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?

BTW, if you do not subscribe to Shefi’s daily Coverager newsletter which has the very latest in information about industry disruption, please do.

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Bill Wilson

Founder at InsuranceCommentary.com
One of the premier insurance educators in America on form, coverage, and technical issues; Founder and director of the Big ā€œIā€ Virtual University; Retired Assoc. VP of Education and Research from Independent Insurance Agents & Brokers of America. Reprint Request Information

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