Peer-to-peer insurer Lemonade launches in New York
Steve’s breakdown: Getting in on the ground floor of a good idea like Lemonade, especially as an ad agency, is a great way to ride someone else’s wave without much investment. Worth a call.
NEW YORK, NY: A New York startup aims to disrupt the insurance industry — and the key, it says, is to get folks to behave.
One-year-old Lemonade went live Wednesday in New York with a slick mobile app that offers homeowner’s insurance for as little as $35 a month and renter’s insurance starting at $5 a month.
Lemonade says it can pull off these low rates partly because of a “peer-to-peer” model that it predicts will cut fraud by eliminating an “adversarial” dynamic that has long plagued the industry and its customers.
“Something about insurance brings the devil out in people,” said Lemonade CEO Daniel Schreiber. “Why should insurance be so adversarial, so untrusting?”
The answer, according to Schreiber, is that under the traditional model insurers profit by denying claims to their customers. In response, customers retaliate by filing false or inflated claims.
The fraud accounts for nearly 40 percent payouts, Lemonade estimates, further pushing up premiums.
Lemonade’s solution is to charge a flat fee of 20 percent for coverage so it has no incentive to fight payouts. At the end of the year, Lemonade will instead give any excess cash from its monthly premiums to a charity chosen by the customer.
“Our model suggests we’ll be giving more to charity than to our own profits,” Schreiber said. “But we do that not out of altruism. It’s enlightened self-interest.”
Lemonade has tapped Dan Ariely, a psychologist and economist at Duke University, as its “chief behavioral officer.” Armed with Ariely’s research, Lemonade is also betting it will earn customers’ good will — and their honesty — by paying claims quickly.
“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,” Ariely said.
Lemonade’s app — which ditches brokers (25 percent of the cost of insurance, it calculates) in favor of automated chatbots — has a few other techniques for putting its customers on their best behavior.
When a claim is filed, for example, the app asks the customer to shoot a brief video of themselves with their smartphone, explaining their loss or damage, in addition to filling out a brief questionnaire.
Although it typically takes just a few minutes, the sign-up process also requires an honesty pledge and signature early on — under a scary-looking FBI crest.
So what happens if there’s an honest-to-goodness disaster in New York, on the scale of Hurricane Sandy? Charities will lose out, for starters. And if the losses exceed Lemonade’s pool of premiums, it will turn to a group of reinsurers led by Lloyd’s of London and Berkshire Hathaway.
Those reinsurers, like Lemonade, are taking about 20 percent of Lemonade’s premiums to start — a cut that Lemonade expects will shrink as the company adds scale.
Last year, Lemonade raised $13 million from Sequoia Capital in what was said to be the Silicon Valley venture firm’s largest-ever seed round.