Parsing Lemonade PR to see if P2P insurance is game changer or a mirage

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One of our 2017 Insurtech Predictions was:

#2 P2P Insurance does not (yet) live up to its promise.

We will see many drop out, leaving one or two well positioned to win big in 2018 and beyond. The term P2P Insurance will fall into the slough of despond.

Today we dig deeper into that subject.

A lot of the InsurTech innovation we see can be coopted by the incumbent carriers relatively easily. Knowing how to build a compelling digital user experience is not enough to create a moat and sustainable advantage. So a lot of people are looking at P2P insurance as the disruptive game changer. 

Ever since Lemonade did their $13m Series A funded by the hot hands of Sequoia Capital just over one year ago, there has been a lot of speculation about whether Lemonade will prove this model to be a game-changer or whether the whole thing is a mirage.

Now that Lemonade is releasing some information, we take a look at what we can learn about the whole sector.

P2P insurance 101

P2P insurance, sometimes also called reciprocity insurance, reduces the inherent conflict between insurance carriers and their policyholders. Policy holders are given more control in return for taking reciprocal risk (i.e. paying out to other members). Peers control decisions that are traditionally made by the insurance carrier, such as:

  • forming their own risk pools for deductible coverages
  • making decisions about the proceeds of the pool
  • allowing peers to adjudicate their pool’s claims.

Variants of P2P insurance

  • By country: Both regulations and social networks vary widely by country, so it is natural to see entrants from so many countries.
  • By risk type coverage: some go after automotive, others move into new insurance needs related to the sharing economy. Other examples are liability insurance, household contents insurance, legal expenses insurance and electronics insurance. Which one gets traction first is still unclear.
  • Broker model: a part of the insurance premiums flow into a group fund, the other part goes to a third party insurance company. Claims are firstly paid out of this group fund. Claims above the deductible limit are paid by the insurer. When there is no insurance claim, the policyholder gets his/her share refunded from the group pool or credited towards the next policy year. If the group pool happens to be empty, a special insurance comes into force.
  • Carrier model is similar to the broker model, except that as the peer-to-peer provider is also the carrier. If the pool is insufficient to pay for the claims of its members, the carrier pays the excess from its retained premiums and reinsurance. Conversely, if the pool is “profitable” (i.e. has few claims), the “excess” is given back to the pool or to a cause the pool members care about. Peer-to-Peer insurers take a flat fee for running the operations of the insurance enterprise. The fee is not dependent upon how many (or how few) paid claims there are. The carrier model can be launched by incumbents or full stack, regulated InsurTech startups.

Social and affinity networks

Trusting your peers is critical to the model, so Social and affinity networks will play a key role. The trust is not based on personal relationships, more to do with affinity. To take one example, window cleaners need insurance and if you are a window cleaner you and your peers understand the risks better than any insurance company can as long as you all have access to the same data.

In the broker model, the only requirement is that all group members must have the same type of insurance. In the carrier model, the only requirement is that the group members have something in common, such as being members of the same club or profession or believing in the same charity.

Some P2P Insurance Players

You can see from this list why analysts focus on Lemonade. Most others have not raised much. One that has – Huddle Money from Australia – positions more broadly as a P2P Bank.

Name Country $m Raised
Huddle Money Australia 6
Friendsurance Germany 15.3
Lemonade USA 60
Besure Canada Undisclosed
TongJuBao China Undisclosed
PRVNI Czech Republic Undisclosed
insPeer France Undisclosed
PeerCover New Zealand Undisclosed
Riovic South Africa Undisclosed
Guevara UK Undisclosed

There are many others. This thread on Fintech Genome is where the list is being crowdsourced.

Now for the case for a game changer presented by Tigger and the case for mirage by Eeyore. Note for those who did not grow up with Winnie The Pooh stories, here is the cast of characters:

– Tigger is the excitable cat, full of enthusiasm for every new technology which will surely change the world for the better and do it right now.

– Eyore is the old grey donkey who thinks it is all rubbish, that all this change will only end badly or won’t happen at all.

– Winnie The Pooh is a humble “bear of little brain” who somehow gets to the right answer by asking good questions. We all want to be that insightful bear, but in the tech world the market is the only judge of what works or does not work.

First, lets look at what information Lemonade actually released.

Lemonade’s recent PR 

  • A ‘world record’ for the speed of paying a claim. The company claims that at seven seconds past 5:47pm on December 23, 2016, Brandon Pham, a Lemonade customer, hit ‘Submit’ on a claim for a $979 Canada Goose Langford Parka. By ten seconds past the minute, A.I. Jim, Lemonade’s claims bot, had reviewed the claim, cross referenced it with the policy, ran 18 anti-fraud algorithms on it, approved the claim, sent wiring instructions to the bank, and informed Brandon the claim was closed.

