Lemonade has set up shop in Massachusetts. As Agency Checklists had predicted in June, this summer the on-line insurer officially began selling renters and homeowners insurance throughout the Commonwealth. With little fanfare and no major announcement, the company announced on August 8, 2019 that it was now live in Massachusetts.
The Lemonade story
Lemonade splashed onto the scene in December 2015 promising to disrupt and transform the insurance industry by creating the world’s first peer-to-peer” insurance company. Employing cutting edge technology, an AI Bot named Maya, and behavioral economics, the company stated that its aim was “…to deliver an insurance experience that is instantaneous, un-conflicted and downright lovable.”
While this claim of being refreshingly different, such as in taking a flat fee and then Giving Back leftover money to insured-designated profits, is admirable, the c ompany is the first to admit that it is “backed by GIANTS!” such as the most traditional of all insurers, its reinsurer Lloyds of London. In its 2018 transparency chronicles, co-founder Daniel Schrieber admitted as such when in discussing the first two years of business. ”
Lemonade has a unique business model, where we take a flat fee and Giveback leftover money to nonprofits. We do this in order to avoid being conflicted with our customers, and achieve this through a novel reinsurance structure. The upshot of this is that if we have too many claims, these are paid for by our reinsurance partners, ensuring Lemonade has a constant and healthy net “loss ratio.”
But the fact that our reinsurance agreements protect us from too many claims can’t hide the fact that, since launch, we’ve paid out more in claims than we’ve collected in premiums. Clearly, that can’t continue indefinitely.
The good news is that we seem to have turned a corner.
Lemonade’s 2019 Loss Ratio
While in 2018, the company’s loss ratio was 130%, quite high, but not as high as its H1-2017 ration of 260%, things do seem to be improving for the company. In a May 6, 2019 blog post by John Peters, Lemonade’s Chief Underwriting Officer, entitled “Nearly There: Why Lemonade’s steadily improving loss ration is important,” he explained how Lemonade’s loss ratio is turning a corner.
Insurance is based on the law of large numbers – lots of people contribute money, and it goes to a small number that have claims. As we’ve declared from day one, our results were lumpy, and in total, too high. But as Shai announced at the end of 2018, we’ve been steadily improving, and I’m happy to report we’re closing in on where we need to be to make everything work.
So what’s the big deal?
Start-up companies just don’t do that – especially while growing 500%. We’ve seen the eighth consecutive quarter of loss ratio improvement, and with increasing volume, the numbers are more and more stable, and reliable.
What will be Lemonade’s Impact in Massachusetts?
This is hard to say. While Lemonade has technology and brand recognition behind it, it is an insurance platform that primarily sell renters insurance. So while it does offer homeowner’s, typically those with homes desire a more complex product to cover all their insurance needs. With that said, however, if one looks at the auto insurance marketplace, both GEICO and Progressive have been able to break into the top 10 here, so only time will tell if Lemonade will be able to do the same in the homeowner’s marketplace.
