In her latest issue of Coverager, Shefi Ben-Hutta includes an exchange between an individual and the insurance start-up Lemonade. The individual says he has a renters insurance quote from GEICO for $25 a month and wants to know if Lemonade’s quote of $5 a month is legit. Think about this for a minute and do some simple math….
Let’s say GEICO’s premium is actuarially sound and they’re breaking even or slightly profitable at $25. Lemonade’s quote is 20% of that. On top of that, my understanding is that Lemonade takes 20% of the premium off the top, so the amount left over to pay losses and other expenses is 16% of the GEICO premium.
Assuming ALL of the remaining Lemonade premium is going exclusively to pay losses, how many insurance companies in the history of the industry have been able to sell homeowners insurance with a 16% loss ratio? How is a $5 a month premium sustainable?
Insurance laws generally require rates to be adequate but not excessive or unfairly discriminatory. Is the rating structure being used to generate new business really adequate or is Lemonade burning up venture capital in order to gain market share to generate more venture capital?
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Bill Wilson
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BTW, Lemonade seeks to explain how they can do this in this blog post:
https://www.lemonade.com/blog/saving-80-90-seconds/
It STILL makes no sense. While they might have an expense ratio far less than others, that doesn’t explain how they can reduce the loss component by 80% or more. The numbers simply do not add up.
American Liberty in Alabama tried same way back in the early seventies They determined to take their apartment owner risks writings and sell H0 4 to the tenants using a ridiculously low rate for coverage. Their idea was to grab the youth market who was processing toward a home and family then retain them later It was a loss leader and treated like this. That market ahd very few policyholders then just as is often the case today.
We do not know from the example how much property limit is being quoted for the $5 a month premium either. So making a comparison is hard.
Lemonade makes some expense reductions and targets the mass market of HO4s I might add this market is undeserved which means rates charged are reflective of not having the critical mass of inured risk units and pool.
Yes the price is aggressive if you remain in that silo. But of you are developing a new and previously untapped risk pool that does not buy HO4 because they have not had claims then the numbers may work much better than you assume.
You guys remind me of stock carrier executives in the 1960s saying State Farm could not make their predatory auto rates work and that they could never get the profitable homeowner market ebcause the agency companies controlled the mortgagees. Is history repeating?
http://insurancethoughtleadership.com/lemonades-crazy-market-share/