The Not Unreasonable Podcast

Ty Sagalow on the Making of Lemonade

September 22, 2019 Season 1 Episode 41
The Not Unreasonable Podcast
Ty Sagalow on the Making of Lemonade
Chapters
The Not Unreasonable Podcast
Ty Sagalow on the Making of Lemonade
Sep 22, 2019 Season 1 Episode 41
David Wright
Ty Sagalow on the making of Lemonade
Show Notes Transcript

My guest for this episode is Ty Sagalow one of the founding members of the Lemonade Insurance Group. Ty has held various underwriting and product development position at AIG over his 25 year career there and served as Chief Innovation officer at Zurich North America and Tower Group before joining Lemonade as its first Chief Insurance Officer.

Ty wrote a book about his Lemonade experience called the "Making of Lemonade" which is the topic of the interview!

We cover all kinds of ground in the conversation (innovation, starting a company, what were some innovation failures in Ty's career) but I didn't take long to get to the heart of the matter. The thing that distinguishes many tech startups of course is that their technology is so great. What is that like? 

Listen to the episode to find out and check out notunreasonable.com for more!



David Wright:
0:01
My guest today is Ty Sagalow, founder of Innovation Insurance Group. Ty has held various underwriting and product development positions at AIG over his 25 year career there and served as Chief Innovation Officer at Zurich North America and Tower Group. Ty was a founding member of Lemonade group and served as Lemonade's Chief Insurance officer. Ty wrote a book about that experience called The Making of Lemonade, which is the subject of today's show. Ty, welcome.
Ty Sagalow:
2:19
Thank you, David. Thank you for having me.
David Wright:
2:22
So one thing that strikes me about your bio actually is how much experience you had in insurance innovation before you even started in the insure tech business, or at least as we think of it today, that tech startup business with Lemonade. So I'm wondering if you could start maybe with talking about that part of your history in particular of any stories of failure or successes even from your prior career that was in your mind with Lemonade? Now that you're starting a company, what are some things that you wanted to make sure you were thinking about the whole time?
Ty Sagalow:
2:46
I spent my entire career prior to Lemonade, 33 years, in the traditional insurance industry. Although I've had a lot of jobs and a lot of titles during that time, they all dealt with innovation on one sort or another. I thought I was doing pretty cool stuff. At AIG, I was a chief innovation officer for a few years. Even before that when I led a team that invented Y2K insurance and cyber insurance and the modern form of directors and officers liability insurance. A lot of fun. I learned a great deal of things during that period of time and a number of lessons, many of which ended up being absolutely untrue.
David Wright:
3:34
What's the most untrue?
Ty Sagalow:
3:38
Well, so when I was doing product development and even teaching and writing books and whatnot, I would tell folks that the goal is to create out of the box the perfect product, one that never needs to be changed from the moment you launch it with an understanding, of course, that you'll never reach that goal, but that's the goal nevertheless. Of course, at InsurTech and at Lemonade, I learned the idea of MVP. And when I first heard about MVP, Minimally Viable Product, I never heard of that. I was trying to figure out what Most Valuable Player had anything to do with what we were doing at lemonade. Then it was explained to me that Minimally Viable Product means that you create just the minimum that meets the needs of really first movers. Just enough to get something out into the market that know and intend to be imperfect. Then you change it over time. This confused me a great deal. I remember saying to Shai Wininger, one of the co founders of lemonade, I said, let me see if I get this straight. We are trying to be imperfect. We're not going to be imperfect by accident. That was a little bizarre to me at the time. The other thing that I was taught, and I taught others during my years in innovation and traditional insurance is that you try to figure out what your clients want, and then you send something out into the market and you hope it works. And if it doesn't work, then you bring it back and you look at it and you change it and you send it out again in an approved form. In InsurTech I learned about something called "a/b testing" and a/b testing is you send out multiple versions of something to see which your clients like better. This also confused me because when I was first told about a/b testing, I responded with: I understand that we do "A" and if "A" doesn't work then we try "B". And I was told, no, no, no, no Ty, we try "B" no matter what even if "A" is working fine. And this confused me because why try something new if the thing you're trying seems to work. But what both these concepts of a/b testing and MVP stand for is don't be arrogant that you think you know the product that your clients will want. You really have no clue. They are the deciding points. Send out the minimum that you know isn't perfect because only through their feedback will you make it better. Try multiple things and see which they like better. At one of my employers, we called it customer focused innovation, but the traditional insurance industry tends to use that as a marketing phrase, when for InsurTech, it is in the DNA of an InsurTech company.
David Wright:
6:56
So in a traditional insurance product development process, what does failure look like? How do they fail? Is it failure where that nobody buys it or it's a failure when it's a, I don't know, I guess when it's illegal, that can happen. What are the ways in which products fail?
Ty Sagalow:
7:13
There are many ways in which products can fail. Of course, a product can fail because nobody buys it.
David Wright:
7:22
Nobody wants it.
Ty Sagalow:
7:22
Great idea. People said they were going to buy it, and then when you launch it, nobody buys.
David Wright:
7:28
Because you'll do like a customer survey or focus group or something like that.
David Wright:
7:31
I had a spectacular product one time. It was great. It insured missed hand signals in the Chicago Commodity Exchange. So you know how people in the Chicago Commodity Exchange they do buy/sale transactions with hand signals because it's so noisy, you can't hear what people are saying. And sometimes the hand signals get mismatched, it's called an out-trade.
David Wright:
7:58
If that was a buy then actually a sell or something.
