Lemonade has built a “millennial-friendly” insurance company that has digitally innovated two key stages of the insurance value chain: the company has built a paperless direct to consumer acquisition process; and the company has developed an algorithmic claims processing system to increase the speed and accuracy of their claims processing decisions. As a result, the company is both disrupting the traditional broker-intermediated sales process and undercutting the market dominance of the legacy insurance carriers.
Lemonade is structured differently from traditional insurance companies in a few ways. On the customer acquisition side, the Company uses a completely online/mobile interface to collect relevant customer information, display pricing, and confirm customer purchases. This model is in contrast with the more traditional independent agent-intermediated structure (depicted below). As a result of the direct-to-consumer model, the company can better manage the customer experience and control the flow of ancillary revenue products/services. Though incumbent players point to the fact that they too offer online insurance portals, the inherent tension created by having to hand over clients to assigned independent agents can often lead to a less smooth customer onboarding experience.
After customers are onboarded. Lemonade claims to use algorithmic models to more quickly differentiate between authentic and fraudulent insurance claims. Thus, allowing it to pay out on legitimate claims more quickly (in as little as two days in some cases). The Company’s reliance on algorithmic decision making proved problematic in its early days. Because the models did not have much customer experience, they were “driving loss ratios – the amount it pays in claims divided by the premiums it collects – of an unsustainable 166%, compared to 65% to 70% for large insurers”. By Q1 2019, that ratio had fallen to 86% and the Company expects the ratio to fall even further as its models gain more experience.
The undisputed winners from this disruption thus far have been Lemonade. The company has posted impressive growth figures since inception:
“In 2018, its second full year offering renters and homeowners insurance, Lemonade took in $57 million in premium revenue from 425,000 customers, 75% of them under 35 and 90% of them buying such insurance for the first time. Already operating in 22 states, the 170-employee New York-based startup expects to double revenue this year and expand to all 50 states and Europe.”
Though the Company still only represents c.0.1% of the combined homeowners and renter’s insurance markets (as compared to 19% for State Farm and 10% for Allstate), the fact that the vast majority of its customers are first-time customers should be of concern to insurance companies as they think about long-term growth prospects. However, Lemonade’s inability to win over existing insurance customers provides some evidence of just how sticky insurance customers are to their incumbent policies.
As indicated above, if Lemonade’s customer growth accelerates in magnitude and retains its composition, it could deprive traditional insurance carriers of a key source of their future growth. Moreover, if the Company’s insurance models continue to improve with time and meet/surpass traditional methods, Lemonade could gain a cost advantage on traditional players, which it can either retain in the form of profits or share with customers in the form of more attractive prices.
Traditional insurance agents are also losers from this move to DTC insurance sales. With the advent of more advanced mobile apps, data capture technologies, and increased data security, insurance agents are under added pressure to justify their role in the insurance value chain (and the margin their present position commands). If traditional carriers are forced to re-assess prices / the customer on-boarding experience in order to compete with firms like Lemonade, they may opt to build their own direct digital channels (which cannibalize customer flows to agents) or remove the role of agents for all but the most complex of insurance cases.