Can you make Lemonade out of insurance?

Lemonade is a renters and homeowners insurance company that is looking to “uberize” the insurance industry through a P2P model. Lemonade’s goal is to transform the insurance industry. The Lemonade app and website allow consumers to purchase insurance and make claims (currently only in New York).

Per Lemonade’s website: traditional insurance companies make money by keeping the money they don’t pay out in claims. This means whenever they pay your claim, they lose profit. This is why getting your claims paid fast and in full is sometimes so hard. Lemonade was built differently. We take a fixed fee out of your monthly payments, pay reinsurance (and some unavoidable expenses) and use the rest for paying out claims. In essence, we treat premiums as if they were still your money and return unclaimed remainders in our annual ‘Giveback’. Giveback is a unique feature of Lemonade, where each year leftover money is donated to causes our policyholders care about. We treat policyholders who care about the same causes as virtual groups of ‘peers’. Lemonade uses the premiums collected from each peer group to pay for the group’s claims, giving back any leftover money to their common cause, and uses reinsurance to cover for cases where the group’s claims exceed what’s left in the pool. This way, our customers enjoy amazing insurance, and society gets a little push for the better. It also means that, unlike traditional insurance companies, we’re not in conflict with our customers, so we’re happy to pay claims fast and with no hassle. Lemonade CEO discusses the company’s foundation on artificial intelligence and behavioral economics.

There are many opinions about why Lemonade will work and why Lemonade will not work. Here’s the bottom line, insurance has been around a long time. When a policy owner pays a premium and does not file a claim in a certain year, the insurance company does not just count that whole premium as profit, instead they use it to form a claim reserve. Claim reserves are important since claims will vary from year to year. Insurance companies in a number of states have their premiums reviewed by insurance commissioners and as noted above, sometimes, they have to lower their premiums and must apply for premium increases. Insurance companies use decades of their claims history to set premiums. Yes, insurance companies have not fully implemented technology and AI. Another concern on Lemonade is claims fraud and how their artificial intelligence can improve on current fraud techniques. Claims fraud is a huge problem and insurance companies face this issue constantly and often in partnership with insurance departments and law enforcement. Ignoring history and being aggressive in pricing with new products in the insurance industry has proven to be a failure quite often as evidenced by Long Term Care insurance, Universal Life and Disability Insurance (from the 1980’s-1990’s). All of those types of insurance policies were introduced by traditional, well-managed insurance companies, yet all three types of policies faced issues with universal life and LTC still facing major issues. Ignoring history does not work in any field and will definitely not work in the insurance field. Technology should be used to augment the current insurance world rather than replace it.

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