A start-up insurer is aiming to shake up the industry by promising to donate to charity any money that is not used to pay claims.
Lemonade, which is due to launch with home insurance in New York, is one of a clutch of so-called peer-to-peer insurers.
The company will ask customers to nominate a charity when they buy a policy. It will then pool the premiums of everyone who has chosen the same charity, and pay their claims out of that pool. Anything that is left at the end of the year will go to the charity.
Lemonade will take a fixed 20 per cent of the premiums at the start. It said that it would not stand to benefit by reducing payouts to customers.
“We’re inverting the business model,” said chief executive Daniel Schreiber. “We have no interest in delaying or denying claims.”
He hoped that by linking insurance to charity, customers would be less likely to put in fraudulent claims. “The idea that ‘I’m in conflict with the insurance company’ breeds the kind of attitude that people have towards their insurance company. People feel entitled to embellish their claims and to lie. Fraud is rampant.”
Lemonade, which will sell its policies via an app, will start with a preset list of 15 charities but customers can also nominate other worthy causes that they would like to support. “The charity could be a local church or school, or it could be the Red Cross,” said Mr Schreiber.
We’re inverting the business model. We have no interest in delaying or denying claims
– Daniel Schreiber, chief executive
The company has been going for 18 months, but until now its business model has been a closely guarded secret. It has attracted plenty of attention, however. It has raised a total of $13m from the likes of Sequoia and XL Innovate, and has recruited a clutch of experienced insurance executives. It has also hired Dan Ariely, author of bestselling behavioural economics book Predictably Irrational, as its chief behavioural officer.
As well as pairing customers with others who have the same interests, Lemonade will deploy a range of other psychological techniques. For example, it will ask customers to sign their name to certify that everything is true at the start of the claims process rather than the end.
Unlike many other insurance start-ups, which have focused on distribution, Lemonade has become a fully-fledged insurance company. It takes on the risk from the policies it writes, but also has reinsurance deals at Lloyd’s and with Berkshire Hathaway.
Mr Schrieber says that Lemonade’s 20 per cent cut of premiums is well below other insurers’ cost ratios, which stand at about 35 per cent.
Lemonade’s cut of premiums
“It is hard to articulate a case where charities would lose out. Our models show that . . . we’ll be donating significantly more to charities than we take in profits.”
He believes the model takes insurance back to its origins. “It is not that different from how insurance operated 300 years ago. If you go back to Edward Lloyds’ coffee shop in the 17th century, there was a communal aspect and a social covenant. Insurance that predates the big insurance companies was social in nature.”