The Sheer Genius of Lemonade – A Whole New Paradigm for Personal Lines Insurance

We’ll admit it; we were caught asleep at the wheel on this one. We had heard of Lemonade a few months ago and how they successfully raised $13M in investor funding, but given that there are 500+ other InsureTech startups out there, we didn’t pay that close attention. Then on September 21st, they opened for business. Both Carly and Tony were in Hawaii for the CPCU Society Annual Meeting and entirely too busy drinking Mai Tais, err, I mean, working the event to even notice that Lemonade went live. We’re back in the lower 48 now, back at our day jobs, and after almost a month working on catching up, it just recently hit us that Lemonade is a BIG deal, a REALLY BIG DEAL.

A lot of digital ink has already been spilled at ITL with at least three great articles about it, but we still needed to give our own point of view. As Insurance Nerds we are completely geeked out, and as Millennials, we can’t help but want to move our own insurance to Lemonade and are actively wondering when they’ll expand to Pennsylvania and Georgia, where we live.

Lemonade is not just another InsureTech startup.  They are an actual mobile-first, legacy-system-free licensed carrier offering P2P (Peer-to-Peer) insurance to delighted customers in the state of New York through a seemingly magical iPhone and Android app. To start understanding what this is all about, you must watch these 3 short videos:

That first video looks like a VERY snazzy proof of concept, and it almost makes you wonder if this thing will ever go live or if it will simply be vaporware, smoke and mirrors. But it’s already live! Maya, the young lady who asks you in plain English a few simple questions to “get you some great insurance” is not a call center rep in NYC, Des Moines or even in Delhi, she’s an artificial intelligence chat bot. This technology is so new that it was unknown before 2016 and is only starting to be experimented with in the high tech industry, and it’s live on Lemonade, helping people buy home owner’s and renter’s insurance.

Notice how as the user fills in his address, the system automatically pulls potential matching addresses, and once it has a full match, it automatically displays a map to confirm. Then it asks whether you have Roommates, a Fire Alarm, or a Burglar Alarm, if you answer yes to any of those it knows what else it needs to ask.

It immediately pulls data from databases, analyses all the underwriting characteristics it needs, and offers an incredibly cheap policy. Oh, and if you already have a policy, they’ll even cancel it for you and get you a refund! Coverages are shown in a simple, graphical illustration, and just tapping on a darkened icon adds that coverage to your quote immediately. Enter your credit card info and done. The whole video takes about 40 seconds to a bound policy. It’s running fast, in real life, it probably takes about 90 seconds. You even get to sign your contract right on your touchscreen. It’s downright magical.

The ease of use and freedom from legacy systems by itself is probably enough for 70% of Millennials (and many Xers and Boomers) to leave their existing insurers and go with Lemonade instead! As Michael Tempany explains, no existing insurer can produce an app like this because of our legacy systems, workforce, and processes. It’s simply not possible. He even argues that “The only solution for traditional insurers wanting to compete with Lemonade is to start from scratch. In short, they need to create a company or subsidiary unencumbered by legacy systems, workforce constraints, and intermediaries.”

But that’s just the beginning of it, Rick Huckstep of the Digital Insurer is absolutely right that “This is what insurance is meant to be: mutuality in the pooling of shared risk.” He argues that “the industry has lost its way with the evolution of mass scale personal lines in the 20th century. The profit motive has gotten in the way of trust; the insured and the insurer are both chasing the same dollars. And now, their interests are no longer mutual but are misaligned. The insured wants a helping hand and to be ‘made whole.’ The insurer wants to satisfy its duty to shareholders.” This is true to an extent even with mutual companies with no shareholders, the existing model of every other insurance carrier puts the customer’s interests against the carriers interests at least to some extent. While Lemonade is a full on risk bearing carrier, they have eliminated the existing dilemma of every other carrier: Lemonade takes a 20% cut of the premium as a fee, and that’s it. If you have a loss, you get paid for it (immediately and without questions) and if you don’t have losses, and your policy produces a profit, it gets donated to the charity of your choice.

