Lemonade, an insurance upstart that offers homeowners and renters insurance policies in 23 US states, recently raised $300m in a funding round that reportedly valued the four year-old company at more than $2bn.

Here’s how the fintech insurer successfully broke into an industry dominated by powerful, entrenched firms.

A radically different – and efficient – app-based customer experience

Lemonade is focused on making the process of purchasing homeowners or renters insurance as quick and painless as possible. Its value proposition to buyers: “We promise zero paperwork and instant everything by replacing brokers and bureaucracy with bots and machine learning.” According to the
company, prospective customers can sign up for an insurance policy in 90 seconds and for as little as $5 per month.

The entire Lemonade customer experience is app-based, although buyers can also start the process through a web-based wizard, and is driven by wizard-like interactions with a chatbot named Maya.

Maya asks buyers questions about their insurance needs and based on the responses, creates a policy tailored to their needs.

Once a customer’s policy is in effect, the Lemonade app is used to manage the policy and file claims.

Changes to the policy, such as increases or decreases to coverage limits, can be made with a few taps, and documentation for claims, such as photographs, can be submitted without offline human interaction.

Lemonade uses AI to evaluate claims and boasts that it set the world record for settling a claim from approval to payout – 3 seconds.

Not surprisingly, some in the insurance industry have expressed skepticism about the Lemonade customer experience. Shortly after the company launched, insurance industry veteran Nick Lamparelli wrote:

“…yes, you can buy their insurance products through an app on your phone in which a bot named Maya will help you with your coverage selections, but it’s still just an insurance company with a fancy website. I can buy insurance from other insurance companies where I can choose from dealing with their website, walking into an agent’s office or calling them over the phone. They’ve eliminated 2 options from me, and given me a sole option that is little different from what I could have had before. And before you start screaming, “but I
don’t want to call anyone or drive to any office” just keep in mind that having options makes the experience better. Insurance is complicated enough that occasionally I would like to call someone or walk into an office and scream my head off. I deserve that option!”

While there are no doubt insurance buyers who would prefer to deal with a traditional insurance company, and might be best-served by this, the “it’s just a fancy app” criticism under-appreciates Lemonade’s customer experience innovation.

It also explains why Lemonade’s co-founders, who previously worked in tech, not insurance, were able to build a company that has gained traction in a stodgy old industry by rethinking the insurance buying process.

Lower prices

There is a general perception in the insurance industry that customers get what they pay for. Put simply, insurers that are more expensive than their peers are often seen as offering their customers better overall experiences, including when it comes to paying out claims.

But Lemonade’s tech-enabled customer experience doesn’t come at a premium. In fact, Lemonade has become known for offering policies at rates sometimes substantially lower than those of its competitors. According to the company, its policies can cost as much as 80% less than those offered by
other insurers, but it says that, contrary to criticisms that are leveled by some in the industry, there are logical explanations for this that aren’t nefarious.

Among them: because it doesn’t rely on a network of expensive humans to sell its policies, its customer acquisition costs are much lower. How much lower? According to the company, “our acquisition costs are already 10x lower than legacy carriers. This allows us to do away with punitive minimum premiums, and allows renters to save a fortune on insurance. Simple.”

Targeting first-time insurance buyers

According to Lemonade co-founder Daniel Schreiber, the company “appeals to an underserved market” and the evidence of that is that 87% of its customers are first-time insurance buyers.

Given Lemonade’s tech-enabled, app-based customer experience, it shouldn’t come as a surprise that many of Lemonade’s customers are millennials, a segment that is important to established insurers but has proven somewhat difficult for some of them to sell to.

Transparency

Some of the challenges around selling insurance, especially to young consumers, relate to the reputation of the insurance industry. Many see it as opaque and question where their money actually goes. This in turn can lead to doubts that insurance is worth what it costs.

Lemonade attempts to address this by explaining in detail how its business is structured and how each part of its business earns money. Some in the industry suggest that there’s nothing revolutionary about Lemonade’s business structure, and that it doesn’t even offer consumers much benefit, but these arguments ignore the value of being more transparent in an industry not known for transparency.

A charity component

Numerous studies have demonstrated that younger consumers are more likely to patronize brands that are socially conscious and support causes they care about. Apparently with this in mind, Lemonade has created a component of its business called giveback that allows it to support non-profit organizations its policyholders select.

Lemonade’s Schreiber explained, “After you get a policy at Lemonade, we ask you to select a cause you care about most. Unclaimed money goes to that nonprofit of your choice at the end of the year. By building an insurance product that is based on social good, rather than a necessary evil, we can give
back up to 40% of your premium to a cause you want to support.”

He added that this behavioral economics hack could also be good for Lemonade’s business as an insurer. “By urging our policyholders to choose a cause to ‘give back’ to, we are creating a community of like-minded individuals, building trust and reducing probability of fraudulent claims. If someone embellishes their claim, they are only depriving their cause.”

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