Ty Sagalow:
7:58
Exactly. Exactly. We did a focus group of the biggest traders on the Chicago Commodity Exchange and they all said, this is something that worries us. And if you are able to create an insurance product for it, we'll buy it. And my partner at the time was the head actuary at National Union and he said, give me the data and I'll tell you the price. And of course the Chicago Commodity Exchange had years and years and years of data on these out- trades. So we were able to figure it out. And the chairman of the exchange really liked the idea. So in an unprecedented manner, gave us a room right on the floor. So we had access to the clients. We had a product that they told us they would buy based upon focus groups. We had the sponsorship of the head trader. We had an actuarially defined product that would make money --- did not sell one. That's because we forgot a fundamental thing about product development, which is you really have to know your customer. And these were traders. So the concept of buying insurance that they hope they would never need was foreign to them. They kept on asking, "Well, what's my ROI on my premium? What are the odds of me getting more in losses paid than the premium that I paid?" And so it was a spectacular failure. So you can have failures plus you learn a lot more from failures then successes. You can have failures based upon the fact that nobody buys the thing. That happens a lot. And if you're an insurance company, you're supposed to make money so you can have failures when losses exceed premium. Now, hopefully that's just a speed bump because you can figure it out and either change the price or change the terms or do both.
David Wright:
9:53
Tell me another story. I love that story about the trade. What's another cool product you might have come up with, AIG or at Zurich or anywhere else you work?
Ty Sagalow:
10:00
I'll give you a success story. And it wasn't because it made a lot of money. That's the flip side, which is what makes it success, and then you would think, well, you have to make a lot of money. But that's not necessarily true. You shouldn't lose money. But the new product that I remember the most in all my years was not the one that had the most profit and not the one that had the highest topline, but the one that did something important to society. There are hundreds of thousands of children who die in Africa as a result of malaria. And there's a very simple fix, which is getting malaria nets. But there were only three manufacturers of malaria nets, and they don't manufacture the net until they get the grant from the UN and that's a political process that takes years. So we created a surety bond product that would guarantee the payment to the manufacturers of malarial nets during the UN process that resulted in hundreds of nets being created years before they normally would and savings of what I was told was tens of thousands of lives of children in Africa.
David Wright:
11:21
Because they got the net sooner than they otherwise would have.
Ty Sagalow:
11:23
Correct.
David Wright:
11:25
Because you've dealt with the risk of the UN delaying or denying the application, I suppose.
Ty Sagalow:
11:30
Yes. So it's sort of political risk insurance. The amount of money at risk was nothing for AIG. And it was my first example of trying to create a product that makes the world a better place, which of course ultimately led me to Lemonade.
David Wright:
11:52
Well, let's come to that in a second. How do you get into this product development kind of role? It sounds pretty unique. Tell me when did you begin your innovation officer career at AIG? What was the transition? How did that happen? What were you doing before?
Ty Sagalow:
12:08
It was interesting because I'm a lawyer by training, so I started AIG as a litigator, which I hated and I wasn't very good at it. And then I moved over to National Union to learn directors and officers liability insurance.
David Wright:
12:25
As an underwriter or?
Ty Sagalow:
12:26
As a deputy general counsel. So, of course, I was on the lawyers side. And one of the jobs of a lawyer at National Union was to help create rewrites, refreshes. And because of AIGs culture, part of that process was thinking about doing something different, thinking about something new. Back then, we never created a new version of an insurance product without also containing some features that the industry had never heard of. And I immediately realized that for me, that was the fun part. So whatever I did, I later became the chief underwriting officer of AIG, actually of Natural Union. And I was always naturally thinking about doing new things that no one else has ever thought of. And Luckily, I picked a carrier that had that culture and eventually that led to creating Y2K insurance and Cyber Insurance and then ultimately being Chief Innovation Officer for AIG.
David Wright:
13:40
So fast forwarding now to the Lemonade part of the story. Before you met Dan Schreiber, you must have been pitched by startups before that, right? You had a great resume for them. I can tell why they were attracted to you, why all these folks were attracted to you. What were you doing?
Ty Sagalow:
14:00
So, I went on my own in 2012 and created a company logically called Innovation Insurance Group. And I hung out my shingle saying I will help people innovate. And a lot of that was helping carriers rewrite products like,when I worked for them, and helping brokers. But the really fun part was helping entrepreneurs. And so when an entrepreneur would come to me and say they wanted an insurance policy in order to make their business work better, but the insurance policy that they want didn't exist. Sometimes they would go to a broker and the broker would say, we don't really do that for a living, but we know a guy. And then eventually people just found me directly. So for example, I had a client that wanted to create a website that would sell collectibles. And of course there's a lot of competition in that, Ebay being a main competitor. And so one of the value propositions that he wanted was that everything he would sell would be guaranteed to be authentic. There's a lot of fakes and in-authenticity in collectibles these days. So he wanted to give a guarantee that it would be not fake, that it would be real. And he wanted that guarantee to be insured by Lloyd's of London. So he went to a major broker and said, "I want collectible authenticity insurance." And they said, "it doesn't exist". And he said, "well, your XYZ, you know, create it, create it." And they said, "yeah, not what we do for a living, but we know a guy." So he came to me and eventually I did create the first and I think the only collectable authenticity insurance through Lloyd's of London. And so I did that two or three times for various entrepreneurs. And so I would get these phone calls on a regular basis.
David Wright:
16:00
And your main thing that you would bring to the table then would be a policy form. Like what is the output of your product?
Ty Sagalow:
16:05
It was everything. So putting on my chief underwriting hat, I would write up the rating plan. I would figure out working with actuaries to the extent you needed to what the right premium was? Of course, I would draft the policy, I would do the pitch deck, I would do a demand analysis.
David Wright:
16:23
How did you come up with the premium for new product? It's never been done before. What do you do?
Ty Sagalow:
16:29
It's fun. And it's as much of an art as it is a science. So a little known secret up to now when I'm now going to announce to the world, but that's okay because it happened 20 years ago. We were trying to create Cyber Insurance back in 2000. And we wanted to cover the business interruption loss of a distributed denial of service attack.
