Update: Lemonade is now available in California (in addition to New York and Illinois). Get a free quote from Lemonade and see if they are cheaper than your current homeowner’s or renter’s insurance policy. Feel free to leave a comment about whether they were more or less expensive at the same coverage and deductible level. If you missed the follow-up, I asked for more clarification on how Lemonade differs from mutual insurance.
Right or wrong, many people view insurance companies with suspicion. Even though you pay them money every month for protection, you’re not really sure if they are truly on your side (despite what the commercial says). The problem is that with most insurance companies, any money they don’t pay you ends up in their pocket. The incentives are not aligned. Will they find a reason to deny your claim? Recall the Insuricare scene from the movie The Incredibles.
Lemonade is a new insurance company that takes a flat cut upfront, and the rest is put aside to payout claims. They are starting out with homeowner’s and renter’s insurance. The specific breakdown is below.
- 20% to Lemonade.
- 40% into a pool to pay out for claims (or charity).
- 40% to reinsurance in case that pool is exhausted (catastrophic cases).
Reinsurance is basically what is sounds like – insurance for insurance companies. This provides additional safety that there will be money to pay out your claim in cases of catastrophic losses (i.e. certain natural disasters). Examples of reinsurance companies are Lloyd’s of London and Berkshire Hathaway.
If there are fewer claims than expected, Lemonade will donate the money to a charity of your choice. Therefore, they have no direct incentive to deny a valid claim. In turn, hopefully their customers will also not make false claims because they will only be taking money away from charities and not the big bad insurance company. When signing up, you even take a “honesty pledge”.
Here’s how behavioral economist Dan Ariely, who is their “Chief Behavioral Officer”, puts it:
Knowing that every dollar denied to you in claims is a dollar more to your insurer, brings out the worst in us all… Since we don’t pocket unclaimed money, we can be trusted to pay claims fast and hassle-free. 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 too. Everyone wins.
Lemonade is also structured as a Public Benefit Corporation (B-Corp), which makes it the “World’s Only Public Benefit Insurance Company”.
Lemonade also saves money with tech start-up tricks. No human salespeople. No brokers. No physical branches. Apply online. File your claim online. Handy smartphone app (iOS and Android). The app has a chat-based AI interface, which also saves money. If you have to file a claim, you can take a video of the damage using their app and explain the situation.
It remains to be seen if they can truly disrupt the industry. In the meantime, they need competitive premiums. Uber would not be nearly as successful if they were more expensive than traditional taxis.
As of right now, Lemonade is only available in the states of California, New York, and Illinois. Lemonade has a stated goal of being available to 97% of the U.S. population during 2017, and it has filed for licenses to operate in 46 states and the District of Columbia. Get a free online quote from Lemonade and compare with what you have now. Prices start at $35 a month for homeowner’s insurance and $5 a month for renter’s insurance.