Lemonade: the tech company ‘doing’ insurance

For all the hype of the so-called insurtech revolution in recent years (and the past 12 months especially) it remains rare for a startup to go from concept to tangible business—let alone to gain market share in a meaningful way at the expense of incumbent insurers.

But that is exactly what Lemonade, probably the most high-profile insurtech startup of recent years, has achieved since it was launched just 18 months ago in New York. The venture, founded by tech entrepreneurs Daniel Schreiber and Shai Wininger, who raised $13 million from private equity firms prior to launch, had a different feel to it from the start.

Significantly, it boasted an impressive line-up of seasoned insurance executives including Ty Sagalow, the former president of product development at American International Group (AIG); John Peters, previously executive vice president of commercial insurance operations at Liberty Mutual, who is Lemonade’s chief underwriting officer; James Hageman, previously senior vice president of claims at ACE, who has been hired as chief claims officer; and Ron Topping, previously AIG’s head of financial planning and analysis (P&C), Americas, who is Lemonade’s chief financial officer.

The company claimed at the time to be the world’s first peer-to-peer insurance carrier. In fact, similar ventures have been launched in Europe, although they tend to be managed by brokers as opposed to being a fully regulated insurer with the requisite security.

It can also be argued that Lemonade’s business model is not technically peer-to-peer either, but that would be splitting hairs. What is true is that the firm has gained a remarkable amount of traction—and business—in a very short space of time and is forcing more traditional insurers to take note.

Schreiber crystallises the secret to the company’s success in a very simple way: “We view Lemonade as a tech company doing insurance, and not the other way around.

“It’s precisely this agility that the incumbents struggle with. We’re a tech company doing insurance, and not an insurance company just doing an app.”

The crazy part

It seems to be working, so far. In April 2017, Lemonade reported a 4.2 percent share of the home renters’ insurance market in New York. To put this in context, the market shares of some of its rivals are as follows: Geico (23.4 percent), State Farm (17.2 percent), Allstate (16.2 percent), and Liberty Mutual (7.8 percent).

Perhaps more significantly, the company estimates that its market share when it comes to first time buyers of this form of renters’ insurance (people who have bought a policy since January 1, 2017) is closer to 27 percent. This is very exciting to Schreiber.

“Exponential growth isn’t the craziest part,” he says. “The craziest bit is that even if that acceleration stopped, even if we just maintained the status quo from April, within a few years our overall market share would automatically climb to match our ‘first timer’ market share,” he wrote in a blog discussing these numbers.

Take into account the fact that it has done this in less than a year, and its potential as a disruptive force in the market is clear to see. “In homeowners’ insurance in the US, a 1.6 percent market share makes you a top 10 insurance company,” Schreiber said in a recent blog post. “And this exclusive club has been at it, on average, for 104 years. Lemonade launched in September,” he wrote.

The concept is proving popular among young people. Lemonade continues to grow among its primary demographic, with 78 percent of its customers between the ages of 25 and 45, and mostly urban dwellers.

Copying the unique

Perhaps other insurers can learn something from the way Lemonade is operating. While clearly disruptive, there is nothing completely mind-boggling about the company.

For instance, the peer-to-peer tag is in some ways misleading in that there are no direct transactions between customers. Instead, Lemonade groups what it terms like-minded individuals based on a common cause. Payouts to each individual are made from collective premiums, as is the case with any insurer, but all leftover funds get donated to the agreed-upon charity of the policyholder’s choice.

That level of transparency might be difficult to overlay on a traditional carrier but it might not be impossible. Equally, the company’ slick and friendly customer-centric offering is certainly something other insurers might learn from. Its strong brand and altruistic ethics might be perhaps more difficult to match.

Then there is the real core of what sets Lemonade apart: its use of an array of technologies including artificial intelligence-powered chat bots, and behavioural economics and clever algorithms to speed up almost every part of the process. This also means that the entire insurance element is processed through its website and app.

“AI displaces brokers and paperwork, reducing time, hassle and costs. Behavioural economics displaces fraud and conflict, reducing time, hassle and costs,” Schreiber says.