David Wright:
17:02
They are topical now, isn't it?
Ty Sagalow:
17:04
DDOS attacks were not that common back then. So there was insufficient frequency information to help an actuary. And of course it was no really loss data to even figure severity. So we had to make certain assumptions and we made certain analogies. So first on severity, we assumed that a client would be able to prove the amount of loss income in the same way they would if there was a fire. So we had to then decide, well, how long would this fire last? And then we had to decide how often it was. And we talked to a number of CTOs and CIOs and just made an assumption on how a denial of service attack would compare to having a fire, both in terms of length of recovery time as well as frequency. And of course it was a complete guess based upon some input but an educated guess nevertheless. With an understanding that you would watch your losses and you would watch your product and with do surplus lines obviously, and then adjusted as needed.
David Wright:
18:27
So that worked, that process?
Ty Sagalow:
18:30
Yeah, I can say it now, because it was 20 years ago, but we got up to $100 million in sales at 11% loss ratio, which is something I'm still proud of 20 years later.
David Wright:
18:40
Wow, that's cool. So then you get a call one day from Dan Schreiber, tell me about that.
Ty Sagalow:
18:46
So here I am. I'm at my desk at Two World Financial Center and I get a phone call from an entrepreneur, not unlike any other phone call from an entrepreneur, except this guy had a nice British accent. He said he was calling from Israel and he found my name because he googled innovation and insurance. And even apparently from Israel in 2015, if you googled innovation and insurance, I would be above the fold. I really owe those guys flowers. And he asked to see me for two hours to talk about an idea for the sharing economy, which is something that I had been following for some time.
David Wright:
19:30
This is Uber, Airbnb.
Ty Sagalow:
19:30
Airbnb and things of that nature. And I've been following that from insurance perspective for some time.
David Wright:
19:36
What do you think about that from an insurance perspective? What was your analysis of that at the time? Segwaying, you were a little bit, not segwaying at all. We're changing the subject for a second.
Ty Sagalow:
19:46
I thought at the time that it was a cool direction for the economy to go into. And I thought it wasn't going to go away, but I wasn't 100% sure. Now, fast forwarding seven years later obviously the sharing economy is here to stay. One of the things that you learn in product development is that the most sustainable products arise out of substantial changes in society. And so there is a substantial change in society from a belief in the statements and the capabilities of the expert and then compare that to "wisdom of the crowd". So "wisdom of the crowd" is a phenomenon that is hitting all areas of society where we trust the views of hundreds or thousands of people like us more than the view of the so called professionals. You trust a five star rating of an Uber driver more than you trust a Hilton hotels commercial. And same thing for Airbnb. And again, the analogy between a Airbnb and Hilton hotels and Uber and the New York Taxi and Limousine Commission. So the fact that there is an entity, a centralized entity called the New York Taxi and Limousine Commission that gives licenses and allegedly gives approvals, to the taxi drivers. So back in the day before this concept of wisdom of the crowd, you would say, well, I'm going to use a yellow taxi. These guys are licensed and they're evaluated and they're approved by the centralized authority called the New York Taxi and limousine Commission. But what wisdom of the crowd is about is no; folks don't trust that opinion as much as they trust a thousand people giving a five star rating to John Smith driving his Ford. And that phenomenon of wisdom of the crowd started back in 2012. Bitcoins, crypto currency, is yet another example of that. And today it's firmly implanted. So those are the sort of trends I was looking at before Dan gave me the call. He said he wanted to talk to me about something like that in the insurance area and he wanted to see me for two hours. So I said I would give him an hour because it's not billable. He came in two weeks thereafter. We spoke for about an hour. Very, very impressive individual immediately. But he only knew three thing:. He wanted to create a company called Lemonade, he wanted it to be in the insurance industry -- back then, he didn't know the difference between insurance broker and an insurance carrier -- and he wanted to have something to do with the community.
David Wright:
23:09
That's pretty broad.
Ty Sagalow:
23:12
Pretty broad. And at the end of the hour he asked me whether I would be willing, within the next three weeks, when you deal with Israeli entrepreneurs, you know, you got to move fast.
David Wright:
23:24
It surprised you to give that much time.
Ty Sagalow:
23:24
Exactly. Three week's a huge amount of time, to fly down to Israel and meet him and his partner, Shai Wininger, who was the CEO of a fabulous Israeli based company called Fiverr that went public just a couple months ago, I think, to talk to them about this new idea they had. And so I agreed. In three weeks, I was on United Airlines going to Tel Aviv and Jerusalem.
David Wright:
23:59
You took that because of the force of the personality and the charisma of Dan Schreiber. At that point you didn't have a whole lot to go on.
Ty Sagalow:
24:06
That and a free trip to Israel.
David Wright:
24:08
They're paying for you to go to Israel. It's a place you wanted to go.
Ty Sagalow:
24:09
I'm Jewish and I'm somewhat ashamed of the fact that I've never been to Israel.
David Wright:
24:20
Take that one back.
Ty Sagalow:
24:20
I was interested in the idea and I was equally interested in a free trip to Israel.
David Wright:
24:24
So who's on the team at that point? You have, Dan, you have Shai. Who else do you have?
Ty Sagalow:
24:26
That's it. I was employee number three. Daniel Schreiber, who was the president of Powermat and also the CMO of Sandisk and Shai Wininger, who is the CEO of Fiverr, and me.
David Wright:
24:45
Which company are you talking about there? These guys are software guys, I guess. Certainly Shai, but Dan as well as, is he a software?
Ty Sagalow:
24:51
I would call him a technology executive, a great, great technology company executive. And probably his subject matter expertise would be marketing and Shai equally great technology company executive with a subject matter expertise of software coding.
