Lemonade: Fresh Squeezed Insurance
A customer claimed for a stolen coat. He answered a few questions on the app and recorded a report on his iPhone. Three seconds later his claim was paid. In those three seconds “A.I. Jim”, the firm’s claims bot, reviewed the claim, cross-checked it with the policy, ran 18 anti-fraud algorithms, approved it, sent payment instructions to the bank and informed Brandon. The real-life Jim, the chief claims officer, was driving home for Christmas at the time.
This is how Lemonade is planning to disrupt the insurance industry. It’s a startup that offers crowdfunded, “peer-to-peer” property insurance via a smartphone app.
Benjamin Franklin formed America’s oldest mutual insurance company in 1752. Everyone would pay money into a pool, and if your house caught on fire, you were covered. Lemonade is taking this to the next level with technology and behavioral science and trying to bring the communal economy to financial services, as other startups are hoping to do in areas such as peer-to-peer lending and investing.
Lemonade is the oldest new idea in insurance.
Why Lemonade?
Insurance is not an investment product. Its objective is to make good on the loss. Consumers make premium payments on an ongoing basis with nothing been paid if things go well. In case there is a payout request, there are lot of hardships associated with it. Insurance suffers from misaligned incentives as, every dollar paid comes out from the company’s pockets. Normally upright people have few qualms about defrauding their insurer, pushing up premiums.
How does it work?
There are no brokers or agents, just a phone app. Signing up is quick and paperwork-free. Rates are comparable to those from established insurers, though entry-level premiums for renters can be lower (starting at $5 a month, as compared to a national average of about $20-$25 per month), because there’s near zero incremental overhead to the company for each new customer.
Lemonade’s charges a flat fee of 20% on premium payments. Policyholders designate that their payments go into pools of peers, built around charitable causes that they choose. Any money that isn’t paid out to the peer group in claims goes to the charity, not to Lemonade.
The policyholders know that the company is not making any money by denying a claim. That’s a great value creator for the company.
The Incumbents
The bots are still learning and pass complex claims to the humans. For bots to get really clever, they need lots of data. This is where the incumbents (large insurance companies) have an advantage. If Lemonade’s customer numbers remain small, they will not learn fast enough to stay ahead of the big boys using the same technology.
But insurance moves slowly. Miguel Ortiz from BCG, a consultancy, says that the big bet for Lemonade is that “it can stay ahead of a sleepy industry by doing standard insurance processes better than everyone else.”
