Naked – South Africa’s Lemonade?

A start-up that I’ve been excited to watch for a while now – enigmatically called Naked – launched their product to market late last week. Naked offers car insurance over an app with quote and bind functionality. This post is going to discuss my thoughts on their offering, draw a parallel to the well-known Lemonade start-up in the USA and briefly touch on my experience with the app (spoiler – good price and fun experience).

The basis of Naked’s offering seems to be the following points:

  • The policy on offer is primarily Car insurance (Auto), plus a couple of extras (wheels, lights etc) over an app using a chatbot instead of traditional forms.
  • A neat feature is a pause in accident coverage when your car is stationary, leaving only the flood, theft, fire and other relevant perils on the policy.
  • They take a fixed fee upfront (20%) of premium to cover expenses and profit leaving the rest to cover claims
  • If claims are less than the 80% of premium written, then the extra portion is paid out to a charity of the policyholder’s choice
  • Policies are underwritten by Hollard, which is a big player in the SA insurance markets. Although not explicit on the website, I assume this means that if claims are more than the claims “pot”, then Hollard and the reinsurers on this product (Munich Re and Scor, according to the Naked website) need to pick up the bill
  • In a legal sense, Naked is an intermediary (broker) operating with what I assume is a binder agreement with Hollard, so actually, they could not bank the underwriting profit even if they wanted to

Anyone following the Insurtech scene will notice that this setup is very similar to Lemonade, which is a licensed insurer in the USA offering Renters and Homeowners insurance. Some of the similarities are using a chatbot instead of traditional forms, the fixed fee for expenses and profit, leaving a pot behind for claims, and the extra funds in the pot going to a charitable cause as a Giveback (Lemonade seems to have come up with this terminology). Some of the differences are that Lemonade is an insurance company and could participate in underwriting profit and loss if they wanted, Lemonade seems to have allowed themselves more discretion as to when they “Giveback” (Board needs to approve, they build up a rainy-day fund etc) and Lemonade pushed an emphasis on data science and behavioural economists, whereas Naked discusses their “AI” technology which they hope will bring down costs.

Using the app is a pleasant and short experience, with an emphasis on ease of use and quickly speeding you along the process. I was pleasantly surprised that the pricing is actually quite reasonable on the vehicle I chose to request a quote for (which is the same vehicle I tried to insure online a few weeks ago and discussed in this post).  To actually get the cover, one takes a few photos of your vehicle, and I wonder what exactly the process is on the back-end after that – are these just used at the claims stage or is there something else happening here (deep learning pre-inspection maybe )?

The only point that left me wondering a little bit is a particular claim made on the Naked website when it is explained that A “… flat fee means that our income doesn’t depend on how much we pay out in claims, so we have no reason to make claiming difficult.” I don’t think this is entirely true, despite the claim to the contrary – at the end of the day, if there are claims greater than 80% of written premium, someone will need to foot the bill, whether the insurer or the reinsurers. Therefore, claims will still need to be managed carefully to avoid upsetting these parties (insurer and reinsurers), and claims overruns of the 80% in the pot for an extended period of time will mean prices will need to go up. So I don’t think this has solved the “the age-old cycle of distrust between insurers and their customers” as neatly as one might think from the website.

As a conclusion, it is exciting to see a well-built startup bring an innovative insurance business model to South African shores!

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