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Can American peer-to-peer insurer Lemonade bring a new type of insurance to Europe?

In a drive to expand beyond the “water’s edge”, US home and renters’ insurance start-up Lemonade has set its eyes on Europe. The company’s message (“Europe, forget everything you know about insurance!”) addressed to both the Old Continent and its incumbent insurers – some of whom happen to be Lemonade investors – again puts the spotlight on the sustainability and resilience of the company’s disruptive model.

First and foremost, Lemonade is a digital insurer that deploys algorithms in its underwriting and fraud-prevention processes, and uses chatbots to make underwriting faster and more cost-efficient (chatbots currently undertake 20 per cent of underwriting at Lemonade, although the plan is to increase this to 90 per cent when the algorithm matures).

A delicate imbalance


As for the long-term viability of the Lemonade P2P insurance model, it is still too early to make a verdict. Lemonade launched in September 2016 after a successful seed round raised $13million. Although some experts warn that it takes at least five years and tens of millions of dollars before it becomes apparent that an underwriting model works, many expect Lemonade to incur bigger losses in the future rather than break even, unless it tones down its original value proposition for the sake of profitability.

While Lemonade’s acquisition rate is impressive, with a quarter of a million customers reported in September 2018 (up from 10,000 a little more than a year earlier), its loss ratio, albeit on the decline, is still the double of the industry average at 116 per cent. However, at this stage – with $180million raised in three funding rounds and reinsurance happy to provide a cheap form of capital for the start-up – stopping the gaps that underwriting losses cause in the balance sheet is not a problem.

But the question is, how long are venture capitalists and reinsurers going to persevere? While sinking money into a promising start-up is part and parcel of a venture capitalist business, reinsurers will make premium readjustments if an insurer transfers too much of their risk to them. In an online article from June 2018, Matteo Carbone and Adrian Jones point out that in in Q2 reinsurers incurred $3.53 for every $1 they received in premiums from Lemonade. Although these losses are negligible for giant reinsurers such as Lloyds, who are happy with the aura of trendiness and innovation start-up clients lend, inability to recover their losses in the long run may become a turn-off.

Lemonade CEO Daniel Schreiber, a former SVP Corporate Marketing at flash memory manufacturer Sandisk, maintains that the payback (the leftover from the underwriting profit that insured clients can donate to a charity of their choice), the cornerstone of the Lemonade model, won’t be in any way impacted by loss ratios.

However, Carbone and Jones are convinced that the Lemonade pricing model is not viable and the amount of the rebate – despite the CEO claiming otherwise – is bound to decrease. To make their case, they point out that Lemonade has already increased the flat fee, the company’s share of the premium, to 25 per cent in March 2018 (retroactive to 1 January), although a content marketing Lemonade piece on The Dubs from September 2018 still features (at the time of writing) the 20 per cent enshrined in its disruptive model at the outset.

Detractors of Lemonade believe that despite all the hype, the company will suffer a similar demise to Guevarra, the UK’s poster child of P2P insurance. Unlike Lemonade, though, Guevarra was a broker, and had to close its operations following a failure to upgrade and get registered as a full-stack insurer. Paul Anderson, Guevarra’s CEO, when asked about the causes of the start-up’s failure, was quick to point a finger at incumbent insurers lamenting how high the barriers to entry to the insurance market are. He also criticised Lemonade for watering down their original model to curry favour with incumbents, which paradoxically might be a sign of Lemonade’s agility and a strong potential for survival.

If you can’t go it alone, collaborate!


It seems that the fall of its fellow P2P insurer did teach Lemonade a lesson about incumbent buy-in. In May 2018 Lemonade launched Policy 2.0, the world’s first open-source insurance policy, intended to replace the antiquated English of traditional policies with something more approachable. Policy 2.0 lets insureds flexibly change the coverage of their insurance policies, rather than having to ask for a quote again and take out another one. Lemonade has invited competitors, regulators and even customers to make contributions to the policy or edit it, but so far it seems that the objectives of Policy 2.0 sound too radical for incumbents to have an appetite to co-operate.

As always, a lot will depend on timing. If Lemonade can acquire a critical mass of customers before the enthusiasm of its investors and reinsurers is dampened by bad results, it will stand a good chance of becoming the fierce disruptor it wants to be seen as within the industry. At present, 75 per cent of Lemonade’s customers are under 35. With 86 per cent of millennials living in emerging and developing economies, aging and heavily regulated Europe doesn’t sound like the best choice embarking on a global expansion journey, but if Lemonade cracks it, the global insurance market will be its oyster.

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