David Wright:
25:18
And so during that trip, I suppose you guys do some brainstorming sessions and then you eventually come up with something, some version of the company which was launched?
Ty Sagalow:
25:28
What we did, we spent three days together, so 10 hours a day or three days in a row and we started off, and there's a picture of this in my book of a room with a word on the wall that's called Lemonade. And then a table. and the table had a whole bunch of yellow stickies. We would pick up a sticky, write something on it and put it on the wall. And that's what the three of us did for 30 hours.
David Wright:
25:58
Where did the name come from?
Ty Sagalow:
26:02
The name originally came from that saying that's well known, that "when life gives you lemons", what do you do? "You make lemonade." So the concept behind Lemonade was to turn insurance from a necessary evil back to a social good, which is what insurance really was created to be back in the day. So here we are, just a room, a word, lemonade, and yellow stickies. And for the next 30 hours, we would pick up a sticky, write something on it, put it on the wall.
David Wright:
26:38
Like what? What would you be writing on the stickies?
Ty Sagalow:
26:40
Well eventually they became columns of life thoughts: Underwriting, Claims, Customer Service, Technology, Onboarding, Finance, Business Model, etc. And so after 30 hours of doing this, you look at the wall and it begins to look like a business model. It begins to look like something. And it was the beginning of what was to be Lemonade. I remember Daniel going to me and pointing to the wall and saying, "Will this work?" And I looked at the wall and I said, "Nah, that's not going to work."
David Wright:
27:26
And why not? Why wouldn't it work?
Ty Sagalow:
27:28
And that's what he said to me. He said, "Well, why not Ty? What's not going to work? We'll change it. What's not going to work." And I taught him his first lesson in insurance innovation . --. e's obviously knows a lot about innovation-- which is "I have no idea what's not going to work, but something on this wall is not going to work and it may even be something really fundamental. And we'll just have to figure it out and change it and make something else work".
David Wright:
28:01
So at that point, you're committed, are you in when you're going back on United Airlines?
Ty Sagalow:
28:06
So I was walking out the door, not committed to anything. I gave my three days and got my free trip to Israel and I was ready to go home. And that's when they stopped me again, very Israeli and said to me, here, I've known these guys for 72 hours. And they say to me, "We think you're our guy." And I said, "well, thank you very much. What do you mean?" And he says, "we like you to be the company's chief insurance officer." Later on it was determined that I, for regulatory reasons, it made sense for me to be CEO of the insurance subsidiary. So I was flattered. And by then I was all hyped about this company and I said, "how much money you need to raise?" Now we had already determined it was 10 million. So I was really testing him. And he said, 10 million. Okay, how long? He says, 12 weeks, maybe less. So I said to him, well, until you raise 10 million, I'll work with you one day a week, this is the price.
David Wright:
29:14
While they're raising the fund.
Ty Sagalow:
29:15
While they're raising, one day a week. Here is the price. At the end of three months, you pay me no matter what. But if you raise $10 million in 12 weeks or less, I'll be your guy. And then of course we work out the details and why not? Again, very Israeli, let's figure it all out, turnkey. So it happens. We don't have to do any more negotiation. And as it turned out, of course, they raised $13 million in 10 weeks.
David Wright:
29:39
That's amazing [incredible] achievement. And so now over that period of time and there's a lot more detail on all of this in the book. But now you're in and now, so they raise the money, what does Lemonade have when it's raised the money in terms of people, assets, you have code, what do you have?
Ty Sagalow:
30:02
I think at that point in time we had six people which became the founding members. It was the two founders, Shai and Daniel, and myself. And then someone from Powermat called Maya Cohen for the business development.
David Wright:
30:18
And so Maya joins after the sticky session,
Ty Sagalow:
30:21
After the stickies and-
David Wright:
30:23
Before the funds.
Ty Sagalow:
30:23
And as part of the fundraising. And then Shai brought a fabulous coder by name of Moshi Lieberman, 26 years old, very bright. So that's five. And then the six was, uh, Dan Ariely, who's a professor at Duke University, known for a number of things, but mostly behavioral economics who became our first and I think the first industry chief behavioral officer. So that's what we had. We had six people. Maya and I opened up a small office in WeWork in the financial district.
David Wright:
31:04
Maya's based here?
Ty Sagalow:
31:06
Yes, and we were off to the races
David Wright:
31:09
One of the things that fascinates me about the InsurTech scene, the tech startup scene generally is that, it seems to me that the software design and implementation process at tech startups is a different kind of process than you get at an insurance company. Are they doing something different, more productive, more effective? They build better software, all these things. You were there from the very beginning, what did it look like?
Ty Sagalow:
31:36
All of which is true and nothing against the software providers and the policy administration companies,that have been servicing insurance companies for decades and decades and decades but it's a different mindset. I remember before we ended up deciding to do everything ourselves, my initial recommendation was that we would create proprietary software for anything that was customer facing, but anything back office, we would just buy off the shelf. We had a meeting with one of the major providers in this area and they heard what we wanted to do. And they said, okay, "we can do that. It will be between $2 and $3 million and it will take 18 months to two years." And Shai, whispered in my ear, "Ty, I don't understand. I could do this for one 10th of the price and I can do it in 60 days. What don't I understand?" And I said, "there's nothing you don't understand."
David Wright:
32:43
What does he do that they don't do? Why don't the big tech companies or the vendors hire a bunch of these people and then change?
Ty Sagalow:
32:50
It's the same problem with why aren't big established insurance companies going at the speed of InsurTech companies? There is a difference in mindset.
David Wright:
33:04
What is the different mindset? Well, you tell me more about that.
