On Wednesday, September 27th, I saw a tweet from Lemonade announcing their Zero Everything product for their homeowners, condo owners, and renters lines.

Article Link

As I am the person who wrote the Lemonade Hype article almost a year ago, I feel compelled to at least comment on this newsworthy event.

My thoughts?

I LOVE IT!

Let me clarify – I love the idea that someone is testing whether this is a good idea or not. For as much as Lemonade has done, that they have considered Earth-shattering, I have found their product features to be nice, but hardly worthy of the mountain of hype they ski on.

But this one is different. This will be the first new product feature that challenges the centuries-old fixture to insurance…the deductible. We are finally going to be able to have a real-world test as to whether everything we’ve been taught about the deductible is true or not (and fingers-crossed we learn a ton more about human behavior).

Renters and Homeowners policies are the lab rats of Lemonade’s grand experiment in zero deductibles.

So why do insurance policies even have a deductible? There are 3 main reasons why the deductible exists:

1. The cost of small claims. When small claims occur, it can cost more to adjust those claims that for the expense of the claim itself. That’s a cost burden on the insurer that ultimately gets passed along to the consumer.
2. Skin in the game. The deductible (as we’ve been taught) is also meant to align the interests of the insurance buyer and insurance seller. At the end of the day, they both want the same thing…no losses. With a deductible, it is believed that insureds will be active in the risk management of the exposure so that they themselves will have the incentive to NOT pay money out of their pocket if a loss occurs.
3. Economical premiums. By accepting the first dollar of risk, via the deductible, the insured is reducing their premium expense to the insurer. In states that are catastrophe prone, raising the deductible can provide significant premium savings.

So with their Zero Everything product, Lemonade is betting that their AI technology will be so good as to reduce the costs of claims adjusting those small losses to almost $0. That removes the need for bullet number 1 above. I get that. Seems like a reasonable business case.

My concerns are with the other 2 bullet points. Will the waiver of the deductible cause the insureds to behave differently when it comes to the risks they face? Will they shrug or actively participate in risk reduction if every dollar of loss and risk is transferred to the insured? My guess is that Lemonade is counting on the charity angle as social pressure to keep that from happening. My other guess is that the charity thing is unlikely to work in that regard, but I can be convinced otherwise once the data comes in.

My final concern is with economics? How much more is this Zero Everything plan? A lot more? A little more? That price will be telling. If it’s a lot more, then take up won’t be that great. If it’s a little more, then take-up will be massive but exposing Lemonade and its reinsurers to losses not priced in.

(not a concern but a comment…how the heck did they get this by their reinsurers?)

Regardless, get your popcorn out, we are going to have a wild ride with Lemonade over the next couple of years.