Lemonade vs. HelvetiaShai Wininger & Daniela Maag - START Summit 2017

So coming from Fiverr, which is a consumer-facing company, doing insurance is not a natural thing. And I think the first thing that we started looking at when we thought about doing an insurance company, which is crazy by the way, that's a different topic, was what's broken with the industry, what can be fixed. There's a lot of startups doing facelifts and nice UI over insurance companies, insurance brokers, and things like that. But we felt that if we're going to address this industry, we have to do something more profound.

And when we looked into the way that people interact with insurance companies, the first thing that came up was the fact that people don't like insurance companies very much. I'm talking about the US market, the US industry, so no offense here. I'm sure that, you know, I mean, just by looking at your website today, I love you guys already. But you know, it's very common to not like your insurance company. And when you dive deeper and you look at why, you discover something that is pretty amazing, and that is there's a conflict that exists. I think it's the only industry maybe that relies on a conflict between the customer and the insurance company.

And so we all pay insurance premiums all the time, and these insurance premiums are collected into this big bank account. And at some point, I need to file a claim, something happened to my home or my car or whatever, and now there's a problem. Because insurance companies, if they go out and pay my claim, they lose money. If they don't pay my claim, they earn more, because they basically fight on the same coin. So every dollar that I claim is a dollar less on their bottom line, and that's a problem.

You know, when you talk about innovation and experience of having something like a bank or an insurance company interact with a customer, the first thing that you want to do is create something that is instant, right? You have it on your phone, you want to get insured, you want to hit a button, you want to get insured. You want to file a claim, you take out your phone, you say a few things, and you want to get paid immediately. That couldn't exist with that conflict going on, and that was the first thing that we've changed.

So a long answer to a short question: the first thing that we've changed was to instead of using that remaining funds that end up after paying the claims from out the premium, we just take 20% off the top. So it's just like a SaaS model if you think about it. So we take 20% regardless if it's a great year or a bad year, we make our 20%. But here's the cool part: everything that's left, the 80%, has to go out of our account. We can never keep it, and that's our commitment to our customers. So there's no conflict.

So we pay the remaining funds for claims, and whatever is left, we let our customers choose where they want to donate that money. So it goes to causes and charities and whatnot. So that's basically the idea behind Lemonade. And to add to that, we have obviously multi-layers of AI and machine learning and things like that that will allow this experience to exist within your phone without going through brokers and agents.

Yeah, so we knew from the start that we wanted to do something in the P&C space, property and casualty. It's a fancy way to say stuff. Because you know, life insurance, it takes ages to go through a cycle, and it's very not in line with the way that we look at technology today. We want to have short cycles. And with auto insurance or homeowners, auto seems like a very crowded space. There's a lot of activity going on over there. And also, you know, buying auto insurance is like buying a catalog item, so it's a fight over price, and there's not a lot of tech challenges around risk or rating risk around cars.

Homes is totally different, right? Your home is very different than mine, and Daniela's home is probably very different than mine. And Daniela by nature is a very different risk than I am, regardless of my home. And so that became a huge challenge for us, to understand and find a way to have algorithms really kind of being able to understand those risks and price the premium, price the policy accordingly. That was a challenge that we wanted to tackle.

So obviously, I will answer yes. I don't see a scenario where I say no to that question if it was true. But no, seriously, I think it is. And there's a few points that I think really make it disruptive. The first one is that in the homeowners and the renters business, it's not common to sell insurance directly to consumer. And going through brokers or agents creates a distance between the insurer and the customer, and that distance is basically the entire reason why there's not enough innovation in the space. Because if you go through a broker, you can't innovate user experience. If you go through a broker, there's nothing you can do around messaging or brand or loyalty, right? Their loyalty is to the broker. And so I think that being direct-to-consumer is the first thing.

The second thing is affected by going direct-to-consumer and using AI instead of people. So just as a side comment, one of our KPIs is the reverse correlation between the headcount in the company and the revenue that we make. So you want to have as small a team as possible and as much revenue as possible at the same time. And what that does is it pushes us to work towards automation, towards AI, towards machine learning, and self-serve experiences instead of having this huge organization with tens of thousands of people working for it.