“The combination is powerful: aligned interests remove any motivation for not paying claims, and check the inclination to defraud an insurer. That lowers the need for artificial intransigence and cumbersome paperwork, clearing the way for AI to take over the underwriting and claims process. The upshot is a process that is far more seamless, instantaneous, trusting and trustworthy.”

Not all companies are comfortable boasting such a reliance on technology (as opposed to human beings), never mind the sometimes controversial and misunderstood AI. But these things are Lemonade’s USPs. Schreiber stresses that it is possible to contact a person if needed but stresses the efficiency of the ‘bots’.

“In the rare case that there are outstanding questions before payment, users can send a note to our customer care team and get the human touch. Similarly, our claims process is handled by AI Jim, our claims bot. Anything that is not considered an emergency, or is ongoing, can be handled by AI Jim, allowing Lemonade to pay claims in seconds,” Schreiber says.

In spite of the speed and efficiency of the AI bots, he admits there is always room for improving the service, and being ‘a tech company doing insurance’, it has the agility to constantly change and improve very fast.

“This mindset allows us to iterate quickly,” Schreiber says. “Our engineers can code algorithms on the go, our product managers can design features overnight. In our last Transparency Chronicle, we wrote that our engineers push 2.3 updates out daily, on average!”

Preaching to the unconverted

Although it is licensed as a P&C insurer in three states, Lemonade distances itself from the business model and values of traditional insurers as much as possible, shunning their legacy systems, processes and workforces.

Schreiber believes its model makes Lemonade unique in the insurance landscape. Again, he reiterates that it is because Lemonade is a tech company doing insurance, rather than the other way around.

He adds that it’s clear that incumbent insurers are aware of the need to change and become, at the very least, more customer-centric. But he understands how hard it can be for established companies to change their business models quickly.

“We’re seeing quite a few carriers ‘digitise’ part of the insurance process, but the infrastructure and business model is often the same, century-old framework. It’s genuinely hard to innovate under those conditions,” he says.

“Other insurtech startups are not licensed insurance carriers, so while they improve part of the insurance process, they are still dependent upon the traditional insurers for basic elements such as underwriting and claims.”

Lemonade sees itself as a pioneer of change and has the broader goal of trying to change behaviours and attitudes within its rivals. Hageman, its chief claims officer, has written a fascinating blog on this subject in which he contrasts the claims culture in Lemonade with that of its rivals.

He details a dispute between Lemonade and another insurer over a claim, which Lemonade was eventually forced to compromise on. He concludes the blog saying: “They won this battle. We vow to fight the war. We already know policyholders don’t trust their carriers. We also know change doesn’t come easily. Changing our customers’ impression and view of insurance companies will be crazy difficult. But, perhaps trying to influence other carriers, our competitors, and colleagues in this space to also change, may prove to be the most difficult challenge of all.”

Onwards and upwards

Licensed in seven states and operating in three—New York, California and Illinois—Lemonade’s ambitions are clearly not confined to New York and this has some of the larger insurers looking over their shoulders. If initial projections stack up, the company could quickly become a significant player in the US—forcing reinsurers to sit up and take notice.

It is not just geographical expansion that excites Schreiber—he is mulling new business lines as well.

“Of course, this model borrows certain elements from the sharing economy (flat fees) and from social entrepreneurship (the Lemonade Giveback), so in theory the model could probably work in other lines of business too,” he says.

He also suggests there is no reason that this particular model could not work outside the US, for example in Europe.

Are rival insurers right to be concerned? Could the principles underpinning Lemonade truly revolutionise the market, as Schreiber predicts, or he is an overly optimistic technology executive misunderstanding an old and very traditional market?

To answer that, perhaps it is better to recall the words of insurance veteran Sagalow when the company was first launched.

“Choosing Lemonade was a very personal decision for me but in many ways it was a culmination of 20 years of seeking and developing innovation in the insurance industry. This is the most exciting product or company I have been involved with yet,” he said.

“The peer-to-peer phenomenon has the potential to fundamentally change the economic framework of this country. Some 30 years ago, we looked at the internet and concluded the same thing. That has come to pass. You could not imagine the insurance industry today without the internet.

“From my perspective, this is going to represent a big change to the economic framework of this country but for the insurance industry this offers an opportunity to innovate and do a better job for its customers.”