The Lemonade story: Can insurance be disrupted?
Startup
The insurance industry has traditionally been bureaucratic
Insurance companies aren’t popular. They unreasonably reject claims, take years to process paperwork, and even engage in fraud (AIG incident).
NY startup Lemonade (founded 2015) has disrupted the industry by taking an approach immersed in AI and Behavioral Economics and has rapidly become the highest-rated insurance app on the App Store (4.9/5)!
Lemonade acquired 1Mn customers in 4.25 years (industry average ~25 years!). It has captured 10% market share in 5 years, which is insane!
Insurance - a zero-sum game?
Traditional insurance has an underlying conflict of interest - every penny paid out as claims reduce the margin of the insurance company. Thus, companies inherently don't want to pay claims. The insurer’s reluctance to pay claims leads to inefficiency - needless paperwork, multiple rounds of due diligence and customer dissatisfaction.
Lemonade's model
Lemonade uses chatbots to sell insurance and handle claims. Their products include renters, homeowners and car insurance. The highly automated system ensures that insurance can be bought in 90 seconds and claims are paid in 3 mins. Lemonade keeps 25% of the premiums as a flat fee. 75% is used for paying claims, re-insurance* and givebacks.
*Reinsurance: Lemonade buys insurance for itself from another insurance company.
Giveback - Behavioral economics 101
The company donates unpaid claims to charitable foundations of the customer’s choice (~40% of their margin is donated yearly). This is revolutionary in the insurance industry.
Lemonade CEO Daniel Schreiber says that this helps resolve the conflict of interest - giveback incentivizes customers to be honest about claims!
The social angle to Lemonade’s model makes them extremely popular with millennials.
AI is central to Lemonade's strategy
Lemonade’s chatbot “AI Maya” can accumulate 1700 data points per customer sign-up (industry average ~ 50). This data is then crunched using AI algorithms to drive growth and marketing strategy, claims processing, underwriting, etc.
Lemonade’s operations are also largely automated, with over 30% customer tickets handled by chatbots.
Automation helps Lemonade control its operational costs to a significant degree - the amount is instead spent on aggressive marketing.
Growth and path to profitability
Revenue growth ('20): 138%
CAGR, Premiums: 450%
Loss ratio*: declined to 70%
Gross margin: 17-18% (past 3 years)
These are extremely healthy numbers.
But, losses have mounted. Q1'20 net loss was $15Mn. The loss can be attributed to marketing spend (SG&A is 213% of revenue) - this makes sense since Lemonade is still young and growing.
With healthy growth, Lemonade (backed by a solid 2020 IPO) should turn profitable once it realizes economies of scale.
*Loss ratio is the total claims paid divided by total premiums earned. The equivalent loss ratio for Top 20 US insurers in 2020 was 82.34%.
Lemon for thought
Lemonade's 2 major products are renters ($150) and homeowner's ($900) insurance. The percentage buying homeowner's insurance is relatively low - only 10% of those buying renter's insurance also buy homeowner's insurance.
Lemonade needs to ensure that customers “graduate”* from buying renter’s policies to homeowner’s policy – the good news is that the spend per customer has been growing at a CAGR of 16%.
Acquiring valuable customers will be the key to unleashing Lemonade’s full potential.
*To graduate means to sell home insurance (a high-value offering) to a current customer of renter's insurance (a low-value offering).
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