Lemonade Is An Interesting Technology Play In The Insurance Industry (NYSE:LMND)


Lemonade (LMND) is a pioneer of the rapidly growing insurtech industry. The company is leveraging technology to improve efficiencies and reduce bureaucracy in insurance. Lemonade, which is built upon an entirely digital substrate, is looking to upend the traditional insurance industry with the use of bots and machine learning.

Changing the Insurance Paradigm

Technology is having an increasingly large influence on the insurance industry. Lemonade is capitalizing on this trend and attempting to completely upending the traditional insurance business model. Although the traditional insurance industry has long been resistant to rapid technological change, this is likely to change.

The emergence of AI and increasingly powerful computer technologies has the potential to change the paradigm of insurance. Lemonade is one of the first insurance companies to successfully use AI and machine learning as a basis for their business model. This relatively new approach to insurance could dramatically change the landscape of insurance.

The digitization of insurance has the potential to completely change how insurance is done.

Source: emerji

A New Approach

Insurance companies essentially collect large amounts of data to quantify risk. Lemonade’s digital substrate allows the company to capture far more data than traditional broker-based companies. In fact, Lemonade estimates that it collects ~100-fold more data compared to traditional incumbents.

What’s more, Lemonade experiences a continual cycle of improvement as more data allows for their AI to improve. This translates into better marketing, fraud detection, and understanding of customer needs, which in turn attracts more customers. The company’s use of bots and machine learning is also vastly improving the customer experience.

By removing brokers and the bureaucratic elements of insurance, customers are able to save large amounts of time and avoid headaches. According to Lemonade, “the median time to buy a policy from lemonade is about 90 seconds” and “roughly a third of our claims are paid instantaneously.” The incredibly efficient nature of Lemonade’s technology allows for cost savings on both the company and customer’s sides.

Lemonade’s approach is clearly working as the company grew its Q2 revenue of $29.9 million by 116.7% Y/Y. The company also increased its customer base by 84% to 814,160 customers. Perhaps most promising is the fact that 70% of the company’s customers are under the age of 35. Lemonade’s ability to capture a younger customer base should pay dividends in the long-term.

Lemonade’s innovative use of technology is attracting a relatively young customer base.

Source: business wire

Large Risks Remain

While Lemonade is incredibly promising, the company is still relatively unproven in the industry. Insurtech, in general, is still a relatively new industry that continues to change at a rapid rate. Moreover, Lemonade is utilizing some high risk, albeit high reward, strategies. The company’s reliance on reinsurance, for instance, poses risks to the company.

Potential defaults on the reinsurers end will negatively impact the solvency and profitability of Lemonade. Lemonade will essentially be responsible for the insureds’ claims if the reinsurer defaults for whatever reason. Given that Lemonade will cede 75% of its premiums to reinsurers, this risk cannot be ignored.

Lemonade is also far from the only player in the insurtech industry. Root Insurance, for example, is also making large moves in the emerging industry and uses arguably more unique technologies. For instance, Root uses an app to measure a plethora of driving behaviors in order to more accurately evaluate drivers. Root’s app even uses machine learning to differentiate between drivers and passengers. Competition from companies like Root and other emerging insurtech players will likely only grow more fierce as the opportunities in the industry grow.

The insurtech industry is expected to grow an incredibly rapid rate in the coming years. While this is obviously a good thing for Lemonade, it will also attract far more competition.

Source: grandviewresearch


Lemonade is certainly expensive at its current market capitalization of $2.82 billion. The company only expects a 2020 revenue of $86 million-$88 million, which indicates that investors are already pricing in a great deal of growth. However, Lemonade is one of the leading figures in the rapidly growing insurtech industry, which has the potential to upend traditional insurance. Lemonade may still have a good deal of upside given the company’s large addressable market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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