Lemonade's position is that they are a tech company offering a new approach to insurance.  Their approach to media and marketing has garnered a lot of attention.  Their first 48 hours results show an entire world watching the start-up in New York State.

So why hasn't the insurance industry thought of this before?  Umm, they have.

So why haven't they done this?  In variations, they have, however regulations bind their behaviour and options.  Lemonade is managing their brand and trying to make an old industry sexy again.  Are they as unique as they say?  Let's test it out.

The Lemonade taste test:

1)      A transparent fee to run everything.

Insurers have this too although it is more fluid than the fixed 20% fee Lemonade is committing to.  It is known as the Operating Ratio and, when combined with the Loss Ratio, becomes the Combined Ratio.  Typically, carriers work to keep a Combined Ratio at less than 100% which means an underwriting profit.

2)      Giveback And Community

Lemonade pitches this as unique however, traditional insurers give back 3 different models:

1. Stock Company Insurers pay dividends to investors
2. Mutual Company members (policyholders) have the right to excess premiums via a dividend or reduction in premiums to members
3. Corporate Citizenship which both stock and mutual insurers take very seriously.  Many of these companies play very active roles in their communities:
• Volunteering hours
• Sponsoring local charities
• Employing and investing in local communities
  
   

3)      * Subject to board discretion and the company meeting certain financial standards

After the operating expenses, other financial standards are to be met including:

• Claims reserves
• Claims incurred but not reported reserves
  
   

4)      We pay claims super fast.

While there are stories of how quickly insurers respond to claims and catastrophes there are probably an equal number of stories to the contrary.

Insurers have learned that not all claims can be settled quickly due to fraud and litigation and legal red tape.  Often, new insurers get a claims-reality check within a few years of being on the market.  Lemonade's ability to commit to this long term will be watched closely by clients, investors and competitors.

 

5)      Insurance, Explained & Can I Switch

Lemonade simplifies some key concepts with their FAQ which will be fantastic for new entrants to the industry.  Tenants who have never purchased property coverage before.  They hit the main questions with straight forward answers.

They also offer to advise your existing insurer that you are cancelling the old policy and that if you have questions, you go to the app as they have no call center/agents.

Positive approaches to earning business – make it easy for your customers.

However, this is where concerns may start to rise sooner than the claims and where disruption comes at a price.

• Lemonade simply says if you are entitled to a refund, they will help you get it.  However, when a legal contract is cancelled mid-term, penalties often wipe out most refunds. 
• By separating home and auto packages, clients may now see increases in their auto premiums due to discount bundling. 
• Claims that involve the auto and home may now be subject to individual deductibles.  When policies are not with the same carrier, both carriers will charge deductibles and the total claim may no longer be viable leaving the policyholder to suffer the financial loss they thought they were insured against.

Lemonade may be okay with their simple answers but without advisors, time will tell if their clients are content with this level of service.

6)      Errors and Omissions

Once these claims, questions and coverage gaps start to appear, Lemonade will be subjected to E&O claims.  Some will be defendable but others will need to be played out in courts. 

Insurance in most established markets is sold by licensed and regulated professionals who can explain the risks and exposures to their clients and ensure that clients have appropriate coverage. Lemonade's app is replacing most of this role and is a key trade-off in "keeping it simple" model.

Verdict:

Lemonade is an insurance company which will collect premiums, pay claims and answer to their investors and is bound by the same legislation, restrictions and protocols as traditional insurers.

Lemonade is a winner in leveraging technology for ease-of-doing business and creative marketing and traditional insurers should take some notes.

Traditional insurers and legislators must monitor Lemonade's success.  If the market determines the taste test as sweet, there is much that can be done with the existing packages and processes that have added weight to the traditional insurer's processes.

However, if the market finds the product a bit too tart, we might need to continue to disrupt to find the new equilibrium rather than settling on the old ways as there is little doubt Lemonade is disrupting the perception of the insurance market.

Lisa Smith is a Senior Consultant with Pathway Partners, Ltd.