Ty Sagalow:
33:07
So if you are a large technology provider, you have now a base software that you have been selling for decades and you have many, many, many clients. And so the natural tendency is to make incremental improvements. We'll twist this, we'll twist that, but we really want to sell what we have to as many people as possible. And now we have a big infrastructure and we have a lot of employees. And that's very different than two guys in a garage. It's actually simpler to change something a thousand fold than to make it tenfold better. To make a tenfold better, you have to begin with what it has. And with all the restraints of what it has. If you want to create a new process, it's a thousand times fold better. You've got to start from very beginning, start completely from scratch and that takes a different type of way of looking at things. And I'll give you one of my best examples. So, we were at the tail end of almost getting our license from New York and they wanted to make a number of changes, a dozen changes. So I call up Moshe and I say "Moshe, we need to make a whole bunch of changes." So I start rattling off these changes as fast as I can and I'm hearing clicking noises in the background. And at the end of my dozen changes, and I'm saying as quickly as I can, I say to "Moshi, do you got that?" And he says, "What do you mean Ty?" And I said, "well, have you've taken note of everything that I've just told you we have to change?" And he said, "No". And I said, "Moshe, why the hell not?" He says, "Well, I made the changes as you were saying them. Should I have not done that? Should I undo the changes?" And I said, "Moshe, no, you don't have to undo the changes." And that's the last time I ever questioned Moshe Lieberman. If I was dealing with a traditional insurance software provider, I would have to send my requests in an email. It would then prompt a meeting, which would prompt a number of emails, which would prompt then a number of meetings and maybe six months later I would have what I asked for.
David Wright:
35:34
Unbelievable. It's amazing to me how different it is. And is it that their risk averse, is it that maybe Moshe is just, I mean, he's going to be more intelligent than the average anything, because he's clearly are brilliant individual. Is that enough? Is he motivated? Passionate?
Ty Sagalow:
35:50
It's all of the above. He's motivated, he's passionate, he's young and he's in an environment that speed is king. It's a huge difference in culture.
David Wright:
36:05
So in that culture, it's interesting to me. That's not just a culture that's different from the traditional insurance software business. That's a culture that's kind of different from the insurance business as well. And so here you are trying to create, and this is your role as the insurance guy, chief insurance officer, to build an insurance infrastructure capability inside of this different culture because the culture that starts with is a software culture. This, the startup culture, did it clash with the insurance culture?
Ty Sagalow:
36:41
So my first job, imagine with me and Maya and we have $13 million in a bank, half of which came from Sequoia Capital. Those guys don't take time outs. They funded 20% of the Nasdaq, they are big shots and we have nothing. So I have to build insurance company literally from scratch. Now luckily, I don't have to worry about customer service. I don't have to worry about business development. I certainly don't have to worry about operations and technology, but I have to build everything else. I have to build underwriting, I have to build claims, I have to build finance, I have to build legal. And I went to, again, the normal insurance executive recruiters who said to me, "Ty, we're happy to help you do all this. You know who we are, there'll be $100,000 up front and it will take about a year." I didn't have $100,000 that I wanted to pay them. So I decided to do it myself and I gave myself four months.
David Wright:
37:38
You definitely didn't have a year.
Ty Sagalow:
37:39
And I didn't have a year. We had a saying back then that we were looking for people that were going through a midlife crisis because I wanted senior insurance executives with 20 plus years of experience that wanted to abandon corporate America just like I did and join a startup, one which might not exist a year later, for one third of the salary they were making now. They'd get stock options. If it ended up working out well, they would make a lot more money. But of course you don't know that at the time. And so we were very lucky that we found claims and finance and underwriting and even legal people who were emotionally and financially in a position to say, you know what, I've had it with this. I want to try something new.
David Wright:
38:39
We can take a risk.
Ty Sagalow:
38:40
And I can take a risk and I could afford to take a risk.
David Wright:
38:43
Not for everybody. You don't just go grab people off the street. Come back to this original idea right at the beginning of our conversation where you're talking about the adaptability and the need to make changes. Can you think of an example when, let's say the insurance culture clashed with, let's say the Silicone Valley, although they're not from the valley, they're obviously in Israel culture. Can you think of an example of when the insurance culture one and maybe an example in the software culture one?
Ty Sagalow:
39:11
I'll give you an example of each, just ones that are hitting my mind. So the the insurance one. The CFO was asking for a report on past premiums. And the technology team said, what do you mean [past premiums] when something happens, we over right the past.
David Wright:
39:41
We don't care what we were charged a year ago.
Ty Sagalow:
39:41
We don't care what happened last quarter, we're concentrating on this quarter. And literally there was no records of past activity. And so the CFO said, "yeah, we kind of have to have that, we're a regulated entity" and they didn't understand. It went back and forth. But eventually we did win out, of course, and we went backwards and fixed everything. But it was that just fundamental disconnect that anyone in insurance would say what are you talking about, past premiums? We're not just talking about actuaries, like a real insult to actuaries. The past doesn't exist. And then we added another example, where I got to be a little careful here. Here's not the best example that comes to my mind but one that won't get me in trouble. So the insurance has a concept of seasoning. And what seasoning means is that if you are a new insurance company, you start off with state number one, your domestic state and then you have to hang out there and work there and do business there for three years. You have to be "seasoned". And then only after that can you venture into other states. And it's a firm rule in the insurance regulatory environment and has been around for decades and decades and decades. Well, that is contrary to the idea of a technology company. The idea of a technology company is you don't have to have boots on the ground. So there's no restraint from you being available to everyone. You should be available worldwide on Day One.
David Wright:
41:29
No marginal costs.
