When you make an insurance claim with Lemonade, the online-only startup that mainly sells renters policies to young American urbanites, you quickly fill in details on its slick mobile app and then record a quick video to explain the claim again.
Smart software analyzes this video for telltale signs of dishonesty, one of 18 antifraud algorithms that Lemonade says helps it pay claims fast. About one-third are paid instantly, according to Daniel Schreiber, co-founder and CEO, while the average claim is settled in less than a day.
For established insurers this is a risk, especially when insurance policies are relatively small like Lemonade’s or in highly competitive markets where insurers struggle to turn a profit, like auto insurance.
The profits available from simply supplying funds to underwrite risks have been squeezed because capital is plentiful in insurance markets. Smaller, smarter challengers that can manage customers and the claims process at lower cost will find ways to take industry profits, sell more competitive policies, or both.
Lemonade isn’t alone. Another, more established U.S. startup is Snapsheet, which provides its app to U.S. insurers including Chubb and several smaller groups such as Ohio Mutual and NJM insurance. It can assess car damage claims in under three hours based on photos from customers via a mobile app. It closes most claims in less than three days: the traditional process can take up to 30.
For sure, some auto insurers have become more efficient. Progressive, for example, has its own repair shop network. But the industry remains fragmented and companies know they must improve their processes, especially the efficiency and costs of claims adjusters, according to Tim Zawacki at S&P Global Market Intelligence. Auto insurance is intensely competitive: savings worth just a single cent in every dollar of premiums would make a huge difference.
Big property and casualty insurers give away too much revenue (and potential profit) to a whole network of companies that help insurers deal with clients and claims. About 60 cents of every dollar of premiums gets paid directly or indirectly to these companies, according to forthcoming research by Oliver Wyman.
Just 16 cents of that goes to things like car repairs or physical therapy and so benefits claimants. The rest pays for services from claims adjusters, brokers, software companies and other intermediaries—many of which make better profits than insurers do.
This is a big problem for insurers, which as a group have failed to earn their cost of capital for years, according to Oliver Wyman. They should try to recapture some of this lost value by building their own technology, or buying a company that can cut their costs significantly.
Some have started: Allstate , for example, has its own photo app to speed up claims estimates, while Liberty Mutual, USAA and Intact of Canada all have stakes in Snapsheet.
But insurers will struggle to boost profits while the property and casualty industry is flooded with capital and investment returns remain depressed. Their only option is to get quicker and smarter.
Write to Paul J. Davies at paul.davies@wsj.com