The insurance industry is as old as it is complex. The concept of insurance itself has been around for hundreds of years and many traditional insurance companies have been around for over a century. Insurance works by having individuals each pay a manageable monthly premium into a pool. In the event that something catastrophic happens to one of the policyholders they will be reimbursed from that pool. Since the risk is mitigated by being spread out over a large group of individuals, a small percentage of policyholders filing claims does not deplete the pool.
In other words, the individual doesn’t have to worry about having the money on hand to replace a costly item, like a home or vehicle. This business model has been the standard for years with your premiums based on your individual level of risk as determined by the insurer. But there is a new player in town shaking up the traditional model, and promising to do something radically different. That player is called Lemonade Insurance.
What is Lemonade Insurance?
Lemonade Insurance is the first peer to peer insurance company to become officially licensed to sell insurance. They currently offer both renters and homeowners insurance. Rather than have individuals pay into a large pool with premiums based on risk, and payouts based on total damages or coverage limits, Lemonade Insurance works by having you pay for a certain flat coverage amount. Everyone in that coverage amount is put into the same pool. If you have a claim you get paid out whatever amount you have signed up for. This allows this to pay the claim very quickly and without much paperwork.
Lemonade's Business Model
Lemonade also incorporates advanced technology into their business model to both control risk and keep expenses low. Their goal as a company is to keep overall expenses at or below 20%. They also purchase what is known as reinsurance, which is basically insurance for the insurance company in case they have a year where they have to pay out a large number of claims and the pool is at risk of becoming depleted. This allows them to keep the low overhead, but also guarantee that they are able to pay out claims when called upon.
The Give Back Program
Another unique aspect of Lemonade Insurance’s business model is called the Give Back program. At the end of the year, if there is any money left over in the individual's payout pool, the money is given to a charity that the individual previously selected. Individuals are grouped with others who support the same charity. It is the goal of Lemonade Insurance to pay out to the Give Back program everywhere, but it is not guaranteed. The company's first priority is paying claims of course.
Time will tell if Lemonade’s revolutionary new business model is sustainable and is beneficial to consumers as compared to the traditional model. More choice though is always a good thing for the consumer. Innovation is something that should be welcomed in all fields.