Yeah, just one comment on that. First, I hear what you're saying. I obviously disagree with some of that. I think that disruption today is very different than what we saw a few years ago, and every year that goes by, it becomes more exponentially quicker and shorter in time. It used to be a creeping thing where incumbents would just ignore a certain growing new player in the market. I think today it happens, it could happen almost overnight. I think we saw that with companies like Uber. We saw that with Wikipedia, who really reshuffled the cards completely for companies like Britannica. I mean, it happens all the time.

And as what you said about disrupting the business model, yes, I mean, insurance, we haven't changed anything profound about the way that risk is handled. I mean, it's the core of insurance, you have to do that. Insurance is the same thing. Rating is pretty much the same, forms are pretty much the same, underwriting is pretty much the same. But there's a big difference. The difference is, and I think you said it and I totally agree, and that is the cycle time of change. So just to give you a glimpse into what that means, we deploy four times a day to production on average. That's four changes a day to either algorithms, apps, user experience, things that we learn. Why? Because we have the customer directly connected to our systems. We have millions of data points for each customer, millions. And so you constantly learn and constantly improve.

And that cycle of improvement lets us do something that is disruptive, and that is if you look at the pricing of Lemonade renter insurance in New York, we're on average 80% cheaper than incumbents. Now, if you don't call that disruptive, I don't know what is.

Yeah, so yeah, I agree. I mean, I think that eventually, I just spoke with Daniela just before we went on stage, and I told her that for me, this session, it's not David versus Goliath. David with Goliath. And I think that that's going to be the story of this industry and the way that it grows. Daniela mentioned before that the incumbents and traditional insurers are kind of taking steps towards adding innovation into their process. I'm less optimistic on that front. I think it doesn't have necessarily to do with insurance, but it's huge organizations, like as you said, it's an aircraft carrier. To make it act like a speedboat, it's not enough that the captain wants to make a quick turn, the ship has to go with him, right? And so I think that the quickest and simplest, most sensible solution would be cooperating and kind of creating alliances between traditional insurance companies and startups.

So first, you have to be very smart who you take money from, and that doesn't have to do with the insurance space, it's a general comment, right? I think that I've seen so many startups crash and burn just because they took money from the wrong people. And in our case, it's pretty much the same thing. We won't take money from a company that is a potential direct competitor with ours unless we see a mutual kind of runway for the two companies to collaborate at some point, and then it becomes a strategic thing. XL Catlin's investment in us was amazing. It brought in a lot of knowledge that we were missing on the inside of the industry, and I think that the right combination is always great. You don't have direct competition, of course.

There's something that we didn't mention so far, and I think it's very important not only for insurance but generally for startups, and that is the brand. And I think that one of the challenges that the traditional insurance face with the growth of the millennial generation is the mismatch between the brand tone of voice and approach and worldview of a huge corporation that exists, I mean, you guys exist what, 150 years, 1850? It's impossible for a company like that to communicate with the generation of people who spend their lives on Snapchat and think that Facebook is for old guys, right? So it's a totally different ballgame.

And I think that one of the challenges, regardless of those small speedboats that you guys are building, which is great for learning, it's great for understanding what the next thing is, going to be launching a company like that for an insurance company that relies on brokers, that relies on the middleman, is impossible because they're bound by their distribution channel. The distribution channel is like a weight on their feet and prevents them from moving faster. And so I think that the best thing for the industry would be to have incumbents kind of acquire players and startups. So this will be much cleaner and in a way without cannibalizing their existing user base and obviously the distribution channel.

So I don't have the talent to predict what's gonna happen two years from now, let alone 2025. But I can make a wish for us as a company. I would love to see us continue to innovate. I think that's one of the biggest challenges of companies, specifically when they succeed. It's kind of counterintuitive, but the more successful you are, the more busy you are with growing the business and becoming optimized and kind of forgetting about the broad strokes and testing broad and very bold ideas. So I wish that we continue with the innovation and lack of fear to do things that are risky from the corporate perspective, of course, nor our customers. And I think that I'd like to see the company managing to do a lot of disruption, a lot of noise in the industry, continue to be kind of the black sheep of the insurance industry. I think that's a position that is very, very good for us. We like that very much.

