“The oldest new idea in insurance.”

That’s how Lemonade, the world’s first self-described peer-to-peer insurance company, sees itself. The company launched yesterday in New York state, offering renters and homeowners policies on its own paper.

In an interview with IA, Lemonade CEO Daniel Schreiber says he gets various reactions when he describes the company’s model: “Some people say, ‘Oh, it’s a disruptor,’” he explains. “So different, so new. And other people say, ‘This is what insurance used to be like.’”

He notes the concept of the sharing economy is about using technology to reconstruct modes of social interaction that were in vogue a couple hundred years ago. Schreiber likens what Lemonade is doing to the early days of the Lloyd’s coffee shop where people sat around a table and pooled risk without intermediaries, big corporations or TV commercials. “Lemonade is going to be using technology to bring people together with a common cause and allow them to insure in a way that has similarities to the way it was done back then,” he says.

But many in the industry are wondering if the company's new twist on an old idea will be enough to change insured behavior and alter traditional actuarial data.

Streamlined Pricing and Underwriting

Lemonade offers consumers a “lower premiums, more heart, no paperwork” mantra, and its process is entirely mobile. It advertises policy pricing starting at $35 a month for homeowners and $5 a month for renters policies for “equivalent” coverage of national p-c carriers, which Schreiber says is based on ISO forms.

“What used to take weeks or months now happens in minutes or seconds,” says Shai Wininger, Lemonade president & co-founder. “It’s what you get when you replace brokers and paperwork with bots and machine learning.”

Schreiber notes Lemonade’s underwriting process is “much more streamlined” than traditional underwriting—so streamlined, that in a test case on lemonade.com for a homeowners policy, Lemonade only asked the consumer for the following: name; address; whether the property was a house, condo or co-op; square footage; presence of a fire or burglar alarm; presence of jewelery worth more than $1,000; email and birthday.

Within seconds, the site showed a star rating for the property on building age, building durability, distance from coast and distance from fire station. A quote appeared with the option for the consumer to begin coverage that day. In general terms, the quote listed what’s covered and what’s not—along with a link for them to view the full policy.

Consumers can change their deductible and coverage amounts via a menu with additional guidance only available through the “Ask Us Anything” tab. Without further verification at that point in the process, the consumer could enter credit card information to pay for the policy.

Giving Back

In addition to digitizing the entire insurance process to save costs, Lemonade claims to reduce costs through giving—a strategy it calls “a reversal of the traditional insurance model.” Lemonade treats premiums as the insured’s property and returns unclaimed money during its annual “giveback” by donating underwriting profit on the customer’s behalf to a charitable cause of their choice.

The company says when customers choose their cause, it creates virtual groups of like-minded people, or peers, and the company uses each group’s premiums to pay their claims, giving back leftover money to their common cause. Consumers can either select from a list of common charities or nominate their own charity.

In a press release, Lemonade claims that fraud consumes as much as 38% of all money in the traditional insurance system, “inflating premiums by $1,300 and making the claims process protracted and unpleasant.” What’s the source of the statistic? Schreiber says, “[We relied on] Wikipedia’s entry on fraud, to be honest. I wouldn’t want to try to defend that number.”

But reducing fraud—and the savings that come with it—is a linchpin of Lemonade’s business model. The company says that while the insurance industry accepts fraud as a cost of doing business, Lemonade’s behavioral scientists have mapped the underlying drivers and provided the company with a blueprint for building a new kind of insurance carrier—with “giveback” as a part of the solution.

Such a concept is similar to that of a mutual insurance company, where policyholders—not stockholders—own the company. While Lemonade’s model has its distinctions, the key question is whether Lemonade’s policyholders will behave differently than those of a mutual insurance company. 

Dan Ariely, Lemonade’s chief behavioral officer, says consumers know that denying a claim puts money in the insurance company’s pocket, so it “brings out the worst in us all.” Ariely explains Lemonade avoids conflicts of interest by taking a 20% flat fee and then giving unclaimed money to the policyholder’s cause of choice.

Because the company doesn’t take unclaimed money, he says Lemonade “can be trusted to pay the claims fast and hassle-free. As for our customers, knowing fraud harms a cause they believe in, rather than an insurance company they don’t, brings out their better nature too.”

Research Rationale?

Is Lemonade’s model backed by actuarial science as well as behavioral science? Schreiber says, “There is data, and with data you can create models, and I guess you can assume the New York Department of Financial Services would not give us a license if they didn’t feel like this was modeled in a conservative and responsible way.” He adds, “We also received an A exceptional rating from Demotech, and the likes of Sequoia Capital wouldn’t have invested in us, and the likes of Lloyds wouldn’t have reinsured us” if Lemonade’s approach wasn’t sound.

Schreiber agreed some elements of the company’s model are “new and untested,” adding that time will tell if the claims ratios are very different.

“There is a lot that is still yet to be determined,” he points out. “But the basic actuarial models that are using disciplines that are well understood from data that is widely available—I don’t think there is anything that is too scary about that. That’s not to say there is no innovation. We’re creating a business model that is different from the way traditional insurance companies operate, but the actuarial side of it is not particularly challenging, even if it is novel.”

As for Lemonade’s plans, Schreiber says the company doesn’t envision working with agents or brokers. “Our cost structure assumes direct to consumer and passing on those savings,” he says. “People who want to have a broker and want that experience are already well served. But for people who are comfortable with self-service through technology, we’re providing an option.”

Although the company currently operates in New York only, Schreiber says Lemonade has aspirations that may include geographical expansion and product line expansion. “Homeowners is a $90 billion market in the U.S., and for a company of our size, that is a large market to go after,” Schreiber says. “So far, New York is receiving us very warmly, so we want to make sure they all get the experience that we’re promising. When we feel like we’ve proven this works, then we’ll look toward other lines and geographies.”

Katie Butler is IA editor in chief.