Ty Sagalow:
41:30
No marginal costs. And so this was head on concept, the essence of a technology company being available to everyone everywhere, right at the beginning and this concept of seasoning, direct clash. And so we looked at the concept of seasoning and looked at it from the point of view of a technology company trying to create something new and eventually was able to make the argument successfully everywhere that the traditional rule of seasoning should not apply to Lemonade because we were serving a market in a way that had never been served in the past. As far as I know that interpretation of what was the an "underserved market" had never been done in the history of the insurance industry. It was a direct creation of the technology culture. and we eventually convinced everyone, all the insurance regulators in the United States where we're licensed. And now we're licensed I think in about 80% of America from the population point of view. that we deserved seasoning to be waived because of a way that technology views society.
David Wright:
42:59
And so you, of course, you needed to obey those or at least confront those regulations on seasoning because you were an insurance company, which is another very important decision that the team made was to actually launch an insurance carrier versus an MGA or agency. Maybe talk about that decision. How was that made? Why'd you go that way? Was it the right decision and it looks okay now?
Ty Sagalow:
43:23
Well, it was a major decision. But strangely enough, it was a major decision that we made almost instantaneously. There are pros and cons of if you are an insuretech company and you want to be something other than a technology service provider. Your two choices is an insurance broker or insurance company. And there are pros and cons. Almost every insuretech company, almost everybody decides to be an insurance broker. And the reason for it is it's a lot cheaper. You don't need $10, $12 million, you need much, much, much less. You are not taking balance sheet risk and there's no seasoning requirement and you're less regulated. A lot of reasons to do it and almost everybody does it. We decided almost from the beginning that we wanted it to be an insurance company. And the reason for that, and it became probably the most important decision that we made, and the reason for that is that we did not want to put our fate in the hands of another. When you are a insurance broker, even if you're an MGA, and I am an MGA today on a couple of my businesses so it's not that I'm against the model, but the problem with the model is that you are putting your fate in the hands of the insurance carrier that's giving you paper. And more to the point, you're putting your hands into your rabbi at the insurance company. That may be one or two people. And if they leave, you could be out on the street. If your Lemonade or your an InsurTech company and you believe in a/b testing and MVP, you want to rapidly change your product, rapidly come up with new versions and you don't want to be hamstrung into having to get the okay from the insurance company. So we decided straight on to take the path, the road less taken, do what is hard, not as what easy. And I think obviously it turned out extremely well. But it continues to be the minority choice by insuretechs today, but it was a right choice for us.
David Wright:
45:53
Any strategic pivots in the history of the company? Did you ever go with B instead of A over something? Was there something that you changed about what you thought was going to work at the beginning and then you wound up taking a different direction?
Ty Sagalow:
46:06
There's one that comes to mind, which is being a technology company, well at first, we didn't want an 800 number, we didn't want any ability to someone to call us. You had a question you use our chat box. And maybe if you have a slow day use email. But an 800 number. Why would I want an 800 number? But we had to have an 800 number because, both Demotech, our rating agency, as well as New York State Department of Financial Services required us to have one. So we were got this 800 number that we assumed no one would call. What we found out was even millennials sometimes want to talk to a person. Not most of the time, but if you have a big enough target audience, a small percentage of a big number is still a big number. And so we had a pivot and create a customer service department that rapidly became really one third of the employees we had in New York. But that was not the original concept at all.
David Wright:
47:19
Here's a different way of thinking about this. This is a company that is selling a product that already exists in the marketplace to the point you were making earlier about the innovation and an underserved market being an interesting argument. What about Lemonade's process is different than what came before it?
Ty Sagalow:
47:44
So there are three fundamental value proposition of Lemonade, and they all work together in what I'll call a sweet and delightful manner. One, of course it's cutting edge technology. The use of chatbots instead of insurance applications, speed, friendliness. You apply for the insurance in less than three minutes, probably even more impressive, you submit your claim in 90 seconds. You only can submit a claim on your phone. There is no fax machine, there is no paper, you can't even do it online. You can only do it on the phone. And again, you do it through a chatbot. And part of it is just videotaping what happened to you. So a very unique interface with our customers. Second, of course, is the elimination of the inherent conflict of interest. That's what most intrigued me beause I'm a history guy. Insurance was supposed to be a social good. It goes back to helping ship captains get to the new world by ship captains pulling their resources and taking a risk together. There was no centralized insurance company. It was "us" and somewhere along the line it changed from "us" to "we versus them". And it developed into a model where for every dollar not paid in a claim is another dollar of profit to the insurance carriers. One of the only models I'm aware of that inherent in the business model of the company or the industry is an inherent conflict of interest between the provider of the service and the recipient. And so the second thing we did is turn insurance into a SAAS model, software as a service. We charge 25% of, it's changed over time. I think now it's 25% of every premium as a fee. And that's what we use to run the insurance company and hopefully make a profit. The other 75 cents, more or less, is used for things that the policyholders need us to do for them or it goes directly back to the community. We developed this concept. Originally it was thought of as peer-to-peer insurance. We don't use that phrase anymore. It was very popular at the beginning. We were called the "Uber of insurance." And the reason why that became popular at the beginning is that it helped explain what we do with our policyholders. That at the end of the onboarding process, you'll be given 15 charities to choose from and you choose a charity that's closest to your heart. And then we group all the folks that chose the same charity and made them into a virtual cohort. And then we look at the profitability of that cohort, just that cohort. And if that cohort is profitable at the end of the year, which we define as a loss ratio less than 40%, then the excess, the unearned money is, if you will, the difference between their actual loss ratio and 40% is then given back to the cohort. We don't get one dime. There's no profit sharing as it is in reciprocals and whatnot. It's not like a mutual where there's one big cohort. We make separate little cohorts and we don't make one penny by denying claims. So the second value proposition is getting rid of the conflict of interest. And the way we did it, as I just described, leads to the third value proposition, which is helping community. So we can't take these unearned money. That's how we get rid of the conflict of interest by not taking it. Who do we give it to? We give it to the charity chosen by the cohort helping that community. So those three value propositions are very, very hard to duplicate by a traditional legacy insurance company. And there is to the best of my knowledge, no other insurance company existing today that has those three attributes.
