TLDR How can an interview with an insurance startup founder go from discussing InsurTech and innovation, and end up focusing on the concept of a Ulysses Contract, Game Theory, Prisoners’ Dilemma, and the Nash Equilibrium?  Simple- find some time to talk with Daniel Schreiber, serial entrepreneur and now CEO of Lemonade Insurance.  It’s certain that additional perspective would have been added by Daniel’s co-founder, Shai Wininger, but we’ll focus on Daniel’s views for this article.

Lemonade has been under intense scrutiny since its entry into the insurance world in 2016, and Mr. Schreiber has been the guest of many interviews since then.  As is expected for any figure that resides in a legacy industry, finances and insurance ‘stuff’ have in general been the main topics of those discussions.  It seems all the questions related to insurance accounting and finance had been asked, and those at Lemonade have been rather public in getting out their ideas of what the industry should know about the company, so I was not interested in simply conducting another ping pong contest of convention versus innovation.  In planning for this Daily Fintech interview I thought I’d take a different approach- ask others what they would want answered by the CEO of this very public startup- so I crowd-sourced the questions.  More questions came than there would be time to ask, but the questions were shared with Daniel ahead of time so we figured we could sort out some key points.

Spring boarding off a recent optimistic posting by the firm’s Chief Insurance Officer,  John Peters  (read that here ), Daniel was asked of his impression of Lemonade in the insurance market- customer impressions, marketing, industry reaction, any factor that was meaningful.

The primary response- gratification that the insurance incumbency is tolerant but somewhat unimpressed based on ‘backhanded’ compliments, e.g., “they are good at PR,” “have a delightful APP,”, “they don’t ‘get’ insurance,” “Lemonade is not serious,” and the like.  Not ‘getting’ insurance is due to the app that is at the core of change in insurance, with invisible to the eye analytics, transformed user experience (UX), and predictive risk tools that are unavailable to traditional broker systems.  Not getting it means the firm’s approach is truly different/innovative.  And as time passed, the firm’s growth prompted comments such as, “if it grows like a weed it probably is one.”

The discussion led to a general touch on the first of the crowdsourced questions (answers quoted but paraphrased from Daniel’s remarks):

“At the very beginning of Lemonade’s creation, what was the vision, who was the target customer, what value could you add to them?”

DS:         This, of course, touched on a primary reason for the firm’s existence- how could insurance be made available to customers in a way that was entirely different than the legacy system that was by some estimation, “A business that involves selling people promises to pay later that are never fulfilled?” (Urban Dictionary) .  Early on, per Daniel (and recounted by co-founder Ty Sagalow in his recently published book, “The Making of Lemonade”) , the founders of Lemonade worked to form an insurance company that aligned the interests of the carrier and the customers, in a fashion that was economically viable, applied cutting edge technology, and contributed to a common good.  Insurance is a need for most and is not a product that people yearn for, it is as is said, ‘sold, not bought’.  The vision was to be a 24/7 insurance company that delighted customers, and not one that irritated them.

“What early action do you regret was handled in the manner in which it was?”

DS:         At the initial launch of the company we announced Lemonade as being the ‘world’s first P2P insurance company’, a designation that posed immediate issues.  First off, the phrase only made sense within the insurance industry, insurance customers didn’t know what P2P was and didn’t really care.  In addition, those within the industry questioned the definition and if Lemonade was truly peer-to-peer.  Rather than wrestle with semantics and the distraction we backed off from that marketing.

“An important aspect of the firm’s make-up is the charitable contribution (up to 40% of premiums.)  Shouldn’t contribution levels be detached from an arbitrary loss ratio result?

DS:         We are very proud of the amount of premiums that Lemonade has shared with charitable organizations on behalf of our policyholders.   2018 found the contribution to be approximately 2% of premiums.  It’s understood that Lemonade is not the only company to make charitable contributions, but compared with other companies Lemonade’s efforts represent not a bilateral, traditional approach where a portion of a company’s revenues are donated to a charity, Lemonade expresses a trilateral approach- the policyholder, the company, and the designated charity.  As discussed, Lemonade’s financial operating model allows for a set percentage of earned premiums to be set aside for operations, a portion for reinsurance backing, and the balance for payment of claims.  When claim/loss payments have a favorable performance versus the set aside, the balance is apportioned by group to the respective policyholders’ choice(s) of non-profit.  As a B Corporation, or Public Benefit Corporation, Lemonade is proud of its efforts to be a social good that is also an insurance company.  

“When it’s said in Lemonade’s press and marketing that traditional insurance companies make money by denying claims, which claims do incumbents deny that Lemonade would pay?”

