October 26, 2016
Lemonade: A Whole New Paradigm
by Tony Canas
"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.”
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 it successfully raised $13 million in investor funding, but given that there are 500-plus other insurtech startups out there, we didn’t pay that close attention. Then on Sept. 21, it 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 Lemonade, 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 the company will expand to Pennsylvania and Georgia, where we live.
Lemonade is not just another insurtech startup. It is 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 the three short videos in this article:
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. 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 homeowner’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, the system knows what else it needs to ask.
See also: Lemonade: Insurance Is Changed Forever
It immediately pulls data from databases, analyzes all the underwriting characteristics it needs and offers an incredibly cheap policy. Oh, and if you already have a policy, Lemonade will 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 get to a bound policy. 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 themselves are probably enough to get 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. 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 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, it has 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 get paid, on the spot, immediately.
Oh, and by the way, Lemonade is 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 Lemonade explicitly explains what Geico’s “15 minutes can save you 15% or more” line has always meant: There are no brokers or agents involved.
Nobody explains Lemonade 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.”
See also: It’s Time for Some Lemonade
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 five to seven years at the very latest, and it will expand beyond renters and homeowners.
A lot of questions remain open: Will Lemonade have decent underwriting results? Will the underwriting results even matter given the fee-based structure? Will the company be able to come up with an equally genius model for auto insurance? How about commercial insurance?
A couple of things are absolutely certain: Millennials have no issue leaving legacy insurance companies and will be thrilled to try this out; and our industry has changed forever. Lemonade is what we will get compared with from now on. How will your company compete?
Want to support InsNerds?
InsNerds is free, it’s a labor of love and it takes a lot of time. We have a ton of fun doing it, and we would really appreciate your support in keeping it running. If you’ve been helped by one of our articles, if we’ve helped you grow in your career, if you agree that our content is improving the insurance industry and that we are unique in what we do, please consider donating. We’ll use your donation to deliver even more career- and industry-changing content, and to spread the word about that content far and wide in the Insurance Industry.