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Lemonade From Insurance’s Lemons

Insurance is, by its very nature, not an easy product to sell because it requires customers to give up current cash flow to hedge against a bad future situation of some kind.

Consumers don’t like giving up their current cash flow, nor do they like thinking about bad events that have yet to happen to them. That makes insurance a tough initial sell – and a tough ongoing commitment even after they’ve signed on the dotted line. And, insurance premiums are often the first things to get jettisoned when times get tough for all but the most risk averse consumers.

But the team over at Lemonade thinks a little differently about insurance — namely that the industry needs a little less compulsory enrollment and a lot more disruption.

"Most Americans view insurance as a necessary evil rather than a social good, and that’s something we’d like to change,” noted Lemonade’s CEO and co-founder Daniel Schreiber. “As a FinTech-insurance company, Lemonade is designing around the bureaucracy and conflict that haunts the industry, replacing them with technology and transparency. What makes this exciting is that it requires reinventing the very structure and business model of insurance in ways not available to the legacy insurance carriers."

Schreiber and his co-founder Shai Wininger are both serial entrepreneurs — Wininger is a co-founder of the jobs marketplace Fiverr and Schreiber’s last job as the president of Powermat, a wireless charging tech firm — and were both looking for an environment ready for disruptive innovation.

And insurance, a widely reviled lemon of a vertical was just the sort of ripe fruit they were hunting for. Because — as we promise the puns will end after this — if insurance companies were handing their customers lemons, then the only sensible course would be to make some Lemonade.

“There’s something very profoundly broken about the way the insurance sector works today,” Schreiber noted.

And Lemonade’s proposed fix is a P2P insurance product.

What exactly that will mean is somewhat blurry still. Lemonade is just out of a very snappy $13 million seed funding round, one of the largest such seed rounds in that firm’s history, backed by Sequoia.

The main vision, it seems, is to correctly what Schreiber describes as a deep structrual flaw in the relationship between insurers and their customers.

“You’re in a zero-sum game with them; every dollar they give you is a dollar less to their bottom line,” he said. “This conflict of interest is absolute.”

And not fixable by merely putting newer, better technology on top of existing infrastructure. Because that infrastructure is built on the flawed idea that the insurer and the customers are in a race for every individual dollar.

How Lemonade plans to disrupt the market, or what technology it plans to leverage to take the zero-sum nature out of insurance remains to be seen. But there are perhaps models to look to.

London-based Guevara offers peer-to-peer car insurance; while Germany’s Friendsurance, sells peer-based personal and casualty insurance. Those platforms allows policy owners to form small groups, and premiums are paid into a cash-back which allows members of the group to get money back at the end of the year (provided they haven’t filed claims).

Those moves, some have argued, essentially remove the moral hazard in insurance by removing the ability for insurers to use non-payments of claims as a revenue generator for their firms.

"We’re challenging the way insurance companies work, with a peer-to-peer business model fueled by self-serve technology,” said Wininger, President and CTO. “We’ve seen this kind of combination breathe new life into other industries, and we’re determined to do the same for insurance."

Lemonade is New York based, and currently employs 15. According to TechCrunch, some of those 15 are “titans of industry” but Schreiber declined to name drop past that.

Their $13 million seed round is massive, even by contemporary Silicon Valley standards, but the property and casualty insurance industry generates $1 trillion of gross margins annually, according to Lemonade’s estimates. Those numbers make it attractive, particularly if Lemonade can find a way to crack that business in a way that most consumers find so odious.

"It is very unusual for a company to receive $13 million in an initial round of funding,” said Haim Sadger, Partner at Sequoia Capital, in a statement. “But it is rarer still to find such accomplished founders tackling such a sizable industry … We’re betting Lemonade will transform the insurance landscape beyond recognition. It is one to watch."

Investment Tracker for Week Ended 12-4-15

So much for rebounding in the investment world. From a recent “pop” off of depressed levels, it looked, however briefly, like kindling was being lit. But where there was smoke, there was no fire. Not this past week. The total tally logged by our IT, at least for the past few days, came to $211 million.

There was only one triple-digit deal for the week, and that came through Australia’s financial tech company Tyro Payments, which raised funds from Tiger Global, TDM Asset Management and others. The company will be using the funding to help boost the engineers on staff from 150 to 450 people. The company has also stated that it is growing sales by about 38 percent compounded annually, to as much as $73 million in 2015.

Way down the list we can see that ZeroFOX scored $27 million in Series B funding, with an ultimate goal of a “public exit” a bit closer to reality, which means IPO. That investment series was led by Highland Capital, and also included previous investors including New Enterprise Associates and Core Capital. The table below represents the Top 5 investments ranked by size for the most recent week.

As we can see in the chart below, the fintech sector yet again held sway, with $192 million or 91 percent of the week’s dealflow.

And it is the FinTech universe that saw a rebound even with the anemic pace of investments capping off the first week of December. Though far, far off weekly average tallies excluding large deals seen earlier in the year, there is at least some awakening from recent slumbering wherein the lows of sub $100 million weeks (for the FinTech group as a whole) may be in the rearview mirror.

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Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. The July 2019 edition of the FI Innovation Readiness Playbook examines how the innovation playing field is leveling as small FIs implement bolder strategies and larger banks adopt more measured approaches.

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