David Wright:
52:07
How do you know innovation's working? Those last two pieces, they exist in a version as mutual insurance companies, a version of it. You make some comments in the book and it's great to hear your thoughts on the way the mutual model exist as represented today, but innovating on stuff like that, how do you know it's working. Is there a way to measure success there?
Ty Sagalow:
52:36
Eventually there is. Take John Peters, our chief insurance officer. He has to make decisions based upon actuarial studies and reserving and whatnot. At the beginning you don't have enough data so you just reserve based upon industry standards. But over time you use more of your own data and then you compare what are your redundancies, what are you reserving, what's your ultimate loss ratio, compared to the industry? And if you are, for example, reducing so-called insurance fraud by eliminating the conflict of interest, that will eventually have a positive effect on your loss ratio. That doesn't mean we Lemonade make more money because we don't. But what it does mean is that we give more and more money to charity.
David Wright:
53:26
It'd be a pretty strong evidence there of some kind of difference in the claims trend against some benchmark that would show the consumers are behaving differently. Early read on that, do you guys have a feel for that yet? Is it still too early to know?
Ty Sagalow:
53:39
It's too early to say something that's statistically significant. But the trend is in the good direction. There's also antidotes, so it's not statistically significant, but it's worth talking about. In the year, that we were operational, I was there, we got a dozen inquiries from claimant saying "I found the thing that I thought I lost that you paid me for. I want to send back the money to you. How do I do that." Now it only happened a dozen times. And that's not statistically significant. But I was at AIG for 25 years. I cannot remember one instance, not one, where we got a phone call from a claimant saying, "I found the thing that I thought I lost. I want to send back the money. How do I do that?" So again, these little data points that makes you suspect that maybe things are different.
David Wright:
54:42
How about on distribution? Distribution for Lemonade is online. Although not completely new, it's existed for some years for some large personal lines carries and it's like a Geico or Progressive or something. When we're building this, the customer interaction process, where are in your mind is there.
Ty Sagalow:
55:02
So that was another major decision that we made. Personal lines carriers go in one or two directions. They either have a huge insurance agency either using independent agents or captive agents that are really for the most part, independent, meaning they're not W2. Or they go direct, but they spend tons of money on advertising, billions of dollars literally on television. We didn't want an independent huge insurance agency and brokerage because that would eat too much into the 25%. And we didn't want to charge more than 25%. And at the same time, we didn't have billions of dollars to spend on advertising. So a saying that was very big back then when we were thinking about these issues was "if you're going to challenge Bobby Fisher to a game, make sure it's not chess". So if we're going to challenge GEICO and Allstate and Progressive to the game of personal lines, we would have to do something differently.
David Wright:
56:20
Don't buy a Superbowl ad.
Ty Sagalow:
56:20
Don't buy a Superbowl ad. And we must be doing something right because now I'm seeing more and more GEICO commercials about renters insurance featuring millennials. I don't think that's a coincidence. But we had to figure out a different way. And for us, that was blogging, SEO, social networking, and a distribution channel that was yes, direct in the way that I just mentioned, but also what largely is called in the industry "affiliate marketing," But we had different types of affiliates. So we had building owners, for example, who wanted to make the renters insurance available to everyone in their buildings. That was a type of affiliate marketing.
David Wright:
57:04
There's an economic theory and let me know what you think of this, where distribution costs will get bid up to the price of the opportunity cost, the next marginal use of that fund. So in this example, buying a Google adword for auto insurance will eventually turn into 15%. It's calculated differently because you're obviously paying for the lead and not for the actual policy written, but eventually the price will wind up being the same as an independent insurance agency because it's worth for a company to actually get that distribution. Can distribution genuinely be cheaper?
Ty Sagalow:
57:41
it actually can. Again, that's the brilliance of the people at Lemonade that would charged with, which is if you buy the word insurance from Google, it's ridiculous.
David Wright:
57:56
Some say the most expensive keywords Google sells.
Ty Sagalow:
57:58
Exactly. And buying "homeowner's insurance", buying "renter's insurance", that's all very, very expensive. But if you buy "renter's insurance for people with dogs in New York", that's not too expensive. So what you need to do is find out, and the folks that do this at Lemonade are brilliant -- and I don't even understand it, I thinking I'm too old to really understand it-- but I know the general concept, which is narrow the keywords to a particular situation that happens often enough in your target audience that it's a worthwhile group to go after but it's not so large you end up having to use general words.
David Wright:
58:44
So you have to have this large portfolio of words you're monitoring prices on to try and find which ones are the ones that are most efficient there.
Ty Sagalow:
58:50
And you do a lot of a/b testing and you literally changing this multiple times a day.
David Wright:
58:56
That's amazing.
Ty Sagalow:
58:57
It is amazing.
David Wright:
58:58
One of the ways I like to think about this sometimes is people will ask or hypothesize in our business, in insurance business, when will Google move into insurance? And I would argue that they're already there and they're selling the keywords. You think suddenly the customer interaction, that is maybe the most valuable part or maybe not the most of the part, but extremely valuable part of the whole distribution chain is actually accessing the customer. I don't think you will need to do anything else.
Ty Sagalow:
59:25
I agree. The problem with Google going into insurance, and I'm not going to say I know enough about it to have a firm opinion on it, but I'm sure they're very concerned about cannibalization of their own business. You got to be very careful about that sort of thing.
David Wright:
59:45
So we're running at a time. A couple more questions. One of them is just on another really important difference I think between a call it venture back startup and a traditional insurance startup or international insurance company is the venture backed part. And so I'm wondering if you have any reflections or thoughts on how venture capital might behave differently, might influence the management differently or just, let's call it, enable a different kind of culture and affirm versus, I don't know. Who else? Like a stock company or mutual or something else, are they different?
