A Remarkable Journey of an Insurance company – Lemonade!

Lemonade’s IPO is a fugitive success. It has gained a lot of media attraction, everyone is talking about it- New York Times, The Wall Street Journal, CNN. Despite all people don’t seem to understand what this company is actually all about. Let’s start from the beginning! 

In 2017, a Los Angeles man in his mid-20s made a video call describing how his camera and other electronic devices have been stolen. Later this video is submitted to his renter insurance provider, Lemonade, who paid the claim of $677 in just two days. After three months, they find another video of the same man changed his appearance and using a different name, mobile number, and email address, claiming for his stolen camera worth $5000. But this time, the algorithms that are the most crucial concept of Lemonade’s highly automated systems flagged the person as suspicious. Last year, the same person tried again appearing like a woman, only to be foiled once more by Lemonade’s computer. 

Lemonade founder Daniel Schrieber and Shai Wininger using the combination of Artificial Intelligence, mobile apps, and other tech-centric methods, along with behavioral economists to disrupt the centuries-old insurance industry. They use this technology to battle insurance fraud. This company offers homeowners and renters insurance in the United States and also gives profits to the non-profit by the community under Giveback. 

The main significant problem faced by Lemonade was the lack of transparency and conflicted interests. It was astonishing for the industry that is playing such an important role in the society is perceived so negatively. Insurance fraud is the major symptom to fill such type of distrust within people. That’s why Lemonade took AI help to bring transparency to this system. This industry is not a place where many innovations have done, insurance has largely gone untouched by the technology for more than a century. 

Therefore, Lemonade brought an innovative change to this industry and set out to make insurance lovable, and also transform it from necessary evil to social good. So they built a compatible model with the advanced feature of AI and behavioral economics which will detect fraud customers. Along with that Lemonade invented a ‘Giveback’ where leftover premiums are donated to the charities the customers choose. 

In 2018, Lemonade took $57 million premium revenue from 425,000 customers, out of which 75% of them are regular customers and 35% are buying them for the first time. They have already expanded their work in 22 states, a 170 employee New York-based startup that is assuming the double in their revenue next year with the expansion of 50 states and Europe.

What do they mean by Behavioral economists?

Lemonade is not like an ordinary insurance company, they rather have some unique corporate structure. It has been divided into 2 separate silos- a for-profit silos, charges the fixed fee when the customer buys insurance, and,  a non-profit silos, it settles the claim. It will take a flat rate and treats the rest of the money as yours. This money will go to the funds collected from other policyholders and use it to pay claims when they’re due. And the leftovers will be given to the charities they choose. The overall concept for this that they will do anything to pay their claims since they cannot potentially benefit to deny the claims. This feature is known as ‘Giveback’. Because of this customers are unlikely to commit fraud as they know they will be cheating the fund donated to the poor-charity. Giveback has created a vitreous cycle by changing a bilateral relationship into trilateral that reduces the conflict of interest and brings the best behavior within the people, which helps to generate trust in this industry.

The company uses a unique approach to its marketing. Unlike a traditional insurance company, rather than selling the policies Lemonade would become a licensed carrier and put and shows the claim liability on its own balance sheet. It will show that they could pay claims faster. 75% of the revenue is used to fund customer claims, buy reinsurance, pay taxes and fees, others to the charity whereas 25% is used for administrative costs and potential profits.

Another unique approach led the Lemonade’s success is in terms of the customer reviews, employee engagement, etc. they played the ‘Word Association Game’ with ‘Insurance’. People are tweeting about Lemonade being ‘Instant’, ‘fun’, ‘social good’. The younger customers are getting attracted by the new features and values and that is what entices them to enter the market.

Lemonade has grown so far dealing with the traditional issues. But still becoming a real, regulated insurance company it will need more time and capital to grow. According to the data, Lemonade has raised $180 million in 2017. And the company made revenues of $300 million in 2019.