Daniel Schreiber works out of a Manhattan WeWork, equipped with the expected amenities like comfy couches and beer taps. Just outside the conference room, a couple of 20-something guys play table tennis, their errant shots occasionally bouncing off the glass partition.
Schreiber isn't exactly one of the boys: He's a former lawyer and he's been in the tech industry for 20 years. But at less than two years old, his company, Lemonade, is still an infant--at least in the insurance industry. Among the top 10 homeowners insurance companies, the average age is 104 years.
"These companies are a byproduct of the Industrial Revolution," he says, "but they've managed to ignore pretty much every revolution since then."
Lemonade, of course, is pitching itself as a new kind of home insurance company. It operates almost entirely online with no human brokers or underwriters, and promises that everything from signing up to getting a claim paid takes just minutes, thanks to algorithms and artificial intelligence. Here's the real kicker: Lemonade says it erases the tension that exists between insurance companies and their customers because it has figured out a way to pay out claims so that it has zero effect on its bottom line.
A 'necessary evil.'
Insurance is supposed to offer its customers peace of mind and financial aid during some of their most vulnerable moments. Yet at its heart, it pits providers against their customers: Each dollar that the company doesn't pay out is a dollar more it gets to keep.
"Most Americans view insurance as a necessary evil," says Shai Wininger, Schreiber's co-founder, "rather than a social good."
The two tech veterans think they can change that. They both were ready for their next venture when a friend introduced them in 2015. Schreiber had just left wireless charging startup Powermat, and Wininger, who co-founded services marketplace Fiverr, had recently stepped away from his role as the company's CTO. They knew they wanted to shake up an industry. Insurance wasn't near the top of the list, but one number helped change that: $1.2 trillion, the size of the U.S. insurance industry in 2015, according to the Insurance Information Institute. (Property and casualty claims account for 45 percent.) It also helped that the business model hasn't changed for decades--and it's one of the industries consumers tend to despise.
"As an entrepreneur, that triumverate of huge, unchanged, and unloved always makes things interesting," Schreiber says.
Like any insurance company, Lemonade (so named for what a person can do when given lemons) collects premiums. The portion of those premiums that the company keeps at the end of the year--for profits, salaries, and other overhead costs--remains fixed at 20 percent. The rest gets donated to a charity of the customer's choosing, including Make-a-Wish, Teach for America, and more than a dozen others.
Lemonade then pools premiums together with those of other customers who choose the same charity, and at the end of the year, all of the group's unpaid funds go to that cause. This is intended to change the dynamic.
"I'm never going to make money by denying your claims," Schreiber says. "That means you're bringing out the best behavior in me, because I have no incentive to deny you. And hopefully it brings out the best behavior in you, because when you're claiming your stolen bike, I'm reminding you that it's the firemen or students who you want to support who are going to suffer if you embellish your claim, not Lemonade."
The business model has attracted excitement from investors. The startup's $13 million seed round was the largest of any U.S. company in 2015, according to Bloomberg. Sequoia Capital, who led the round, made its biggest seed investment ever. To date, The company has raised $60 million from investors including Google, General Catalyst, and Ashton Kutcher's Sound Ventures.
How it works.
The company offers homeowners and renters insurance. Algorithms calculate your fee, based in part on factors like your neighborhood's crime rate and your home's proximity to a fire hydrant. For many renters, the monthly premium comes out to the company's minimum of $5; for homeowners, the price starts at $25. Higher coverage costs a couple dollars more.
When you file a claim via the app, you must record a video of yourself explaining the loss. Lemonade's logic: Studies have shown that people are less likely to lie when looking into a mirror. That feature, like many of Lemonade's other subtle cues, was added at the recommendation of Dan Ariely, a psychologist and the company's chief behavioral scientist. For instance, the app makes you sign an on-screen pledge of honesty before placing your claim; before you hit Submit, it reminds you explicitly that the money paid for your claim will be taken not from Lemonade, but from the charity you'd previously selected.
The psychological effect at play is called priming, which refers to the way presenting humans with a stimulus can affect their response to a second stimulus. It's the same reasoning behind why witnesses in court must swear to tell nothing but the truth before taking the stand.
Carving out a competitive advantage.
Lemonade is betting these automated features will lessen the likelihood of insurance fraud, which costs the industry $40 billion each year. The FBI reports that insurance fraud in turn costs the average American family between $400 and $700 in increased premiums. Those kinds of price increases would wipe out Lemonade's competitive advantage.
Another challenge will be in how well Lemonade's technology can handle the claims process sans humans. "This approach works only in the simplest situations," says David Paige, an attorney who has spent 28 years representing and advising insurance companies. "I think the only people who will respond favorably will be the people who have a very uncomplicated property claims with relatively low dollar amounts."
Indeed, from its September launch through May, the company paid 117 claims at an average of $1,224 apiece, a fairly low average claim size for a home insurance company. The reason? Ninety percent of the company's policyholders are renters, who are likely to have less expensive property.
While Lemonade is designed for everyone, the company is targeting young urbanites in the 25 to 34 range, most of whom rent and didn't have property insurance before signing up. "In a way," Schreiber says, "we're fighting against non-consumption." And it's not at all a sure bet that Lemonade will convince mass numbers of renters to pay for insurance they previously didn't think they needed. Only 41 percent of renters have insurance, according to a 2016 Insurance Information Institute poll.
The 36-person company is working on getting regulatory approval in as many states as possible by the end of the year. Lemonade currently operates in New York, California, and Illinois. While the company won't reveal revenue numbers, it currently has more than 14,000 customers, and more than half of them signed up in May. Earlier this month, it received its license to operate in seven more states, including Arizona, Texas, and Virginia.
"I don't pretend like it's all utopian," Schreiber says. "This is about bringing your best self to the table. Instead of treating you like criminal, we treat you in an upstanding way. If we get closer to that, then everyone wins."