Ty Sagalow:
60:19
They are absolutely different. And prior to Lemonade, I didn't know anything about venture capitalists. I know who they were. I didn't know how they thought. But I rapidly found out. I remember one of the first things Sequoia said to us was, "we expect you to make a lot of mistakes in the first three years. If you're not making mistakes, then you're not thinking out of the box enough. And eventually we expect you to figure it out, on at least to a certain level. And then once you do that, grow tremendously." Traditional investors in insurance just don't think that way. They like saying, "you have a model. You've tried this for a few years. It works. You have a good track record. I want to buy a book of business here. How many policyholders do you have? Now if I give you money, you'll get more." That's the issue. You want to go into some more states. Nothing against shark tank, but it boggles my mind. Because this is dumb money. This is okay, you got this widget, you're trying in a couple towns, you've been doing this now for a couple of years. You got a great ROI. You just want to grow. Good. I'll give you a million dollars. And with my distribution channel, I'll get you all over. You don't have to be smart to do that. We were fortunate enough to have investors from insurance companies, investment arms of insurance companies, that thought like venture capitalist. XL Innovate being the first one. And then Allianz, SoftBank, and AXA and many others. But at the beginning it was Sequoia Capital, the guy who started 20% of the Nasdaq and Aleph who lead the C-round for WeWorks. It was a different type of investor than normally the insurance industry has.
David Wright:
62:34
Well, what do you think about the charge? And you probably have heard this before, it's all about pumping up the company and selling it. There's a cynical view of venture capital that they're owning it for their short term and the policyholders are going to wind up with a problem when the company sells and you have to raise your prices or change your methods or whatever it is.
Ty Sagalow:
62:53
Certainly some VCs are that way. And that's why you have to be very careful about who you take money from. Fortunately, Lemonade VCs think of it as the long run. And they, share a fundamental concept that many of us have, which is if you want to be successful, don't think about your exit strategy. There are so many people that say, "Well, what are you going to exit? How are you going to exit?" And they say, "You should think about this from day one". Nonsense. I'm a firm believer that you develop a product that is worthwhile that people like, that's good. An exit will take care of itself.
David Wright:
63:32
And what's unusual too about about Lemonade is that your results are public, which is pretty not common for a venture back startup. So the people can look up your schedule F and they can say, your combined ratio is this. I'm sure you've seen headlines, people saying all sorts of stuff about that. What are the venture capital guys think about that?
Ty Sagalow:
63:50
They knew the rules of the game. I remember my first conversation with Sequoia, and they said to me, "Ty, why are you thinking of becoming part of this. You're running a successful consulting company, why do you want to become part of a startup?" And I said, "it's because of Daniel Schreiber and Shai Wininger and their past record and what I think they could do". And then I said to Sequoia, let me turn that question around. You've never invested in an insurance company. You will have a whole bunch of money just sitting in a lockbox somewhere. No interest. It's going to be years before you know whether this is successful. Why do you want to do this? And they said, "This is who we are. This is who we are. This is how we think". You have to be very careful who you take your money from to make sure that your investors, whether they're venture capitalists or anyone else, shares your patience and your long term vision.
David Wright:
64:50
I'm going to make it a guess here. This is one of the more impactful and educational experiences of your life, I would think. And you're nodding your head. I'll let you react to that question. If you were to say to a younger person in this business and you want them to be the next Ty Sagalow, you wanted to move into the InsurTech business, you felt like this was an incredible place to go, what advice would you give such a person?
Ty Sagalow:
65:14
Well first "to your own self be true." Be yourself. Everybody else is taken. So if you like thinking out of the box and you like being innovative and if that is what turns you on and hopefully you're good at, then find an environment that fosters that. I was very fortunate that as a 23 year old kid, I was having dinner with Hank Greenberg.
David Wright:
65:41
Really? What was that like? What was he like at dinner?
Ty Sagalow:
65:44
Same as he is now. We got into a huge argument about the criminal justice system in New York City.
David Wright:
65:51
Oh my goodness.
Ty Sagalow:
65:51
At the end of the discussion I figured this guy really hates me, but I don't care. And instead of that, he asked me to work for him. So make sure you're at the right culture if you're innovative. Continue to look at what you believe the world should be. Follow your dream and make sure you're surrounded by people who support you on that.
David Wright:
66:23
Why did you write the book?
Ty Sagalow:
66:25
I'm 61 years old and you mentioned before about Lemonade in my history. In many ways my entire life in innovation led to Lemonade. It's the culmination of decades of being what I was being, which was this guy creating innovative things in the area of insurance. And I'm 61 so I forget things. So I first wrote everything down and it took about a year. And I worked with some really, really great people who did the writing for me. So I wouldn't forget the stories. And then after I wrote the whole thing, a number of my friends said this is pretty good. Good stories. And they talk about innovation. They talk about startups. They're worth reading. Why don't you just go and publish it? So, I did.
David Wright:
67:17
It's a great book. Great looking book. It works great. You did a phenomenal job, so congratulations on that.
Ty Sagalow:
67:22
Thank you.
David Wright:
67:23
Where can listeners get the book?
Ty Sagalow:
67:25
All right, well it's available on Amazon.
David Wright:
67:27
Well that makes it easy.
Ty Sagalow:
67:28
It's available on barnesandnoble.com. It's also available directly from the author at www.themakingoflemonadebook.com. And I should say that if you want to buy more than 10, you can get a discount by going directly to the publisher, at outskirtspublishing.com.
David Wright:
67:52
My guest today is Ty Sagalow. Hi, thank you very much.
Ty Sagalow:
67:54
Thank you very much.
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