We have run the numbers……..
In February 2017 Lemonade published their Social Impact Report for the first 100 days of trading. As a Public Benefit Corporation social good is part of Lemonade’s legal mission and business model - not just marketing fluff, so we are told.
However a closer examination of the numbers might suggest other motivations at play. Firstly as a Peer-to-Peer insurer, Lemonade take a transparent ‘20% fee’ to run everything. This is considerably lower than the typical 35% expense ratio most insurers report and is no doubt achieved by cutting out Brokers and acquiring customers through social media platforms like Facebook and LinkedIn.
This brings us to the 20% annual 'Lemonade Giveback’ - if there is any money leftover after paying claims. Whilst donations of any size to a good cause or charity must be applauded, customers are forced to choose from a 'pre-set’ list of a dozen charities. From the very small print on Lemonade’s website we always knew this donation was ’subject to board discretion and meeting certain financial standards’. We now know donations are capped at 40% - no doubt at the insistence of Lemonade’s financial backers. In the UK this compares with the c. 30% of commission normally passed back to a charity by an Insurance Broker as part of a ‘Commercial Arrangement’ between the two parties.
Then there is the 20% Loss Ratio paid out for the first 100 days of trading in 2016. Essentially this means only 20% of customers who bought Homeowners or Renters insurance made a valid claim against their policy. Reciproco doesn’t operate in the US, but with such a low Loss Ratio we are sure the UK Financial Conduct Authority (FCA) would have some questions as to whether customers are getting value for money? A key objective of the FCA is to achieve ‘better customer outcomes’. Admittedly Lemonade state they do not know what the Loss Ratio will be on Giveback-day in June 2017, but if the Loss Ratio stays at 20% Lemonade would Giveback to charities 20c of every dollar they collected in premium.
This brings us to the final point - if the Peer-to-Peer model applies a flat 20% fee, the Loss Ratio stays at 20% and you’re forecast to Giveback only 20% to good causes and charities, who gets to keep the remaining 40% that is left on the table? Our guess it is the good old VC’s chasing high returns. If Lemonade was truly set up to create social good for the communities it serves, why not donate the full 40% to charity in June 2017, even if the Loss Ratio ends up being higher than 20%?
This raises another interesting question - if the Loss Ratio drifts towards the typical 55 - 60% for this Line of Business, will the VC’s stay the course and accept minimal returns? Aligning behavioural incentives between the customer and insurer is notoriously difficult as any underwriter will tell you. At best Lemonade can expect to ‘nudge’ the Loss Ratio towards a lower figure. But to suggest that nearly 35 - 40% of all claims are either exaggerated, dishonest or fraudulent is a damning view of modern day society.
At Reciproco we know it is only what you actually DO that makes a difference. That’s why we provide an upfront, guaranteed donation of 50% of our commission. We create insurance communities by providing specialist home insurance and a reputable and independent source of fundraising to the not-for-profit sector. We call it being authentic.