Lemonade insurance - is it for me?

Based upon the recent post by Lemonade blog, claiming the world record for claims payment speed– I wonder Lemonade insurance – is it for me?

Details

According to this article, “Brandon” lost his expensive jacket and filed a claim, he was paid within 3 seconds. Lemonade claims bot, cross referenced against his policy, anti-fraud detection, approved it and sent payment…

The payment was for $729 after Brandon’s $250 deductible. There is reference to Brandon paying $5 per month for his insurance.

Great news or is it?

Loss ratio

(Disclaimer: I am not an actuary but I play one on TV. Obviously there is no statistical credibility to judge an entire portfolio or business model based upon a single policy loss ratio -but that’s all I have to use. Nor would the insurance industry bode well after events like 9/11 or Hurricane Katrina)

Based upon these details that we have, Brandon’s insurer would have been at a 1215% loss ratio on his policy. So that’s a win in terms of the economic value of his individual policy. Not so great for his insurer. But keep in mind his insurer’s capital is his and other peers money- that capital is where his claim is being collected/paid.

Granted this is a small property damage claim and if there was an apartment fire or policy limits claim, you would imagine Lemonade A.I. will have different requirements and proof of claims- but as a peer in the pool, money is money. I don’t think there is a difference between 400 claims like the example above or one apartment fire. I am indifferent to dying by 1000 cuts vs. 1 giant loss.

I’m sure Brandon is happy with his quick ability to collect in a claim, but if I was paired with him as a peer, now I am in a situation where my charity of choice or maybe my claim may be in jeopardy of collection – with less capital available to pay my future claim (assuming no reinsurance protection).

It raises the question, am I at odds now with Brandon do I want him to file claims? Also, how did I get paired with him?

Renters Insurance

Renters insurance (which is the primary product Lemonade has started offering) has one of the largest premium to limit imbalances in the industry, which has historically been great for buyers of insurance but bad for sellers (based upon historic results). Reinsurance purchases help lower the volatility associated with this imbalance but doesn’t eliminate entirely.

Again in this model the insurance consumer/purchaser is both so this volatility is borne by the buyer.

Renters insurance was a nice way to acquire customers at a early entry point, grow with them throughout their lifespan, and offer additional product overtime. I’m sure this is Lemonade’s plan (more premium under management =more fees) – but is it the customers’ plan (more risk + more peers+ more diversification +more capital)?

Anti Fraud technology

The details of the anti-fraud technology, admittedly, I am not aware of. If the technology has to do with facial recognition, pantomimes, and virtual lie detectors – very impressive and exciting. I believe Christopher Walken’s character in the movie True Romance would also be impressed (CW may be possibly disrupted as well).

But if this digital, lie detector, technology is what is used, how come we don’t hear more about it? Would Lemonade be better suited as a business model licensing this technology to current insurance carriers, law enforcement, etc. Why try to start an insurance company? With all the regulations, capital requirements, hurdles, barriers on entry seems like a tougher way to utilize this technology.

Claims

If not, is the speed of the claims payment and unbalance between limit and premium setting up a system attracting fraudulent claims? How did they verify that this claim and in fact was accurate? Did Brandon just walk away with $729 of his peers money?

Does this type of technology, speed and low touch system attract a customer who will file more than average amount of claims? Do the premium rates charged by Lemonade assume similar type of claim filing activity as historic industry results? The data used to come up with premium rates may have been based upon the arduous task of filing a claim, if so, then the new ease of filing claims may increase frequency….Hopefully they looked at companies like “Legacy Chubb” as a business model for claims frequency and rates when claims are paid with such simplicity.

Otherwise when historically filing a claim, the insurance industry (although some may complain) has appropriate, proven, procedures & policies in place to prevent nuisance and fraudulent claims. Ultimately protecting the capital of policyholders to be around in the event of a claim.

There are other systems mostly in government that have lower hurdle rates for proof of a claim and/or to receive payment. Does eliminating these protocols or making it easier/quicker to receive remuneration via Lemonade closer align the pools with the success rates of government programs? If so, then the expenses associated with operating these pools should be adjusted accordingly.

Reinsurers

How do lemonades reinsurers feel about this?

Reinsurers have historically relied on quality underwriting quality, strong claims payment/procedures, and good counter-parties to protect their capital… what are the opinions of lemonades current reinsurance panel if this is a trend that will continue?

If loss ratios like Brandon’s policy are going to be par for the course, is this sustainable at these prices? Will they push for more rate or % of premium collected?

Will other stakeholders where those with vested interest push-back as well: for example the charities, the other peers, and any other vendors who are involved based on the success of the portfolios?

Rate Change

Traditional insurers have the ability to increase or decrease premium rates based upon the success or lack there of of their portfolios. These premium rates are filed with the department of insurance in varying states, which are approved by the respective governing bodies. The goal by any insurance consumer should be to partner with an insurance carrier or in this case platform, who has the best in class risk, and their selection process, so therefore can pass lower rates and savings onto the consumer.

Thoughts

Is it for me? Not Yet (big difference from No or Never).

At this point, a lot of this information is not public and easy to understand, it’s difficult to recommend that our audience utilize this platform if they are truly just trying to insure their risk effectively. But that may change as more information is released.

Although this is a simple example with really no details for us to analyze, at first glance anecdotally there may be some concerns over time with the speed of payment (for everyone but Brandon). Legacy Chubb was a business based upon low barriers to claim payment (look at their success), however, the product was not the cheapest in the market & this better product came at an extra cost to the consumer.

I realize it is not fair to judge an entire business model based upon one claim or event nor would competing insurers (think WTC or Katrina), but these are some thoughts after the recent post.

Considering the No claims bonus/donation to charity might be in jeopardy for Brandon’s pool, the charity of choice might not see a desirable outcome – the donation. So it may not be as good for charity as advertised. As previously discussed, the traditional insurance industry is actively involved in charity already, so the good news is charities will still receive donations from the traditional insurers.

Again this maybe more questions than answers but it is too early to tell…but I am excited about this technology and what other technology has to offer the industry..