Lemonade takes a fixed commission out of your premium of 20% (and another 20% every year you renew with them and pay another premium). So if you pay $1,000 a year for home insurance, they will take $200 of that a year, book it as revenue, and the other $800 goes into actually covering damage to your home and stuff. The $800 gets split into two parts. $400 for immediate short term payouts (or claims) made by policyholders. If the claims made by customers in a given year is “light” and there is some of this $400 left over, they donate the leftover to charity. This is to encourage people to not “cheat the system” and prevent insurance fraud, because you are effectively stealing from a charity instead of the insurance company. Up for debate if this actually works. The other $400 is set aside for long term “bad years” or catastrophic payouts where there are a lot of big claims. Instead of taking all the “bad year” risk themselves, they buy reinsurance. It’s like insurance for an insurance company. So if there is a really bad loss year, they can still afford to pay out the large $$$ claims and don’t go bankrupt. However, of the $400 in reinsurance, lemonade says that they only buy $200 of this reinsurance “externally” and $200 of this reinsurance they keep in house. Meaning, half the time, your bad years are basically being “reinsured” by other policyholders, kind of like a standard insurance company.
Lemonade’s structure and value proposition are leveraged by the company’s spinmeisters to contrast themselves with traditional insurance companies. Their marketing disparages traditional insurance companies who by and large have worthy reputations and aspirations towards their customers.
One of Lemonade’s major propositions is to position themselves to appear more like a charitable non-profit. Though the company’s uniqueness brings a new twist to a 300-year-old financial concept, for some it might be disappointing to learn that making money is still a top priority.
What is purportedly different about how Lemonade works – and – how do they compare to traditional insurance outlets?
Purchase Insurance Online Only:
- In the FAQ section of Lemonade’s website:
- “Can I sign up by phone? Answer: Lemonade will be available for signup through our mobile apps and our website”
- JD Power reports that 34% of customers state they would most prefer to purchase a new policy online. Many traditional outlets allow online purchases to be made, in
additionto supportby phone or a local agent.
- Lemonade’s stated goal “is for the majority of simple property claims to be paid almost instantly”. Their claim statement goes on: “There will be cases in which we’ll need to fully review the incident to approve the claim, and there will be property damage claims or liability claims that may take longer to settle. If this is not the first loss you are reporting, or if some of the information we require is missing from your report, our team will need extra time to manually assess the incident and will most likely get in touch with you for further review.”
- What is a “simple” property claim? Possibly a theft? Fact is, most property claims of any size are rarely simple. Common fire, smoke or water losses involve coordination with adjusters and contractors knowledgeable in that field who can physically investigate the scope of the damage. It will be interesting to see what Lemonade deems eligible for “instant” payment.
Limiting Expenses to 20%: (Update… now 25%)
- Lemonade’s model of holding expenses to 20% is facilitated by their automation (only) rating and underwriting process.
- Traditional insurance carriers expense ratios for Homeowners and Tenant insurance average in the 30% range. However, company limits on expenses are not new. Erie Insurance is a well respected 100–year-old insurance carrier that structurally limits their expense ratio to less than 25%. Erie sells products much more complex than just homeowners and tenant insurance, yet maintains that expense factor.
- In March of 2018 Lemonade increased it’s payment to parent and affiliated companies to 25% retroactively to January of 2018.
- Lemonade’s “giveback” program allows customers to designate a charitable organization for their “giveback pool”. Giveback is at the discretion of the company’s board after paying for reinsurance (40% of premiums) – plus – claims (%age unknown) incurred. The Board of Directors have discretion on the amount of giveback paid, and the money is disbursed over a 4-year period… that is… assuming a customer keeps their policy in force.
- Giveback program is the foundation for their admittedly arguable claim of being a “peer-to-peer” organization, and a gamble that policyholders attracted to their program will be less prone to moral-hazard losses.
- By and large, traditional insurance carriers are already a giving bunch. The US Property and Casualty industry gave $575,000,000 to charity in 2014.
- According to BCorporation.net: “B Corporations are for-profit companies certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency.”
- This ties into their model of giving back to charity. It may be the most notable difference Lemonade brings to the table. Making the company accountable to B Lab’s “Best for the World” standards is a distinction that sets Lemonade apart.