i3 - September/October 2017 - 27

Lemonade is revolutionizing the sleepy insurance industry.
As of June 2017, 27 percent of Lemonade's claims have been
settled instantly by its AI claims bot. The company's longterm goal is to settle 90 percent of claims instantly.
The claims bot is called Jim and was morphed from the real
Jim Hagerman, who is Lemonade's Chief Claims Officer
(CCO), and was formerly CCO of a large insurance firm. The
Lemonade team spent months moving the decision process
from traditional claims procedures and automating it using
algorithms based, in large part, on Jim's knowledge. The AI
works to understand the nature of a claim, its severity and its
urgency. It also assesses the likelihood of a fraudulent claim.
If a claim is too complex, AI Jim refers it to the real Jim.
However, Lemonade AI is still learning. In an industry
where expense ratios average 28 percent, this offers huge
savings. Lemonade's founders didn't come from the insurance world. They are technologists who have built the company on artificial intelligence, algorithms and technology.
Customers can only apply for a policy using a smartphone
and receive approval in as little as 90 seconds.
By eliminating bureaucracy and digitizing the experience,
Lemonade cut the cost of customer acquisition by 90 percent compared to traditional insurers. In part, this is what
allows it to issue a tenant policy for 68 percent cheaper than
the four largest traditional insurers.

HOW CAN THIS BE?

One answer is that while it costs traditional insurers $792
to acquire a new customer, insurance firms with independent agents spend up to $900 to write an initial home insurance policy. Lemonade issues tenant policies for as little as
$5 a month - or $60 a year. No traditional insurers - with
paper-based, time-intensive bureaucratic processes - have
bothered with small tenants policies because their cost
structure prohibits it.
Price is the key determinant for most customers in deciding which insurance company to buy from, notes Bain &
Company's Customer Loyalty Study. This gives Lemonade
a huge advantage.
Initially, Lemonade was only available in New York City. In
the first two days of business, the company wrote $14,300 in
premiums. Annualized, this was $2.5 million just for NYC.
Grossing it up for the rest of the country means Lemonade
opened a $100 million market that had not previously existed.

C TA . t e c h / i 3

In those first 48 hours, the average renter's
policy gross premium sold was $86 a year,
condos $528 and homeowners $691. Today,
Lemonade's average homeowner's policy is
roughly double the average at launch. This
should frighten traditional home insurers.
By the end of 2016, tenants' packages represented 90 percent of Lemonade's policies
issued - but only 53 percent of the company's
premium revenue. By contrast, homeowners
make up only 10 percent of policies but
account for 47 percent of premiums. In other
words, homeowner policies provide Lemonade
with nine times more premium dollars than
renter's policies, which is another reason traditional insurance firms have ignored tenants
insurance. Given that 110 million Americans
are renters (30 percent of the U.S. population),
Lemonade has a long runway for growth.
Seventy percent of these renters are under 35
years old - a target group that has historically
not purchased insurance.
In fact, a staggering 87 percent of Lemonade
customers have never bought insurance before.
So in one sense Lemonade is not disrupting
traditional insurance companies, but has created a new market that did not exist because it
was prohibitively expensive for incumbent
insurers to serve.
However, in another sense, Lemonade is
highly disruptive, although traditional
insurance companies may not have realized
it yet. Lemonade is acquiring the best possible customers - ones with great credit,
great jobs and a desire for insurance - five
years before any traditional insurer could
consider them as clients, says Lemonade
Co-Founder Daniel Schreiber.

SEPTEMBER/OCTOBER 2017

27


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i3 - September/October 2017

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