Bitesize InsurTech: Lemonade


Everyone’s talking about it this week – the FT, Bloomberg and the industry press – so we felt we should too.

Rather than repeat all the hype, we’d like to add a little perspective and give to you three questions every insurance professional and journalist should be asking about the startup before drinking the Kool-Aid.

What’s Lemonade?

Lemonade sprung to fame in December 2015 when it was reported that Sequoia Capital, a VC firm that has a habit of supporting winners, had committed to a $13m seed investment round.

Lemonade has been noisy about its existence and coy about its proposition ever since.  But the press and industry have been going mad for it.  Hats off to their marketing team!

The company’s mantra is that “traditional insurance companies make money by keeping the money they don’t pay out in claims.”  They claim to be revolutionising the model by aligning the interests of the insurer and the customer.

The model is that 20% of the premium goes to Lemonade, their only source of profit.  The rest is then used to a) build a risk pool and b) buy reinsurance.  Any surplus in the risk pool is distributed to charity at the end of the year; each policyholder can choose which charity this is.

The press go wild

Lemonade’s claims have got the press and market commentators going wild.  Since December there’s been a steady trickle of articles headlined things like “Lemonade are Live. Insurance will never be the same again!”.  A journalist in our network recently told us that “brokers [in Monte Carlo are] very impressed with Lemonade.”

But where’s the evidence that backs up the hype?

The lack of depth in the coverage about Lemonade concerns us.  The key to innovation is not to revel in one company’s marketing pitch but to dissect what is really happening and establish what you could yourself be doing.

So what questions should the industry be asking about Lemonade?

1. What is its regulatory status and is it good for customers?

Lemonade seems to be blurring the lines between an underwriter and a broker.  In UK regulatory parlance, is it “Treating Customers Fairly” for an insurer to reserve 20% of the premium as non-refundable income?  Why wouldn’t, say, Aviva decide that 20% of my home premium wasn’t part of the risk pool and refer its customers to its reinsurers when the risk pool runs out?

2. Does the model – as described – really deliver what Lemonade claims?

Lemonade claims that it has solved the problem that “whenever [insurers] pay your claim, they lose money”.  But if this is true for insurers, it’s also true for reinsurers.  Why does Lemonade’s model solve this problem?

3. Will the “giveback” incentive survive a brush with reality?

Lemonade has hired a hotshot behavioural economist, Dan Ariely, into its senior team.  Presumably under Dan’s guidance, Lemonade has developed a concept to reduce claims frequency whereby any surplus in the risk pool is “given back” to charity at the end of the year.  Fraudsters are unlikely to be put off fraud by this incentive.  So the questions are whether a) there’s a sufficiently large pool of people who are effectively prepared not to make legitimate claims on their policy because they’d rather donate to charity or b) if Lemonade has built superior anti-fraud measures.  We are, frankly, sceptical.


We are excited to see what happens to Lemonade and wish it all the best.  There is no doubt that they have assembled a stellar senior team, as reported back in February, and their fresh look at the insurance product is welcome.

However, we also urge the industry to keep perspective.  There are many unanswered questions about their proposition (answers welcome in the comments on our blog) and the industry should look at the components of the Lemonade proposition for inspiration rather than just regurgitate the company’s (outstanding) marketing.

4 Responses
  1. Lemonade is essentially an insurance front, ceding 100% quota shares into the Lloyd’s reinsurance market. This model isn’t new and resurfaces during soft periods of the insurance cycle. Legion insurance company had a similar business model, ceding 90% quota shares into the reinsurance market. They went bust when the last hard market started in 2001/02.
    Lemonade should be given credit for reduced distribution costs (which are horrendously high in the states), but it is difficult to find much else to credit.
    The fatal flaw in Lemonade is that they don’t control the price of insurance – this is effectively set by competition among reinsurers. Whilst ok at the moment, it will expose them during next hard market.
    There are a few examples of niche insurance books in the states that perform well (independent truckers etc). But the problem is scale – big isn’t niche.
    My prediction: Lemonade will grow significantly in next year or so. At next hard market any reinsurers left will scoff at lack of “skin in the game” and demand crippling primary rate increases. Lemonade will be faced with either dropping the hype, admitting they are just any other distributor, or, will need to raise tons of capital to underwrite their own risks (making them indistinguishable from any other insurer).

    BTW have they actually confirmed that they don’t receive a profit commission back from reinsurers? Next year, 22% could be this year’s 20% ….

  2. I’d add a couple more questions:
    1) part of their marketing special sauce is the P2P tag line. I don’t see how this is P2P and frankly, seems misleading at best
    2) doing a bit of comparison shopping (of one so not at all statically relevant) the coverage seems expensive and aimed only st millenials since the benefit limits are too low to include a reasonable wedding band and engagement ring.
    3) there’s nothing particularly ‘new’ in the presentation or sales process so picking renters as the entry point doesn’t feel like there’s much room to grow the product suite.
    Hope they have something else up their sleeves…

  3. Adrian Jones

    A couple of thoughts. (Speaking only for myself, and having no relationship with Lemonade, personally or professionally.)

    1) The 20% fee is somewhat like a takaful operator takes in certain Sharia-compliant insurance models. It’s a fee for running the pool. Or you could think of the 20% as being like the expense ratio of a mutual insurer. No matter how poorly the mutual does, the employees are getting paid. Where it would get dicey with Lemonade is if the management makes a lot of money and the pools fail – but if the pools are properly reinsured, this wouldn’t happen.

    2) & 3) Dan Ariely’s book is quite informative on this question and is a good read. The book’s thesis is that everyone cheats, typically by about 15%. And this amount rises when people are in the wrong frame of mind, which they often are with an insurer, seeing the insurer as out to take advantage of them. So that $1000 Ikea sofa damaged in a fire becomes an $1150 claim, and people still feel OK with themselves, since it’s just a bit of a fudge. In a business that typically runs at 98% combined, a little more honesty goes a long way (as does an efficient sales and claims process, which Lemonade also would probably intend to have). By shifting the frame of mind to a charitable give-back, the consumer’s mindset is no longer consumer vs. evil insurer but the consumer taking from a pool intended for charity. I don’t want to speculate on if it will work, but Ariely’s book is worth reading to understand this. As for the reinsurer, Lemonade’s website mentions this in the FAQs, but most people have no idea what a reinsurer is, so I don’t think the reinsurer would enter the customer’s mind.

    1. Chris Sandilands

      Thanks. This is interesting. If it’s true that you can reduce all claims by 15% then that us, if course, material… I’ll read the book!

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About the author

Chris Sandilands, ACII is a Partner at Oxbow Partners. Chris advises (re)insurers and brokers on a range of strategy topics and M&A. Chris started his career as a D&O underwriter at Munich Re, before joining Oliver Wyman, the consulting firm. You can reach him at

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