Bitesize InsurTech: Lemonade
September 22, 2016 Chris Sandilands
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.
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.