Lemonade, the Insurtech, announced that it intends to introduce Auto insurance within the next few months. This would be their second major product launch in 2021. In February, they teamed up with Bestow to launch Life Insurance. When Lemonade Auto Insurance is introduced, it will be their fifth product after Renters, Home, Pet and Life.
Why this makes sense:
- It is simple: It is a natural extension of their wish to become a life cycle carrier. As they have discussed in the past, their goal is to convert policyholders from renters to home policies. These policies are more valuable and theoretically offer them more profitability and, more importantly, they are stickier customers. I suspect Lemonade realized that when Covid accelerated many renter moves from urban areas to suburban areas, this became a goldmine for their desire to sell them home insurance. However, along with the move came the need for these customers to own cars. And since they do not currently offer a car product, it prompted these current customers to shop for insurance. They probably lost more customers than they gained.
- This reduces their overall customer acquisition costs: in the short term, they will cross-sell the heck out of their current customer base of more than a million customers. By doing this, their acquisition cost for the auto policy might be as low as a few dollars. This means that their average cost per product acquisition might fall by 20% – 30%. More importantly, the lifetime value of their customers may more than double.
Why that doesn’t make sense:
- Personal auto is a race to the bottom: The auto insurance market is a hyper-competitive market prone to switching and price comparison shopping. It is one of the most expensive search terms, meaning that once Lemonade has plateaued with cross-selling into its current customer base, their acquisition costs will go through the roof.
- The market for electric vehicles is complex: they claim that the product will be “especially attractive to drivers of EVs and environmentally-friendly cars.” This market is certainly developing, but the manufacturers of these vehicles are also entering the insurance market (Rivian SUVs, GM with Onstar, Tesla and Dailmer), and they have a leg up, because their products are directly connected to their vehicle platforms. Moreover, electric vehicles and hybrid vehicles are more costly to repair, so the severity increases. A minor error backing out of the garage can damage a $5K sensor.
- You have to take down the Golliaths: The top ten car insurance companies account for 75% of the market. They spend billions on advertising and brand awareness, and they are becoming as sophisticated as the insurtech startups like Root and Metromile. Many of them have created sister brands to bring telematics products to the market for millennials such as Spire and Hi-Road.
- Slick tech isn’t enough: Lemonade declares that they will use technology to deal with emergencies and settle claims quickly. Will they provide a better emergency service than Farmers or Wawanesa Insurance by working with Honk Roadside Assistance? Will they settle claims faster than Frankenmuth, Amerisure, Responsive or the many other carriers that use the payment platform of OneInc? They are unlikely to differentiate themselves more than the market has already done.
What this means for the incumbents:
As an incumbent carrier, this is a continuation of the message “you need to ensure that your product and service offering is modernizing”. If you have not yet done so, here are three areas to explore:
- Product market fit: Does your product meet the changing needs of your current and prospective customers? Can you sell and serve as they want? Whether through agents or directly? Can you continue to grow if you restrict yourself to just one sales channel?
- Pricing sophistication: Are you using newer sources of data telematics and third-party data to improve the price and underwrite your policies quicker or better?
- Analytical rigor: Have you invested in analytics and analytical brainpower to critically evaluate your portfolio? Do you use analytics to improve service? Reduce fraud? Identify litigation exposure? Just to name a few.
I wonder if Lemonade will be the first US carrier to crack the code when creating a real container insurance product. One where the customer can add products and services as easily as placing items in the Amazon cart and ultimately presenting them with a unified single price. More importantly, a unified experience – from acquisition to service – that is a product and a company I am waiting for!
Feel free to reach out.
Insurtech Advisors is dedicated to helping regional insurance carriers and agencies find and partner with Insurtechs enabling you to thrive and continue to meet the needs of your members and independent agents. We work closely with your team to identify opportunities and aspirations and then personally curate and introduce you to the best Insurtechs to pilot.
Kaenan is a professional in the areas of block chain, telematics, wearables, analytics, artificial intelligence (AI) and Insurtech. He has played a key role in innovating many start-ups and established carriers. His advice has been widely appreciated in the financial community, which resulted in multiple quotes and publications in various media.
Most recently he was Practice Lead for Innovation, Fintech, and Strategic Insights at EY. Throughout his career he has held leading roles within Marketing Strategy and Decision Management with top Insurance, Banking and Finance companies, including USAA, Citibank and Sallie Mae.