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October 3, 2016

BMi: Lemonade + The Insurance Business Model

your-lemonade-is-ready

What could be more refreshing than fresh squeezed Lemonade?

Certainly not insurance. At least not from a traditional perspective. Boring. Square. Subversive. These are but a few adjectives that come to mind to describe an industry that squeezes premiums in return for some peace-of-mind against the inevitable.

Enter Lemonade.  A Bot-based, P2P Insurance company that launched last month in the state of New York:

BMi: Reinventing the Insurance Model

As many analysts have rightly pointed out, insurance wasn’t always a gargantuan, actuarial, spreadsheet-based industry, it was very personalized and collective at its inception. Only since the upswing of the Industrial Revolution have we seen it become heavily corporatized, tilting incentive schemes away from ‘shared risks’ towards ‘you have to prove it to get paid.’  Members of a community or workers in a company used to pool money in a cooperative manner, creating a sense of mutuality in the face of disaster where all contributors would bear a small share of the burden. Nowadays, it comes down to the policy fine print, several calls back and forth with an Agent, and a subjective interpretation of what happened, all to determine whether or not you are covered for a given claim.

Insurance companies are incentivized not to pay premiums. And that’s where Lemonade is fundamentally different:

“They take a flat fee for running the platform. They make their profit from the fee. If they don’t pay any claims, it doesn’t increase their bottom line.” Insurance Will Never Be The Same Again

This is pure Business Model Innovation. They shift the business model and rework the entire incentive schemes, creating a dynamic whereby if you file a false claim you cheat your ‘neighbor,’ not Lemonade:

“Unspent premiums are put to good use. As a signed up member of B-Corp, Lemonade group their customers by affinity to good causes. This means that, for example, everyone who cares passionately about local youth development or finding a cure for cancer, are grouped together. Unspent premiums from the risk pool are donated to the good cause at the end of each term.

When a customer makes a claim, they know that any embellishment will be taking money away from the good cause they support, not the so-called “fat-cat insurers”.” Insurance Will Never Be The Same Again

To clarify. They are flipping the entire business model on its head. Lemonade takes 20% of the premium as profit, works with reinsurers to cover big claims, and the rest of the money is pooled in groups and passed on to worthy causes if it is not paid out as claims:

“Peer-to-peer insurance reverses the traditional insurance model, treating the premiums paid as the customer’s money, not that of the insurer. Lemonade takes a fixed fee out for monthly payments, buys reinsurance and then uses the rest for paying claims. By conducting business this way there is often money left over at the end of the year after paying claims. Instead of taking the money, Lemonade will paid it forward to charity.” This Peer to Peer Insurance Company is Powered by Bots

your-lemonade-is-ready

  • Individual takes out an insurance claim – in a few minutes – via the Lemonade Bot
  • Lemonade takes 20% as a fee, the remaining 80% is put into a Pool based on the Cause the individual chooses
  • ‘Cause Pools’ aggregate the remaining 80% from all individuals into one common ‘shared risk’ account
  • Claims – which take only minutes to successfully file – are redeemed and paid out from the Cause Pool, not Lemonade
  • Reinsurers cover bigger risks that cannot be covered by Cause Pools

This is textbook BMi and an exciting example of the #NewEraBiz. Time will tell how profitable this approach can be, but it hits right at the core issues surrounding the insurance business model.

Millennials Hate Insurance

Does it matter if you are an insurer and Millennials – those 18 – 34 year olds who are now officially the biggest demographic in the world – hate your product?

The short answer is yes. The long answer is why.

“Globally, 47% of all customers have positive experiences with their insurers. However, the number drops to 34% for Gen Y or Millennials.” Millennials More Likely To Purchase Insurance From Tech Firms

Millennials show particular disdain towards any insurance that is not compulsory – like renter’s insurance. Millennials are also loath to pick up a phone to have to deal with someone who is being paid minimum wage to deal with a problem or sign a claim. To fix the ‘hate your product’ part, companies will have to create new, more relevant products, and to fix the ‘this claims business is a buzzkill’ part companies will have to completely reinvent the user experience.

Lemonade is all over this. And so are hundreds of other companies in the #InsTech (Insurance Tech) ecosystem worldwide. Billions are being invested into companies, who are reinventing both the types of products available – ie. insurance for the sharing economy (SafeShare) – and the entire user experience – ie. manage all your policies from one app (Knip).

You can bet that Lemonade has Millennials on its list as one group of ‘underserved customers:’

“Daniel Schreiber, CEO and co-founder at Lemonade, told Insurance Business that while “many consumers are happy with the service provided,” by brokers, Lemonade will look at customers that want self-service and simpler processes.

“Many feel underserved – insurance has been a frustrating and bureaucratic process that involves paperwork and hassle,” Schreiber said.

“Lemonade is for those consumers, who want to self-serve, and get an instant, delightful, and transparent experience.” Lemonade to Target Underserved Customers

 

 

rate-experience

 

The Macro – Negative Rates

Lemonade was built to fundamentally transform the Insurance industry. And we expect the younger generations to be all over this. But there are other reasons this will work.

In our post – Business Model Innovation and the #NewEraBiz – we laid out a concept to look ‘beyond the canvas’ referring to the business model canvas. The outer layer of that diagram is Macro:

lumos-macro

Business Model Innovation and the #NewEraBiz

We are starting to see the effects of extreme monetary policy on the insurers worldwide:

“Insurers globally are having to come to terms with the idea of “lower for longer” interest rates, making deep changes to business models that had been unaltered for decades. Whereas previously they might have clung to the hope that higher rates were around the corner, there is a realisation that the industry has to do things differently — from investing in assets that might once have been seen as too risky, to experimenting with new products.” Insurers Forced to Dig Deep

Their business model is under threat, in part due to negative interest rates, which we are seeing in Japan and across Europe. But these companies have also failed to innovate at any level, preferring instead to cling to old paradigms on how the world works and how they should be compensated for insuring against certain risks. Given the current Macro backdrop, they will be forced to innovate – ie. experimenting with new products –  just to stay profitable over the next decade. And those who want to stay on the edge will have to reinvent themselves and completely innovate their own business model.

The days of insuring people via spreadsheet are over. With all the action happening in the #instech ecosystem, combined with the unfavourable Macro, it’s time to shakeup insurance forever.

Simplifying Insurance

Squeezing Lemons. Adding Sugar. Crushing Ice.

This is how simple Insurance should be. It will take some time, but Lemonade seems to be squeezing a little acid in the eye of traditional insurers and saying ‘there is a better way.’  Millennials hate insurance in its current form and the Macro suggests a shift in the business model is required. Let’s see what happens next when fast followers start to put up their own lemonade stands.

lemonade-actions

 

Business Model Innovation (BMi) has been a persistent topic on the Lumos blog since the beginning. BMi is about developing new ways to bring existing product and services to existing markets. One of the key advantages of BMi is that most of the innovation happens beneath the surface, making it difficult to understand and replicate:

Business Model Innovation (BMi) and the #NewEraBiz