Lemonade, Inc: Disrupting the Insurance Industry | In Practise

Lemonade, Inc: Disrupting the Insurance Industry

Founding Member at Lemonade, Inc & Former President at AIG

Learning outcomes

  • Why there is a misalignment of incentives between insurers and insured
  • Core differences in Lemonade's business model versus traditional carriers
  • Challenges Lemonade faced negotiating reinsurance
  • Structural changes in insurance distribution and the role of brokers
  • Challenges for insurers to move away from broker channels
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Executive Bio

Ty Sagalow

Founding Member at Lemonade, Inc & Former President at AIG

Ty is an insurance veteran with over 35 years experience in the industry. He was a founding member of Lemonade, Inc, the insurance technology unicorn, joining the co-founders as the first employee in 2015 as Chief Insurance Officer responsible for building the insurance operations. Ty joined AIG in 1983 and progressed to Chief Underwriting Officer of AIG’s National Union subsidiary and Chief Operating Officer of e-Business Risk Solutions. In 2009, Ty joined Zurich Financial Services as Chief Innovation Officer where he was responsible for new product development across all product lines. Read more

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Great to have you with us, today. I think a good place to start would be to provide some context to your role in the founding story of Lemonade.

I was an insurance guy and have been in insurance for 38 years, and at the time of Lemonade, which was 2015, about 33 years or so, always with big organizations. I was on my own, at that point, operating a one-person insurance consulting firm, after 25 years at AIG, American International Group. I get a phone call from Tel Aviv. I didn’t know it was Tel Aviv at the time, because it was this individual with this nice, British accent. His name was Daniel Schreiber. He wanted to talk to me about this new insurance company that he wanted to create, with another Israeli entrepreneur, named Shai Wininger. These were two technologists; they didn’t know anything about insurance. They were just talking to themselves, for about a month and they had a list of three potential industries that they wanted to disrupt.

Their criteria were that they wanted the industry to be very, very, very big; they wanted the industry to have extremely bad technology and it would be good if everyone hated the industry. I don’t remember what the other two candidates were, because insurance was, by far, their favorite. They decided that they wanted to completely disrupt the insurance industry, but they knew nothing about insurance.

So they Googled, from Tel Aviv, insurance and innovation and apparently, even from Tel Aviv, my name was above the fold. My company was Innovation Insurance Group. It’s always good to name your company the obvious thing that you want to do for a living. They called me up and Daniel asked to see me. I had an office in the World Financial Center, in New York at the time. He came in and we talked for a couple of hours and he asked me to go over to Tel Aviv and talk to him and his partner about this new company they wanted to create.

Why did you think that insurance was so ripe for disruption?

Insurance, in general, is not very creative, which is one of the reasons I love the idea of being an innovator in insurance. A long time ago, I realized that it’s a good career move to try to find an area with very, very few people doing it. There’s not a lot of people being innovation leaders, in insurance. If you pick something that not a lot of people are doing, you don’t have a lot of competition to be best at it. It’s like banking. There’s just something cultural, about insurance, where people don’t think out of the box.

There are, of course, exceptions. One of the reasons why AIG was as successful as they were, for so many decades, was that Hank Greenberg thought differently. He wanted to do things that were different from all the other insurance companies. Most of the time, but not all of the time, he was very successful. That’s how I thought; it was in my DNA. If that’s how you think, then you find an area where not a lot of people think that way. I was lucky.

Insurtech found its place and people like Daniel Schreiber and Shai Wininger, who came from technology, realized that they’d found and industry that was ripe for innovation and was ripe for a need for a different approach towards their customers and a different business model. That’s what intrigued me about Lemonade. It was a different way of conducting insurance.

What was so different about the business model, for Lemonade?

