Using artificial intelligence, a mobile app and other tech-centric methods, Lemonade founders Daniel Schreiber and Shai Wininger are turning the centuries-old business of property insurance into a Millennial-friendly consumer product. In 2018, its second full year offering renters and homeowners insurance, Lemonade took in $57 million in premium revenue from 425,000 customers, 75% of them under 35 and 90% of them buying such insurance for the first time. Already operating in 22 states, the 170-employee New York-based startup expects to double revenue this year and expand to all 50 states and Europe. To fund that growth, Lemonade raised $300 million in April at a valuation, says a source, of more than $2 billion. That would make the founders’ combined 20% stake worth in excess of $400 million—not bad for two middle-aged guys who until 2015 knew almost nothing about the insurance business.
Not surprisingly, the founders cast their status as insurance industry outsiders as a plus, since it freed them to think differently. CEO Schreiber, 48, was born in Britain, raised in Israel, earned a law degree in London and started working on tech mergers at a Tel Aviv firm. At 26, he quit law to cofound an internet security company. While that startup wasn’t a big success, Schreiber went on to hold senior marketing and management jobs in tech, most recently as president of Israeli wireless-charger maker Powermat.
But he wanted another go at his own startup and kept looking for a big idea. By 2015, he had concluded that insurance was ripe for tech disruption because, he says, “every person in the nation, in the world, needs insurance,’’ and yet many distrust traditional insurers. A VC introduced Schreiber to Wininger, a self-taught Israeli coding and design whiz who had already cofounded four businesses, including Fiverr, an Israel-based marketplace for freelance work. Wininger, now 45, quickly signed on as cofounder, heading up tech and product design. “When you’re an entrepreneur and you find something like that, it’s a once-in-a-lifetime opportunity that you have to go after,” he says.
Holed up in a room with a whiteboard, the founders sketched out what an ideal insurer would look like—from a Millennial’s point of view. It would be online only (no paper or insurance brokers), low-cost, easy to deal with and “trustworthy.” They weren’t naïve about needing insurance expertise and, in May 2015, recruited Ty Sagalow, a 36-year industry veteran, naming him chief insurance officer. Together, the three made a crucial and gutsy decision: Rather than sell policies backed by established insurers (the way fintech competitors Hippo and Jetty do), Lemonade would become a licensed carrier itself, retaining claim liability on its own balance sheet. That meant Lemonade could pay claims faster and operate under a unique business model that has become a pillar of its marketing. The company takes 25% of insurance premium revenue for administrative costs and potential profits. The other 75% is used to fund customer claims, buy reinsurance (laying off some risk) and pay certain taxes and fees, with anything left going to charities that customers choose. The social-compact pitch: Lemonade can’t profit from denying legit claims, and customers making bogus claims are cheating charity, not some greedy insurer.
Still, becoming a real, regulated insurance carrier meant Lemonade needed more time to launch and more capital to grow. (A carrier typically must maintain cash reserves equal to at least a third of revenue, Sagalow notes.) So far, the capital has flowed—and from some big names. Through 2017, Lemonade raised $180 million in four rounds. In 2019, it raised $300 million, led by billionaire Masayoshi Son’s SoftBank with participation from GV (Alphabet’s venture arm), Josh Kushner’s Thrive Capital, German insurer Allianz, General Catalyst and OurCrowd.
Lemonade issued its first policies in September 2016 in New York. By January, marketing man Schreiber was boasting in a press release and blog post that Lemonade had set a world record by paying one New Yorker’s claim for his stolen Canada Goose parka in three seconds—the time it took Lemonade’s claims bot to run 18 antifraud algorithms and send bank instructions to deposit $729 in the man’s account. Automation also allows Lemonade to offer policies at a very low price: renters insurance starting at $5 a month and homeowners starting at $25. On the review site Clearsurance, Lemonade ranks second in customer satisfaction for renters insurance, behind only USAA.
While Lemonade’s growth has been steep, so too has its learning curve. At the end of 2017, its loss ratio—the amount it pays in claims divided by the premiums it collects—was an unsustainable 166%, compared to 65% to 70% for large insurers. Part of the problem was that Lemonade had too little customer experience on which to train its algorithms, which it uses for approving applicants, pricing risk and determining whether a claim should be paid without humans getting involved (30% are). Indeed, by the first quarter of 2019, its loss ratio had dropped to a healthier 86%. Schreiber predicts it will continue to fall. “What we’re seeing here is something that is going to be very traumatic for the whole insurance space,’’ he says. “Data is overtaking expertise.”
So far, Lemonade is only a bit player, with a 0.1% share of the homeowners and renters insurance markets combined, compared with 19% for State Farm and 10% for Allstate, according to data from 17 states collected by the Insurance Information Institute. But the big guys have taken note. In October 2018, State Farm released a star-studded ad spoofing budget insurance bots and suggesting they couldn’t compete with human agents. Lemonade’s cheeky response? It tweeted the ad and paid to promote it on YouTube. “This is 2019,” Schreiber scoffs. “You don’t produce ads mocking the power of technology.”