lemonade insurance
Lemonade insurance How does work? Lemonade takes a fixed commission out of your premium of 20% (and another 20% every year you renew with them and pay another premium). So if you pay $1,000 a year for home insurance, they will take $200 of that a year, book it as revenue, and the other $800 goes into actually covering damage to your home and stuff.
The $800 gets split into two parts.
$400 for immediate short-term payouts (or claims) made by policyholders. If the claims made by customers in a given year are “light” and there is some of this $400 leftover, they donate the leftover to charity. This is to encourage people to not “cheat the system” and prevent insurance fraud because you are stealing from a charity instead of the insurance company. Up for debate if this actually works.
The other $400 is set aside for long-term “bad year
Or catastrophic payouts where there are a lot of big claims. Instead of taking all the “bad year” risk themselves, they buy reinsurance. It’s like insurance for an insurance company.
So if there is a bad loss year, they can still afford to pay out the large $$$ claims and don’t go bankrupt. But of the $400 in reinsurance, lemonade says that they only buy $200 of this reinsurance “and $200 of this reinsurance they keep in the house. Meaning, half the time, your bad years are being “reinsured” by other policyholders, kind of like a standard insurance company.
So in summary:
Lemonade: $1,000 policy
Lemonade Fee : $200
Reinsurance: $200 (internal) + $200 (external) = $400
Claims & Charity: $400
Standard Insurance: $1,000 policy
Standard Fee:$100-$200 dollars
Reinsurance: $0-$250 dollars
Claims: the rest
So in reality, they are not too different! Lemonade has a sexy feel and look, and had talked a lot about creative new ways to market their product, but at the end of the day, they are another insurance company with newer tech and a “we donate to charity” clause.
Keep in mind they are NOT donating to charity
Out of the reinsurance pool, but the short-term, expected claims pool of $400. If their claims models were 100% accurate, they would not have any money left in this pool to donate to charity.
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