Esurance Founder Gives Insights on Viability of Lemonade

Lemonade is also struggling with 45% policy retention, after two years.  That looks more like some non-standard auto writers! Best-in-class competitors have a 70% retention rate. This is likely due to the fact 90% of policy sales are to first-time insurance customers.  Regardless of the drivers, an inability to retain renter policies prevents execution of the company’s growth strategy, and severely decreases customer lifetime value.

Lemonade is highly focused on the use of technology to make the purchase and claims handling processes as customer friendly as possible.  While laudable, to successfully retain customers, the company must offer value that extends beyond purchase and claims (nearly 95% of customers do not submit claim in any given year).  Furthermore, the nature of the Homeowner (vs. Renter) claim process requires greater complexity and more reliance on human intervention, both of which will reduce margins and increase the need for the company to increase rates.  Given the concentration of business in highly regulated states (e.g., California and New York) the opportunity to increase rates is severely constrained.

Another factor which may prevent Lemonade from increasing its Homeowner graduation rate is the fact the company is using a HO-3 policy form (with the addition of optional replacement cost coverage).  While this is probably sufficient for many customers in lower value homes, more affluent customers demand the coverage provided by a HO-5 (open perils) policy form.  While nothing will prevent Lemonade from selling a HO-5 policy in the future, the fact the company does not currently offer such coverage is a limiting factor on its ability to improve the rate at which customers graduate from a Renter to a Homeowner product.

We obtained a homeowner quote from Lemonade, for a $650,000 home in Texas.  Interestingly, the UI capped the All Other Peril (AOP) deductible at a maximum of $2,500 and offered the Wind/Hail deductible at a single value of $5,250 (e.g., no choices).  We checked the latest Texas rate filing for Lemonade and confirmed other deductible choices exist.  It is not clear why the alternatives were not made available, as higher deductibles (e.g., 2% and higher) are chosen by more affluent customers as a way of minimizing premium cost.

Another less subtle but potentially critical factor with the potential to limit Homeowner production is the fact Lemonade does not intend to pursue an AM Best rating, but rather will stick with its Demotech rating. The lack of an AM Best rating is frowned upon (outside of Florida) by affluent customers, particularly those who have significant insured assets (e.g., business owners).