The case for game changer by Tigger

  • P2P Insurance fundamentally aligns the interests of the insured and insurer, breaking the win/lose basis of traditional insurance.
  • Affinity networks lead to organic customer acquisition, reducing CAC.
  • Millennials are under-insured and a natural target for renters insurance.
  • Lemonade is a great UX that is personalized & relevant, with a new backend that was built from the ground up (not a new UX on a 30 year old legacy system).

The case for mirage by Eeyore

  • Risk assessment is hard and no UX gloss can change that.
  • There is nothing new about mutual business models.
  • It’s just some social marketing and incumbents can easily copy that.

Our take

I incline to the Tigger game-changer case. Possibly that is me being an entrepreneur and thus having an optimistic mindset, but I also think that the combination of deep-pocketed Reinsurance and full stack new Carriers using a new model and new social techniques and new UX and new anti-fraud technology stands a very good chance. It is still really early in this game, but Lemonade are making all the right moves. A few more thoughts:

  • Quick payout is a big win for consumers. Doing that on big claims may require reducing settlement latency via a blockchain network. So they are smart to focus on really quick payouts on really small claims that do not have that dependency.
  • Loss leaders are a normal way to get early traction for well-funded startups. You cannot glean unit economics from that PR story about one claim to payout thatr was done in seconds.
  • Their PR story does not match the focus on renters insurance. Maybe they had a PR deadline and this was a story that fit, but this seems like a misstep. Or maybe the PR story about instant payout will give their anti fraud tech a real stress test as the bad guys swoop in. Maybe that was the real audience for their PR?

Two horse race at moment

Friendsurance, out of Germany, started earlier, in 2010. Their investors – Horizons Ventures – are not as famous as Sequoia Capital, but a quick glance at their portfolio and the people behind them like Li Ka-shing (the richest person of East Asian descent in the world and the 11th richest person in the world with an estimated wealth of US$26 billion) generates a lot of respect. Expect a move into Asia by Friendsurance given the credentials of the Horizons Ventures team – but not in any hurry as Germany is a very big market on its own and they will be passported into the rest of Europe.

For discussion, please go to this thread on Fintech Genome

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6 thoughts on “Parsing Lemonade PR to see if P2P insurance is game changer or a mirage

  1. Here’s the thing about “P2P” insurance or whatever you want to call it. I’m pretty sure that current insurance underwriters have nice, fat margins. There is room for someone, such as Lemonade, to come in and accept lower margins in order to grab some market share. But that is not fundamentally changing the nature of the game in any way, it’s just the natural effect of competition. The big insurers may decide to protect their space by undercutting Lemondade, and they are better capitalized so they will win that fight if they choose to engage in it.
    But if Lemonade or anyone else is pitching a fundamentally different business model that allows them to price and manage risk better than traditional insurers — I don’t believe it. The modern insurance industry is at least 300-400 years old, and most of modern probability and statistics was developed in response to the needs of this industry. These guys are good at what they do, and on top of that they have a significant amount of regulatory capture insulating them from competition. I’d say this is a very tough market to disrupt.

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    • Thanks Jessie, you expressed the scepticism on Lemonade very well. If they are simply undercutting prices without changing the cost structure then all they are doing is selling a dollar for 99 cents and that will end when dumb money stops funding them. Sequoia Capital is not dumb money and there is a lot of cost take out, so I think the market jury is still out on this one.

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  2. There are three things happening here which are different from the incumbent model – (i) P2P is simply a return to the old mutual insurer model, so nothing new. The issue with the mutual insurer model was lack of capital, which Lemonade solve by their financing set-up. (ii) Reinsurers play a vastly increased role – which may not be as cost effective as an internal capital model. (iii) An intensive software admin system, is the real innovation. Not new to Lemonade, but this will be the true disruptor of the market. Most incumbents will struggle to adjust legacy systems to Lemonade’s low admin costs and fast processing.
    Availability of ‘out-of-box’ insurer admin systems backed by reinsurer capital could destroy the current large company advantage. This does depend a large data source for accurate algorithms.

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    • Thank you Mike, this makes total sense and agrees with what we are researching around Reinsurance As A Platform. I note that Lemonade downplay P2P and use AI as a tag instead. The real secret sauce may be near real time fraud detection on claims (which I think is what you are calling Admin, Bernard

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  3. I’ve been following Lemonade very closely even before they launched. As Jesse suggests above, if Lemonade revolutionized everything about the insurance industry, from use of AI to speed of claims, but did not market a *much* less expensive product than the entrenched competition– no one would’ve cared. They are naive if they believe they are succeeding on the basis of anything else.

    One great unknown is whether Lemonade will ultimately betray the trust of its policyholders: rarely discussed is the Hoovering of privacy-intruding data they collect on their policyholders in order to manage risk. Lemonade’s charity-model is weak enough as is without forcing Millennials to raise privacy alarms.

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