Read the full interview HERE
We recently interviewed a founding member of Lemonade, the insuretech unicorn due to list in June 2020, on the core differences in the Lemonade business model versus traditional carriers:
- Why there is a misalignment of incentives between insurers and insured
- Core differences in Lemonade's business model versus traditional carriers
- Challenges Lemonade faced negotiating reinsurance
- Structural changes in insurance distribution and the role of brokers
- Challenges for insurers to move away from broker channels
What was so different about the business model, for Lemonade?
Three things. The first thing that intrigued me was that there is a fundamental flaw in the business model of insurance, in that there is a conflict of interest between the supplier of the product and the customer of the product. For every dollar paid in a claim, to the customer, is one dollar less of profit to the insurance company. Said the other way around, for every dollar that an insurance company doesn’t pay in a claim, is another dollar of profit to the insurance company. So the supplier of the product and the receiver of the product is in an inherent conflict of interest. There’s almost no other business that one can think of, where the business person and the customer of that business person are in inherent conflict. It’s crazy, if you think about it. That was the biggest problem that Lemonade sought to change.
The other issue was that, insurance was meant and was originally created, as a mechanism for society to help themselves. It was a method of sharing the risk between all members of society. When Lloyd’s of London was first created, it was created as a concept between ship captains that were going to the New World and if the ship was damaged, the people who invested in that voyage would lose tremendous amounts of money. If that ship made it to the New World, the investors would make a lot of money. Lloyd’s of London was created by ship captains, coming together and deciding to share that risk, among themselves and among the investors, of those various voyages. If a voyage was successful, many people would share in that successful voyage and if the voyage was not successful, many people would then chip in for the losses. It was about people helping each other.
Yet, somewhere along the line, insurance became not about people helping each other, but about we versus them. A big building, called insurance, against their customers. So the other concept was, people say, doing well by doing good. Helping the world become a better place.
Finally, because Daniel and Shai were technologists, they were technology executives, it was crazy that insurance was not using technology as well as it should. But also, when the insurance industry was using technology, it was to benefit the insurance company and not to benefit the customer. It was a way of the insurance company saving money, reducing their expense ratio, without necessarily benefiting the customer, by lowering premium. It was not customer-focused technology. It was all back-office technology.
We decided to create Lemonade, to solve these three problems. Eliminating the inherent conflict of interest, in the insurance business model. Give back to society, by creating what we called the annual give back, where 100% of the unearned monies were given to charity. Not just any charity, but the charity chosen by the policy holder. We eliminated the conflict of interest, by the way, by creating a SaaS model, software as a service, where we took a percentage of the premium, no matter what. So if there were less losses, we got the same amount of money. We didn’t benefit by not paying claims, because we got the same fee, no matter what. Whether there were a lot of claims, or fewer claims, we didn’t get more fee by not paying out claims. Where there were low claims, the charities made more money, not us.
Finally, we created a user interface; we used technology to create a sweet and delightful experience for the customer. Yes, we used it to lower our own expenses, but we did that as a way of lowering our premium, not making more profit for ourselves.
What’s the biggest risk to Lemonade’s business model?
It’s funny; we had these three new theories and they were new. In addition to that, we were very worried about something that all start-ups are worried about, which is, is anyone going to buy from the new kid on the block? When you’re in insurance, you’re really worried about that. If you think about insurance, it’s about stability, a rock in the middle of the ocean. You’re in good hands; you’re on your side, you have a neighbor. The theory is that you’re protected by someone that’s been around for a long, long time. They’re not going anywhere; they’ve got a lot of money. They’re financially strong.
Now we have a little company, with a funky name of a summer drink and we’re wanting you to trust us, with insurance. The saying, at the beginning, when we were developing our company and we wanted to disrupt a trillion-dollar industry, that’s been around for hundreds of years was, will the dog eat the dog food? Not that we meant to be insulting to our customers; that was not the point. We were creating a widget; will anybody buy the widget? Will anybody buy into our concept? I remember, on September 15th, 2016, we pressed a button to launch the Lemonade insurance policy. We wait to see if anyone is going to buy, because everything is digital. We don’t have brokers; we don’t have agents. We press a button and we see if anyone goes on their phone and buys the policy.
You worry that nobody is going to buy. You’ve spent a year making this thing. You took millions and millions of dollars from venture capitalists, in our case, and you worry. I worried. For about 14 seconds, I worried, and then somebody bought. Then somebody else; then somebody else. It was about 70 people in the first week, I think. Then, eventually, within two years, somebody was buying every second of the day. That was pretty good, but we didn’t know that at the time.
What do you think is the biggest limitation to Lemonade scaling?
I don’t know if there is. That’s the beauty of technology. You have a big world out there, so you expand geographically. Last time I looked, in the United States, we were in states representing 80% of the population or something like that. Lemonade is already in Europe.
Read the full interview HERE