Home > Personal Finance > Your Friends Could Soon Be the Key to Cheaper Insurance

Comments 0 Comments

The Internet, and the sharing economy, have changed the way we buy everything — from books to mattresses to “hotel rooms” to taxi rides. Now, it’s the insurance industry’s turn.

A series of startups promise disruption of this product consumers love to hate. (Sorry, Flo.) Even well-known author Dan Ariely is now in on the act.

Ariely, a behavioral economist famous for best-sellers like Predictably Irrational, just joined insurance FinTech startup Lemonade as Chief Behavioral Officer.

Fraud is a big reason insurance costs so much, and Ariely said he will use his research into dishonesty as a way to shrink costs for everyone.

“We’ve spent recent years deepening our understanding of honesty and trust, and our conclusion is that insurance is crying out for a makeover,” Ariely said in a press release. “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.”

Less Fraud, Better Policies?

Insurance fraud is a huge problem — and consumers pay for it through higher premiums. By some measures, it’s the largest criminal enterprise in the U.S. after narcotics trafficking. The Coalition Against Insurance Fraud says there’s $80 billion worth of fraud in the U.S. every year. In some places, things are even worse; one out of every three auto claims in New York are fraudulent, according to PropertyCasualty360.com.

Reducing fraud would be a good thing; probably a great thing. Ariely is suggesting a lot of fraud stems from the acrimonious relationship between consumers and the insurance industry.

“Imagine that you wanted to create a system that would get the worst out of people,” he says in a video announcing his relationship with Lemonade. “What would you do? You would start by getting people to give you their money and then you would promise to give them things back later when bad things happen to them but when something bad happens you would start fighting with them plus you would show them that you don’t trust them and you would have extra small print and you would say we don’t cover this and we don’t cover that.”

The implication is that consumers who don’t feel cheated all the time are less likely to “cheat back.” In fact, Ariely ‘s research has found it’s possible to nudge consumers into better behavior.

Lemonade did not respond to request for comment on whether the less-organized, one-off fraud Ariely wants to nudge consumers away from would constitute a lot or a little of the overall fraud rate.

In fact, Lemonade isn’t answering a lot of questions at the moment; the startup is in stealth mode. It describes itself as “set to be the world’s first P2P insurance carrier,” so you can make some guesses about how it’ll work. It’s getting a lot of attention because it’s attracted a tidy sum from investors and some big-name partners, including Berkshire Hathaway and some leading Lloyd’s of London syndicates, according to InsuranceJournal.com. Other insurance startups receiving big investments, the site said, are PolicyGenius ($15 million), Zenefits ($500 million) and China’s Zhong An ($930 million).

Friend-to-Friend Insurance?

Internet/sharing economy insurance startups are gaining some traction in other parts of the world. Germany-based Friendsurance puts together small pools of consumers — friends who go in together, or groups assembled by the firm — who receive big refunds if no one in the pool makes a claim during a year.

“Without any additional costs, the claims-free bonus allows policy owners to get back up to 40% of their premiums if no claims are submitted,” the firm says on its website. “Thereby insurance not only becomes cheaper for the consumer but also provides a clear financial benefit for careful and fair behavior, which in turn reduces fraud.”

Fraud accounts for 5-10% of claims costs for U.S. insurers, and nearly a third of insurers say fraud was as high as 20% of claims costs, according to the Coalition Against Insurance Fraud. So anything that cuts down on fraud is welcome.

But will these FinTech startups offer lasting decreases in fraud rates, or suffer as criminals force their way in? Only time will tell.

In the meantime, you might be able to qualify for more competitive insurance rates by improving your credit score. (You can see where yours currently stands by viewing your free credit report summary, updated every 14 days, Credit.com.) You can improve your credit by disputing errors, paying down credit card balances and limiting credit inquiries.

More Money-Saving Reads:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team