(Image: Lemonade homepage.)
Peer to peer (P2P) insurer Lemonade and others like it are taking the insurance industry by storm. They are being hailed as disruptors that will change the face of insurance, possibly shaking the foundations of established insurers. People are paying attention, from insureds to regulators to investors, while many larger insurers are already making investments in P2P companies, and large reinsurers are covering their books. However, the real question is: are they really all that disruptive? The answer is yes and no.
To start, these products and programs are not reinventing insurance. If anything, they’re going back to basics. Insurance started with groups of people banding together to cover the group’s losses; when Phoenician ship owners started to insure each other’s vessels and cargos, that was essentially P2P insurance. Mutual insurance companies are owned by the insureds (just a reminder: State Farm is a mutual, Lemonade is a stock company) and were often organized at the community level for the community’s mutual interest—hence the name “mutual.” At the most basic definition, P2P insurance, where like-minded people are banding together, is not a new concept at all. It’s the core concept that the industry was built on.
So, what’s the big deal?
What’s Brilliant About Lemonade
There are three brilliant aspects of Lemonade and others like it. The first is that Lemonade took the captive concept and applied it to personal lines. The entire captive industry was developed by commercial insureds (such as doctors and lawyers needing professional liability insurance) that figured they were better off creating their own captive insurers to manage their risk better and cheaper than large commercial insurers. Captive insurance has grown steadily ever since. The look and feel of Lemonade screams captive program—it acts as the captive manager, taking a 20 percent management fee and manages the program of a targeted set of insureds (socially conscious individuals that would like to see their insurance purchase also better society). Don’t be surprised if the Lemonade team comes up with other focused insurance programs for other targeted market segments.
The second brilliant aspect of Lemonade is in the execution. From their marketing and positioning to their website and user experience, Lemonade has rung all of the bells and has made regular, non-industry people care about insurance by bringing it into the social consciousness conversation. They have done what many thought was impossible: made insurance interesting. Articles and notices of investment show that Lemonade garnered significant media and financial attention before they wrote their first premium dollar.
Where Lemonade can claim the label of disrupter is its use of technology to interact with clients both on the web and via mobile. They are executing one of the best digital interaction platforms in the market, one that many standard insurers are looking to emulate. Digital strategy is one of the key areas where most insurers are looking to make significant improvements. Being a startup without the existing system and legacy baggage of a traditional insurer, Lemonade has come out of the gates swinging with a top-notch user experience that provides instant user gratification. Will this straight-through processing approach that Lemonade created impact their long-term claims results? This remains to be seen.
The third brilliant aspect of Lemonade is it was founded by highly respected insurance professionals that brought instant credibility to the marketplace and instilled confidence in investors and reinsurers. Ty Sagalow, Lemonade’s CEO, was one of the first insurance executives to launch cyber risk insurance more than ten years ago, well before most insurers understood cyber liability. Mr. Sagalow is no newcomer to innovation or thinking out of the box and understands the mechanics of running a profitable book.
Will Lemonade work?
While it’s most likely to generate market share and possibly launch similar programs for highly focused individuals, it remains to be seen if it will generate contributions to targeted charities. By Lemonade’s own math, it’s going to require strong controls on claims. They need to generate a loss ratio of under 40 percent to see any charitable contributions (Lemonade management collects a 20 percent management fee, 20 percent is spent on reinsurance and 20 percent is allocated for reserves, which they explain as the Lemonade “rainy day fund” on the website, leaving 40 percent for claims and charitable contributions).
Lemonade ran a 69.6 loss ratio for 2016 and 36.6 for Q1 2017 but being so new, there is no telling how their loss ratio will develop. By comparison, A.M. Best reports the U.S. homeowners industry had a 52.8 loss ratio with 21 out of the top 100 under 40 percent. This will be interesting to watch; if Lemonade can’t make good on charitable donations, their socially conscious clients may be at risk of defecting.
Is P2P insurance new? No. What is new is how P2P insurers are interacting, attracting, and including insureds in the insurance process and aspects of the management of the book of business in today’s market.
How to Compete?
Regardless of whether you agree or disagree that Lemonade is reinventing the insurance industry, the key question is: how do you compete against new entrants like Lemonade? There are several things to consider:
- Don’t be afraid to fail. Being risk averse, the industry can overthink decisions, but the new digital age encourages those to run fast, fail fast, and try again. Being first to market isn’t key anymore, it’s about figuring out how to do it right, which may take several false starts. First efforts may not be hugely successful, but the key is to learn from the experience and refine the next iteration.
- Create new insurance programs. This is not new to the industry, but insurers need to be more cognizant of the role that social awareness plays; programs targeting highly active/health conscious people need to be different from those more focused on environmental or social issues. Stock life insurers adjusted in the past to the benefit mutual life carriers had with yearly dividends and also started paying dividends; insurers know how to adjust to changing market conditions, they just need to start doing so immediately.
- Greenfield Operations. One of the major benefits Lemonade has is that it is starting without the burden of legacy systems. Insurers can try to emulate this by setting up a greenfield operation. Keep in mind that doing so is not always a turnkey solution—it’s a commitment that takes time and significant investment.
- Wrap and Renew. Legacy systems are one of the major stumbling blocks insurers face when trying to create an immediately reactive environment. Leveraging digital process automation platforms can insulate the front office from the back office and provide straight through processing, flexibility, and digital capabilities insurers need today to be competitive.
- There are many startups in this space and investments being made; however, there is no silver bullet solution. An insurer’s product or investment selections must be made with the main goal of supporting and extending core business strategy. Insurers should focus on:
- Artificial Intelligence. AI can aid overall processing and give insurers the ability to control and learn from client interactions. AI can also manage books of business through scenario planning to keep insurers on a profitable path by continuously monitoring book performance.
- Digital Automation Platforms. This is one area where, as an industry, insurers are far behind others such as retail and telecom. Insurers need to select specific platforms, tools, and applications that enable not only straight-through processing but interface tools and apps.
- Omni-channel experience. Insurers need to interact seamlessly with the insured and the agent on whatever channel, device, and/or app the user chooses. Whatever functionality an insurer rolls out needs to work across channels and enable users to switch channels without having to restart the transaction.
It’s an exciting time to be in the insurance industry. Markets and clients are changing, and nimble insurers are taking advantage of emerging trends. Lemonade is the poster child for this change by changing the conversation. In the long run, this disturbance will result in a market that is more responsive to the insured and provide insurers the opportunity to fundamentally change how they work with both their sales channels and the clients themselves.