Three things. The first thing that intrigued me was that there is a fundamental flaw in the business model of insurance, in that there is a conflict of interest between the supplier of the product and the customer of the product. For every dollar paid in a claim, to the customer, is one dollar less of profit to the insurance company. Said the other way around, for every dollar that an insurance company doesn’t pay in a claim, is another dollar of profit to the insurance company. So the supplier of the product and the receiver of the product is in an inherent conflict of interest. There’s almost no other business that one can think of, where the business person and the customer of that business person are in inherent conflict. It’s crazy, if you think about it. That was the biggest problem that Lemonade sought to change.

The other issue was that, insurance was meant and was originally created, as a mechanism for society to help themselves. It was a method of sharing the risk between all members of society. When Lloyd’s of London was first created, it was created as a concept between ship captains that were going to the New World and if the ship was damaged, the people who invested in that voyage would lose tremendous amounts of money. If that ship made it to the New World, the investors would make a lot of money. Lloyd’s of London was created by ship captains, coming together and deciding to share that risk, among themselves and among the investors, of those various voyages. If a voyage was successful, many people would share in that successful voyage and if the voyage was not successful, many people would then chip in for the losses. It was about people helping each other.

Yet, somewhere along the line, insurance became not about people helping each other, but about we versus them. A big building, called insurance, against their customers. So the other concept was, people say, doing well by doing good. Helping the world become a better place.

Finally, because Daniel and Shai were technologists, they were technology executives, it was crazy that insurance was not using technology as well as it should. But also, when the insurance industry was using technology, it was to benefit the insurance company and not to benefit the customer. It was a way of the insurance company saving money, reducing their expense ratio, without necessarily benefiting the customer, by lowering premium. It was not customer-focused technology. It was all back-office technology.

We decided to create Lemonade, to solve these three problems. Eliminating the inherent conflict of interest, in the insurance business model. Give back to society, by creating what we called the annual give back, where 100% of the unearned monies were given to charity. Not just any charity, but the charity chosen by the policy holder. We eliminated the conflict of interest, by the way, by creating a SaaS model, software as a service, where we took a percentage of the premium, no matter what. So if there were less losses, we got the same amount of money. We didn’t benefit by not paying claims, because we got the same fee, no matter what. Whether there were a lot of claims, or fewer claims, we didn’t get more fee by not paying out claims. Where there were low claims, the charities made more money, not us.

Finally, we created a user interface; we used technology to create a sweet and delightful experience for the customer. Yes, we used it to lower our own expenses, but we did that as a way of lowering our premium, not making more profit for ourselves.

What’s the biggest risk to Lemonade’s business model?

It’s funny; we had these three new theories and they were new. In addition to that, we were very worried about something that all start-ups are worried about, which is, is anyone going to buy from the new kid on the block? When you’re in insurance, you’re really worried about that. If you think about insurance, it’s about stability, a rock in the middle of the ocean. You’re in good hands; you’re on your side, you have a neighbor. The theory is that you’re protected by someone that’s been around for a long, long time. They’re not going anywhere; they’ve got a lot of money. They’re financially strong.

Now we have a little company, with a funky name of a summer drink and we’re wanting you to trust us, with insurance. The saying, at the beginning, when we were developing our company and we wanted to disrupt a trillion-dollar industry, that’s been around for hundreds of years was, will the dog eat the dog food? Not that we meant to be insulting to our customers; that was not the point. We were creating a widget; will anybody buy the widget? Will anybody buy into our concept? I remember, on September 15th, 2016, we pressed a button to launch the Lemonade insurance policy. We wait to see if anyone is going to buy, because everything is digital. We don’t have brokers; we don’t have agents. We press a button and we see if anyone goes on their phone and buys the policy.

You worry that nobody is going to buy. You’ve spent a year making this thing. You took millions and millions of dollars from venture capitalists, in our case, and you worry. I worried. For about 14 seconds, I worried, and then somebody bought. Then somebody else; then somebody else. It was about 70 people in the first week, I think. Then, eventually, within two years, somebody was buying every second of the day. That was pretty good, but we didn’t know that at the time.

What do you think is the biggest limitation to Lemonade scaling?

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Lemonade, Inc: Disrupting the Insurance Industry

May 13, 2020

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