurance company ~5 years ago they basically said "If it's not human-explainable we can't use it".

deleted 6y ago

[deleted]

hogFeast 6y ago

You don't. The point is to charge based on risk. There is no sense in which you can transfer gains from one set of customers to somewhere else. The profitability of any group of customers depends only on the price you charge them. And btw, lots of insurers specialise in pricing high-risk customers. If another insurer comes in and tries to subsidise low-risk customers using high-risk customers, then a specialist insurer just comes in and undercuts them profitably. Even a low-risk customer becomes a bad risk at the wrong price. It is all about the price.

tharne 6y ago

> Right now it is mostly laws that protect categories of people that keep insurance companies from charging people more. Those laws don't really do anything. You can just use zip code and credit score, and bob's your uncle.