I actually think I want to make a comment that I think that, you know, back-end is super important, but it's not as important as people might think. I mean, specifically for a startup. I mean, we've built our own back-end and it's gorgeous. I wish I could show it, it's really beautiful. But I don't think it will impact the way that we sell more or less policies or give a better user experience on the front-end. In the end, it's all a game of distribution, it's a game of unit economics, and it's a game of customer acquisition costs. That's the game, right? And so back-end is important, but it's not as important for exponential growth. That's my opinion.

Totally, I totally agree. What I said was not that it's not important. I just think that when you have limited resources, sometimes it's a good thing because it kind of forces you to focus on the really important problems. And the way that having a limited team requires you to have a lot of automation and not as much manual processes. So whenever something goes to a human and it has worked, a problem, we look at it from a product perspective as well. So we don't only solve it for the specific case, we also learn how we can automate that for the future. So the system kind of grows by itself and becomes more and more efficient, more automated during the way. But I'm just saying that the thing that traditional insurance companies take for advantage, which is the distribution channels, their brokers who are incentivized by getting a revenue share for policies, is something that you guys are used to. Being direct-to-consumer creates a new challenge that incumbents don't have, and that is getting to customers at the right price at the right time and getting them on board, which is a big challenge. So if there are any insurtech people in the crowd now, or even FinTech in general, I would focus on that specific case: how do you get customers for 10x lower cost than the existing industry? Everything else will fall into place if you have the right...

That's an amazing question, and I think this is the core of Lemonade. Just to give you an example, it's part of our culture to be customer-centric. And much like if you think about tech companies, tech companies always want to delight their customers, right? They invest in customer experience, in design, in tone of voice, in emails. They would go to shows and bring a lot of swag and things like that just to delight people. It's not necessarily the state of mind of a traditional insurance company. We bring that to the table. And so just to give you a few examples: first, we're now hiring someone who will head our customer care team, and we call that position, it's gonna be a VP of Customer Love, right? Because that's how we think about our customers. In many cases, we would go an extra mile and pay people things that they don't expect to get, because it's not our money. And we have a saying: it's not our money. People pay this money and they expect to get something in return, and because we don't have anything to gain by keeping it, we're so happy to give it back.

Insurance fraud. So obviously I won't go into details of how we do that, but I can just say that because we're direct-to-consumer, unlike traditional insurers who go through brokers and they fill out forms on paper and then they actually send them to someone, so there's a disconnect between the customer analytics, the information about their social graph and things like that from the insurer. We are connected constantly through the app on your phone, so we know a lot about the assets that you are to insure. So we're connected to hundreds and thousands of different data points. So let me give you an example: when you sign up for insurance, we know where you are, we know how old you are, but we know also a lot of details about your home. So we know the distance from water, all in real time, distance from water, what's the history of floods in that area, crime history, is the school nearby considered a good school or not, how are you as a person, we size you up as a potential risk, did you have previous claims, everything happens in milliseconds.

And so I think that the fraud stage is too late in many cases in insurance, because once you have a contract, you're pretty bound by that contract. It's very hard not to pay a claim if you think it's fraud, you have to do a lot of work to prove that. I think most of the logic comes in the underwriting phase, which is just cutting off the potential risk at the right time.

So again, what I said was that we take 20% flat fee as a SaaS fee, right, so to run our business. And then we pay reinsurance, and we take about 15% for our surplus, it's called surplus, a reserve or surplus. And so I hope that answers the questions in regard to that. Anything else you wanted to know specifically about reinsurance? It's about the retrocession program, if you have a retrocession program with XL Catlin, and if basically you reinsure your result, of course. So the answer is, of course, we offload a lot of the risk. And so we're a risk-bearing insurer, okay, we're a carrier, so we're not taking away that. But just like a lot of startups, it doesn't have to be tech startups in the insurance space, you have to cap your risk when you grow because the book of business is very volatile in the first few years. And so yes, we have about ten reinsurers, actually I think it's eight reinsurers, you know, XL, Munich Re, Korean, and a lot of other companies. And so yeah, I mean, that's a very important part of the business, and it's also something that drives your rating. You know, it's very important to have the right rating, specifically in the US. We're rated A exceptional, which is a very high rating for an insurance company, specifically when you just start it. And part of that comes from choosing the right reinsurance.