Take a glass of chilled water, add a little lemon juice, salt to taste, and enough sugar to make sure that the drink is potable. Stir the contents well, and ta-dah! A sweet-sour refreshing drink which is non-carbonated, healthy and pure delight – Lemonade; a no-brainer recipe which is easy even for a fifth-grade kid and merely takes 90 seconds to prepare. I wish the whole world was a lemonade – simple, transparent and with all the goodness. Well, at least the insurance sector is heading towards it – with one company leading the pack – Lemonade Inc. Hola! They certainly have got a name, and analysing their business model, one can say they have an industry-disrupting recipe and also all the goodness of a kindergarten at the same time. Sounds unreal? Let me take you through their journey and how they are changing the future landscape of the insurance business.
Why is Lemonade in headlines right now?
Lemonade Inc, an insurance company located in New York, recently completed its Initial Public Offering (IPO) on New York Stock Exchange (NYSE) raising $319 million from the capital market, with Goldman Sachs, Morgan Stanley, Allen & Co and Barclays underwriting the offer. The 11 million shares offered for $29 apiece in IPO, sky-rocketed 144% on its debut day on the exchange. A time where companies are postponing their IPOs due to pandemic and recession, Lemonade has made a dream debut.In April 2015, the company was co-founded by Daniel Schrieber (former president of Powermat) and Shai Wininger (also co-founder of Fiverr).
- Seed funding in 2015, $13m from Sequoia Capital and Aleph LP each
- Series A funding in 2016, $13m from XL Innovate
- Series B funding in 2016, $34m by General Catalyst
- Series C funding in 2017 and Series D funding in 2019 by Softbank infusing $120m and $180m.
Lemonade Inc is backed by big stalwarts, with total funding of USD 480 million even before the IPO. This is the reason why the public highly trusted the company making the IPO a runaway success. However, many people still wondering why there is so much chatter about an insurance company. In the end, it’s just another insurance company, takes premium, addresses claims and makes profits – what new can happen here? Well, almost everything.
What does the company offer?
Lemonade currently offers insurance products to renters and homeowners in the United States. In Germany and the Netherlands, it offers liability insurance. The insurance in the United States covers any kind of stolen or damaged property, and also covers personal liability, to protect the consumer if they turn out to be responsible for any accident or damage to another person or their property. The company also offers switching from existing insurance policies from other companies. Almost 70% of its existing customers are under the age of 35.
How is Lemonade different from others?
For the starters, Lemonade is a new age tech-based insurance company. Here’s what the company says it on its website, “Lemonade reverses the traditional insurance model. We treat the premiums you pay as if it’s your money, not ours. With Lemonade, everything becomes simple and transparent. We take a flat fee, pay claims super-fast, and give back what’s left to causes you care about.” And they mean every word of that statement.
- Unlike traditional insurance which runs through agents, Lemonade offers its services through mobile app and leverages on Artificial Insurance (AI) bots, to create an end to end digital experience. To get new insurance, the customer has to interact with AI Maya and after answering questions, they would receive a quote within the next few minutes. Similarly, most of the claims are settled by chatting with AI Jim while customer support enquires are settled by interacting with CX.AI bot. So yes, bots at your service. This is quire appealing to the millennial generation.
- Coming to premiums, the company has a radical approach to handling the money. Like other insurance companies, they collect premiums, however, they retain only a fixed portion (flat fee) of such premium to meet their costs and earn profits. In 2019, the company made 67 million Revenue and 108 million losses – a typical SoftBank investment! However, the story gets more interesting when we talk about the balance money.
- The balance amount is pooled separately for settling claims from the customers. At the end of every year, if any amount is left, the company will donate the same to charities of the customer’s choice – they won’t keep it. And this all happens at their annual event ‘Giveback’. So, either you get the money (when in need) or someone else gets it who needs it badly. In fact, the company has paid out $53k in 2017, $162k in 2018 and a whopping $631k in 2019 to charities as ‘Giveback’. Historically, the insurance companies have been seen as evil corporates who do not settle claims when needed or try to escape them. However, with Lemonade’s model, there is no conflict of interest as the balance goes to charities.
- Lemonade asserts that it settles customer claims faster than any other traditional insurance company. And it’s true to quite an extent. In 2016, a customer filed an insurance claim for a stolen coat, he answered a few questions on the company’s mobile app and the claim was settled in world record time by reviewing, approving and paying the claim in merely 3 seconds. Of course, not all claims are settled in 3 seconds, sometimes takes a few minutes, and in most cases, the settlement rate is faster than any other insurance company.
How does Lemonade secure itself?
The company is a for-profit company and settling claims faster would mean a dilution in the verification process and thereby, exposing itself to insurance frauds. However, Lemonade has a different approach to the whole business.
- In 2017, a policyholder had filed a claim for a stolen laptop. The company approved the claim instantly and transferred the amount to his account. The customer was delighted. However, a few days later, the same gentleman approached the company office, to return the money from the payout, saying he has recovered his laptop and he no longer needs the funds, because it was the right thing to do. The claims officer was stunned, as this was unusual. There is a general sense of distrust between insurers and their customers which translates to fraud. However, Lemonade only takes a small fee out of the premiums and committing fraud would mean cheating a poor charity from much-needed funds. The feature of ‘Giveback’ makes it is less likely for the customers to commit fraud. Overcoming conflicts of interest and making insurance business transparent are two significant pillars of Lemonade.
- The company uses artificial intelligence at the heart of its operations. What is the most important thing for artificial intelligence to be robust? Data! And for the insurance business, collecting data is an integral part of the process. Thus, with more customers, insurances, settlements and frauds in the process, the AI-based technology would become robust over the years and can be used in many ways right from pricing the products to setting up verification processes for different products.
- Technically, the company is equipped to fight with the frauds, however, what if the rightful claims go higher than the amount of premiums collected? Well, the company reinsures its policies like other insurance companies, however, Lemonade does it for almost all its policies. This means Lemonade buys insurance from other companies against the insurance sold to their customers and covers itself against risk. The company pays a major chunk of the premium collected (out of the balance funds after collecting flat fee) to the reinsurance companies who settle claims when liability occurs. Thus, the company has to ensure that the premiums being collected from customers are enough to at least pay the reinsurance premium apart from its flat fee and thus, it can securely carry out its business.
Criticisms against the Lemonade’s business model
While Lemonade presents an excellent innovation to the age-old insurance business, there are quite a few pitfalls in its way. If the company is not able to control the insurance frauds in long run, the reinsurance companies would have to shell out a lot of money and thus, the cost of reinsurance may leave little to charity. The relationship with reinsurers would also be put to test if they continue to renew contracts. Besides, Lemonade’s major customer base consists of millennials and thereby, maintaining customer loyalty would be a challenge. The company is also heavily dependent on AI and if the same does not deliver, the business cannot survive the cost of alternative options.