DS:         Lemonade clearly understands that an insurance policy is a contract between the carrier and the policyholder, and the intention is not to say that in handling claims from customers Lemonade will pay claims outside of the policy provisions.  What is being said is that for both parties to the contract incentives matter, and alignment of interests matter, and actions follow the incentive structure.  If there is a reduced temptation for the carrier to deny claims because the outcome is to do good, and there is a reduced temptation for the insured to embellish claims for the same reason, then the dynamic of denied claims, or incentive structure affecting both sides is reduced and in fact there becomes an even closer alignment of interest to do good.  In actuality the principle is a foundation of Lemonade- the Ulysses Contract and Game Theory (author’s note- these concepts will be addressed in more depth in a future article).  Just as Ulysses ‘tied his own hands’ to the mast due to his knowing that the sound of the Sirens would tempt even him, Lemonade ties its financial hands by setting a designated amount for operations, reinsurance, and claims, and the remainder is contributed to good.  There is not a unilateral financial benefit to denying claims (or arbitrarily not paying claims) because any excess is not the company’s.  And, customer knowing that if they embellish claims they are in essence reducing that which goes for the common good.  So it’s not that Lemonade is paying or not paying claims, it’s that the company has its own Ulysses Contract to guide its behavior.

“There are fans of the firm’s Instagram vids- How did you come up with the idea, and what else is the company doing like that to propagate your overall message of transparency and social good?”

DS:         Those videos with the pink goo and others are from a variety of sources, primarily from Lemonaders within the company.  The goo was an idea from a product designer, for example.  If you recall the publicity driven by the Banksy art piece that shredded itself in front of an auction audience not long after that a Lemonade quality assurance staffer came up with a quick homage here .  We are unafraid to encourage these types of contributions.

“A recent Forbes article and LinkedIn article by Chief Insurance Officer John Peters mentioned Lemonade’s loss ratio tracking in the high 80% range, a significant improvement/trend from the prior year’s results.  Is the reported ratio result being ‘subsidized’ by ceding premium and loss cost amounts to the firm’s reinsurers?

DS:         Lemonade are the guardians of the insurance ecosystem as established by the company, and operations are to the benefit of all stakeholders.  there is no financial ‘game playing’ to meet an arbitrary result.  The firm’s reinsurance agreement sets excess limits where the reinsurer accepts responsibility for claim costs above the set threshold.  There is recognition that traditional measures are what the market sees and holds as comparatives but we figure if the original business model is followed the results will speak for themselves.

“You’ve done great stuff, is there one thing of which you are most proud?”

DS:         The ability to create an insurance system that delights customers, allows growth, and generates data sets where the system begins to feed off the customer and claim experience.  Seeing the loop succeed gives us great pride.  90% of FNOL processed by Bot, and 100% of sales?  Validates our founding thesis.

So many questions, and not enough time for them all.

As I reviewed our conversation, recent results/articles, and Mr. Sagalow’s book several things were apparent:

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• The company is ‘all in’ on allowing the data analysis approach to continue its development,
• Growth within markets is driven as much by external forces, e.g., requests from European countries, as it is by internal plans.
• The firm’s start and development benefitted greatly from the founders’ past experience in startups and connections developed therein,
• Lemonade is impatient- that in itself is innovative in the insurance industry.
• The firm remains too new to have financial trends that aren’t subject to variance from reporting period to reporting period.  86% loss ratio can be celebrated today but the vagaries of growth in a new carrier and claim volume can produce unexpected results, and some interesting ceding to reinsurers.  (keeping things grounded with ongoing analysis by Adrian Jones and Matteo Carbone,  interesting summary here )
• Customers who have provided service surveys like the insurance products and service they receive from Lemonade, see Clearsurance’s survey summaries here
• There’s pride in how charitable contributions have been an important piece of the firm’s entry into the market
• The entry into the industry is not a sprint- a carefully run marathon is what the firm needs.  The P&C business is a trillion-dollar (US) business and Lemonade holds a very small part of that; its operating premise is still fragile
• There is strength and opportunity in the firm’s digital approach to operations

The original intention was to interview a CEO and produce a summary of the firm through crowd-sourced questions.  The interview came off well, the questions were presented in volume, where the problem arose was in the expansiveness of the firm’s concepts, the great interest in the entry and growth of the firm, and the author’s inability to distill the available information into one column.  The discussion with Daniel Schreiber did not change my status of being a pragmatic optimist where Lemonade is concerned, but many questions were answered.

I look forward to further examination of the Game Theory concepts as applied by Lemonade in a future column/posting. 

My thanks to those who provided questions in addition to my own (and apologies that not all could be addressed in this article):

Ben Baker Billy Van Jura Anand R (Lucep) Nick Lamperelli Pat West

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Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers,
Attorneys & Owners. He also serves the insurance and Fintech world as the
‘Insurance Elephant’.

I have no positions or commercial relationships with the companies or people
mentioned. I am not receiving compensation for this post.

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