Lemonade
The Insurance Company Built for the 21ˢᵗ Century
Insurance companies play a very important role in society. They are supposed to protect people during tough times, but have you every seen anyone who’s excited about getting a new insurance policy? The answer is probably no. This is because if you have ever had the pleasure of dealing with insurance companies, you would have realized how inefficient and antiquated the entire process really is.
Technology veterans Daniel Schreiber and Shai Wininger saw an opportunity to build an insurance company from the ground up. They used a modern tech stack to provide a seamless user experience. They also realized that a vast majority of people did not trust their insurance providers. We have all heard stories about insurance companies trying to avoid paying claims because they are incentivized to do so. This puts their interest at odds with their customers. In 2016, Lemonade was launched in New York on the pillars of transparency and aligning their interests with the customers. Lemonade introduced a totally transformative business model built on the foundations of behavioural economics.
The company has raised a total of $480 million and is valued at over $2 billion. It has also grown rapidly and went from an annual recurring revenue of $1 million in 2017 to $100 million by the end of 2017. Suffice it to say that the company has raised a lot of money, is growing extremely rapidly and has recently filed papers with the SEC to go public on the New York Stock Exchange.
So let’s understand how lemonade revolutionized the insurance industry.
Unique Business Plan
Lemonade’s business model focuses on transparent fees, easy claim settlement and social good. We will be discussing each of these attributes in more detail later. The fee structure makes sure that the interests of the company and their customers are well aligned. This helps them gain customer trust and confidence, something that the big insurance providers lack. The premium paid by customer is divided into three categories :
- 20% flat fees go to Lemonade
- 40% goes to reinsurance to cover major claims
- 40% used for claims ; if there are no claims, they donate the money to a charity of the user’s choice.
Technology
Technology is deeply engrained in Lemonade’s DNA. The founders made a conscious decision to build the entire tech stack in house. In order to provide a superior customer experience, they improved every stage in the insurance lifecycle. From purchasing an insurance policy to filing a claim, the company has used technology as much as possible, reducing human interference to a minimum.
They use bots for selling policies and handling claims.
- AI Maya provides customer support in English and in German, through the Lemonade mobile app. The chatbot allows customers to purchase insurance, file claims, and resolve customer service inquiries. 100% of the policies purchased on Lemonade are bought directly using Maya.
- AI Jim on the other hand allows users to file for claims effortlessly. To file a claim, users record a video explaining their claim and upload it. AI Jim reviews the claim, cross references it to the customers policy, runs fraud detection algorithms and finally approves of rejects the claim. This entire process takes a matter of seconds. The company has also set a self proclaimed world record for processing a claim, approving it and making a bank transfer in 3 seconds.
The use of AI significantly improves an insurance company in every aspect. It increases underwriting precision and gages premium more accurately. Customer experience is enhanced by using an app which provides a swift and paper-free processes. Finally, it helps lower claim costs by reducing fraud and increasing pricing accuracy.
Lemonade uses big data to issue insurance policies. It categorizes customers in relevant risk groups and quotes a premium accordingly. Over time, the algorithms get better at grouping users that share a similar risk profile. As more data accumulates, recursive risk patterns emerge which enabling more precise grouping.
Social Good
Lemonade is the only insurance company in the world that is a Public Benefit Corporation. This means that even though the company is a for-profit entity, they have a fiduciary duty to balance profits with social responsibility. This transforms the image of the insurance company from a necessary evil to a social good.
The company has taken a stand on social issues like refusing to insure guns over $2500. They also chose not to invest in fossil fuels which could be lucrative but does not align with their social responsibility.
“Lemonade has over $100m in investments — none of them in fossil fuels — and we’re committed to keeping it that way.” — Daniel Schreiber
Behavioural Economics
Behavioural Economics plays a very important role in the smooth functioning of the platform because at its core, insurance is all about building trust between users and insurance providers. The company’s commitment to investing in research and development in this field can be highlighted by the fact that Dan Ariely is Lemonade’s Chief Behavioural Scientist. Ariely is a world renowned Behavioural Economist and has written a series of books including “The (Honest) Truth About Dishonesty”.
The most prominent use of Behavioural Economics can be seen in the company’s business plan. As we can see above, 40% of the premium is saved for claims. If the user does not have any claims, Lemonade donates that 40% to a charity of the users choice. This incentivizes the users to refrain from filing false claims and when they do file for claims, the company has no financial incentive to deny the claim unlike every other insurance company.
Out of all these characteristics, it is this last one that I think will be the most enduring and significant. It fundamentally cements the alignment of trust between the insured and the insurer. Albert Einstein said “The definition of insanity is doing the same thing over and over again, but expecting different results”. Insurance companies have been doing the same thing over and over without any meaningful innovation for the last decade. Lemonade is using Behavioural Economics and Social Good as tools to gain customer trust and transform the insurance industry.
