The Digital Promise: Part Two

Matteo Carbone, an insurance industry strategist with a specialization in innovation, wrote a post for Insurance Thought Leadership called, “Lemonade: No Sign of Disruption Yet“. In the post, Carbone pointed this out:

Lemonade has written almost $370 million in premiums (showing 42% growth from 2020) … with a combined ratio (gross of reinsurance) above a 150% combined ratio in 2021. This means that, for each dollar of premium paid by the client, the companies’ risk transfer approaches a cost of more than $1.50. Almost the same has happened over the past three years. For each dollar of premium, claims cost 90 cents, including the loss-adjustment expenses … To acquire this (underpriced?) business, Lemonade invested almost 60 cents in marketing for each dollar of premium. All other costs add almost 40 cents. It doesn’t seem that behavioral economics, charity and storytelling have made any dent in the insured risks.

We’re not judging Lemonade, but this is what happens when insurtechs put the tech knowledge before the insurance knowledge.

It Sounds Good on Paper

According to Investopedia:

Insurtech refers to the use of technology innovations designed to find cost savings and efficiency from the current insurance industry model:

  • Insurtech is the use of technology innovations designed to make the current insurance model more efficient.

  • By using technology such as data analysis, IoT, and AI, insurtech allows products to be priced more competitively.

  • Insurtech is used to more effectively process claims, evaluate risk, process contracts, or underwrite policies.

Theoretically, that all sounds pretty good. Bring in some new technology to innovate and disrupt a stodgy old industry. But as Albert Einstein said, “In theory, theory and practice are the same. In practice, they’re different.”

The fact is most carriers can’t afford to purchase premium at such high rates. Instead, they need to employ technologies that will work for them and for their particular business models. The good news is we have time, and time will tell whether the Lemonade business model will work. While we’re watching, though, focus on strategies, business models, and technologies that work for you now.

If it sounds too good to be true, it might be … at least until it’s proven.

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