InsurTech

How a FinTech Company is Tackling Social Issues

And How Other FinTechs Are Incorporating Ethics Into Their Business Models

In the United States today, three men control more wealth than the bottom fifty percent of American society (Institute for Policy Studies). With this expansion in the wealth gap accelerated by recent events, most notably the Covid-19 Pandemic, many people have criticized the capitalist systems that the United States has run on for over a century. Can we truly remain ethical in a system that has historically enabled unethical practices? In response to these critiques, companies have been attempting to pivot their business models to become more ethical while remaining profitable — The movement of conscious capitalism has begun to permeate the market in ways that could revolutionize the process in which companies conduct business.

Many FinTech start-ups are using innovative approaches in business ethics by incorporating solutions for social issues into their business models. Lemonade is a notable example. The classic issue in insurance companies is what happens after insurance companies raise premiums (the amount of money an entity pays for an insurance policy). One of the main sources of income in insurance models is the net underwriting income which is defined as premiums minus the claims that the insurance provider pays to cover the insurance buyer. The model, however, has major conflicts of interest.

Since claims were seen as expenses by the insurance agencies, insurance companies had the incentive to decline insurance claims. On the other hand, they also had to deal with an estimated $40 billion a year due to fraudulent claims, due in part to the customer’s distrust in the insurance companies. This in turn caused insurance companies to raise premiums. This deadly cycle is a contentious point of criticism among traditional insurance companies, and it’s one in which Lemonade is providing a solution.

Lemonade is one of the most well-known InsurTech companies in the industry — its goal is to reinvent insurance by eliminating the conflicts of interest between customers and insurance providers, striving to bring trust and transparency to the industry.

The InsurTech company has a ‘“give-back” model, where each registered policyholder chooses a favorite charity and was then grouped into one of multiple, different pools. Lemonade would then donate the remaining money left in from claim and reinsurance pools. This model was created by Dan Ariely, a distinguished professor of psychology and behavioral economics at Duke University. He found that when deciding whether to be dishonest, people considered both monetary incentives and social norms. Psychologically, this model made lying to insurance companies a taboo and even sinful activity.

The first give-back in Lemonade’s early developmental stage was $53,174. This may not sound like a crazy amount of money, but at the time it accounted for 10.2% of Lemonade’s total revenue. In comparison, Fortune 100 companies only donated 0.1% of their total revenues back in 2015, making lemonade potentially over 100 times more generous in terms of wiring donations than the average Fortune 100 company. This also gives Lemonade the potential to be one of the most ethical and generous B corporations, up in the ranks with Patagonia, Ben & Jerry’s, and Warby Parker.

Although Lemonade is a standout, FinTech’s influence on social issues and ethical business practices has not stopped there — the industry has been part of the healing process for small businesses during the Covid-19 pandemic. Yelp reported that nearly 60% of businesses that temporarily closed in March remained permanently closed by September. In response, platforms such as Wisefunding, Bench, and Fundera helped small businesses stay afloat by supporting any type of loan and asset finance to help facilitate their living conditions, instead of using traditional FICO scores or other credit ratings. MX, a company that helps financial institutions with digital transformation, developed an Easy SBA Portal to help banks and credit unions process PPP loans significantly faster, which they supplied to financial institutions for free.

No one can predict the future. However, if the way in which FinTechs have responded to the pandemic is any indication of future business practices, and if companies like Lemonade continue to innovate, there is hope for our future and the state of ethical business practices going forward.

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Written by Jack Hughes, majoring in FinTech, Finance and Data Science at Northeastern University

Source: Zheng, Yanfeng. Lemonade: Juicy Flavor Insurtech. 15 Jan. 2021, HBS Education