The claims process is also amazing. You open the app, tell it you had a claim, answer a couple of questions, sign on the screen, record a quick video explaining what happened and you get paid, on the spot, immediately.

Oh and by the way, they’re A rated and reinsured by Lloyds of London.

The second video explains the science that makes it all work and has a great line: “Insurance that is a social good not a necessary evil.” This tag line is going to be killer awesome. Also, very interesting that they explicitly explain what Geico’s “15 minutes can save you 15% or more” line has always meant: there are no brokers or agents involved.

Nobody explains it better than Dan Ariely, Behavioral Economics Expert, Duke Professor and Lemonade’s Chief Behavioral Officer. “In the very structure of the old insurance industry, every dollar your insurer pays you is a dollar less for their profits. So when something bad happens to you, their interests are directly conflicted with yours. You’re fighting over the same coin. Basically if you tried to create a system to bring out the worst in people, you would end up with one that looks a lot like the current insurance industry.”

And a fantastic commercial making it all crystal clear to the customer:

Make no mistake, Lemonade will expand beyond New York, and we’d expect it to be in all 50 states within the next 5-7 years at the very latest, probably faster, and they will also expand beyond Renter’s and Home Owners.

A lot of questions remain open: Will they have decent underwriting results? Will the underwriting results even matter given their fee based structure? Will they be able to come up with an equally genius model for Auto insurance? How about commercial insurance?

A couple of things are absolutely certain: Millenials have no issue leaving legacy insurance companies and will be thrilled to try this out; and our industry has changed forever, this is the new bar we will get compared to from now on. How will your company compete?

 

2 thoughts on “The Sheer Genius of Lemonade – A Whole New Paradigm for Personal Lines Insurance

  1. I don’t want to be THAT guy…but I think someone has to be.

    The hype with Lemonade has gone way overboard.

    First, underwriting profits DO MATTER! Even though Lemonade has separated themselves from this aspect of the business doesn’t mean that the real risk takers in this endeavor aren’t eagerly waiting for those dollars to flow in. Uncle Warren won’t have much patience if NCOR is negative.

    Second, the claims event, IS the product. It strikes me odd that they both tout their lower prices and their super easy & satisfying claims experience AND that somehow there are claims being denied by other insurers that they won’t deny AND finally that when there is money left over, a charity will benefit from that. There is a conflict between those selling points. If you are a low-cost provider, then how much margin do you have to handle claims in any other fashion than in the way it is currently being handled? If you make it ridiculously easy for a claim to be paid, how can you expect your loss costs to be below industry standard? With higher loss costs, higher premiums must follow to cover the losses and higher reinsurance expenses (Uncle Warren wants to upgrade to a 2000 Lincoln).

    Lastly, I like a lot of what they have done. Making it easier to handle risk transfer transactions in all manners is looong overdue. But…the nifty UX is NOT the product (see above). I can say this flatly, no one will be “delighted” buying insurance through Lemonade. That is hyperbole. It does appear that their UX is better than the traditional route. That’s great. But let’s hold back the hype until we see how they handle claims. It is how they react after they get punched in the mouth that will really tell us what they are all about.

    Winter is coming (this is literally true), and there will be a lot of ice dam, frozen pipe and other winter related claims coming to their doorstep. Let’s see how quickly they are willing to pay out when an ice dam sends melting water through walls and ceilings. Let’s judge these guys not by how fast they are growing but by the satisfaction rating of their claims handling, by the retention of customers year over year and by their NCOR. As we all know, growing fast in insurance is incredibly easy. That’s a cheap and useless KPI.

    So before we start doing delightful cartwheels, let’s see if they can meet the same expectations that we set for other insurance companies. Can they meet their obligations and can they satisfy all of their stakeholders simultaneously? With hype comes pressure. I hope they succeed.

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