Interview with Daniel Schreiber, CEO & Co-Founder of Lemonade
David Gogel chats with Daniel Schreiber, CEO and Co-Founder of Lemonade, an insurtech startup based in New York. The property and casualty insurance company offers fast and low cost homeowners and renters insurance powered by technology, honest culture, and a commitment to social good. The company just raised $34 million in series B financing and is backed by top Venture Capital firms including Sequoia, General Catalyst, and Google Ventures.
Daniel Schreiber, CEO and Co-Founder of Lemonade
David: Hello and welcome to the Wharton FinTech Podcast. My name is David Gogel and I am joined today by Daniel Schreiber, the CEO and co-founder of Lemonade, a peer-to-peer insurance startup based in New York. The company offers fast and low-cost homeowners and renters insurance powered by technology, an honest culture, and a commitment to social good. Welcome Daniel.
Daniel: Thank you David.
David: Just to start off we would love to hear about your background and career path that brought you to launching Lemonade.
Daniel: I’m a recovering attorney, you can probably tell the reminiscence of an English accent. I was born and bread in the UK in London and I trained as an attorney. I qualified and I lasted about a year as a corporate commercial attorney doing high tech law. Then in the late ’90s I started what was my first startup and I’ve been in the tech sector ever since.
David: Based on your background as an attorney, what really led you to want to launch your own startup especially in the insurance space.
Daniel: It’s not a natural thing for a tech entrepreneur to want to go into insurance, it connotes all the wrong things. It’s perceived as being dull, as being retro-grade, heavily regulated, heavily capital intensive but myself and my co-founder Shai Wininger were a little contrarian when it comes to that. The very fact that it was so off pudding made it kind of interesting.
Insurance once we did start looking into it, it lapsed together three very enticing things. It is a huge industry, an industry measured in trillions rather than billions. It is something that impacts just about every person, certainly every household in the nation. The size of the industry was very enticing.
Then you deal with the fact that basically it’s remained unchanged, unspoiled by innovation for a 100 years. The Fortune 500 is made up 10% of insurance companies and the average age is just shy of a 100 years old. You’ve got a huge industry and an industry that has been untouched or unchanged in any profound way for a very long time.
You say, “Well, if it ain’t broken don’t fix it, leave well enough alone.” Of course it’s perceived as being deeply broken. It regularly rates as one of the least trusted factors. People do not trust their insurance company, they perceive insurance as a necessary evil rather than a social good. For myself and my co-founder that’s kind of triumvirate. Huge industry, unspoiled by innovation and disliked in its current form was too much to pass up on.
We didn’t really know anything about insurance, it’s not like we have a background in it. We both have backgrounds in technology and tech platforms, in the sharing economy, and we decided to take advantage of our ignorance so to speak. We locked ourselves in a room with a white board for a couple months. Before looking into how insurance actually works, we tried to sketch out how we think it ought to work. It’s very difficult to unlearn something once you’ve learned it. It’s very difficult to un-think it.
We took advantage of the “carte blanche” that we had when it came to insurance. We had a high school level probability theory and a common perception or common understanding of insurance but nothing deeper than that. What we sketched out on that white board some 18 months ago bares more than a parting resemblance to what Lemonade is today.
The building blocks of Lemonade were really thought of in somewhat motivated by trying to find new ways of insurance but also without a deep understanding of the sector at all.
David: You mentioned the building blocks that were discussed when you first launched Lemonade, are those learnings still applicable to the current business model that you guys have run with? What are some of the things that you’ve learned over time?
Daniel: Yeah, they are. In broad strokes what we thought was that a tech approach to insurance would have a fundamentally different approach to the business. Not only would it be obviously entirely digital and instantaneous and free of any paperwork or faxes or anything like that but that it comes with I’d say a spiritually different approach than the one tha the insurance sector has today.
When you think in terms of a tech platform, you think about transparency, you think about a platform approach and really that brought us to say, “Well what we want to do is take a flat predictable fee and nothing more than that.” Our understanding or our perception, our narrative of what is broken about the insurance sector was that there is a conflict of interest at its core.
It is an industry that brings out the worst in people for a reason. Insurance companies make money every time they decline a claim. At the end of the day when you’re demanding money from an insurance company, every dollar they can avoid paying you drops to their bottom line. You end up with a business model where there’s a conflict of interest at the very core of the sector.
It’s not something tangential or the way you’d motivate salespeople. It’s a very core of how insurance company can make money. To our way of thinking, if you’ve got at the very core a cognitive, an adversarial relationship with your consumer where you’re fighting them over the very same coin, that’s something that’s going to be very difficult to overcome and really requires re-architecting the very core business model of fundamentals of the industry.
We wanted to go back and rethink how insurance could work in a way that we take a flat fee and this is really where Lemonade ended up. When you pay us $100 dollars or a $1000 dollars for your insurance, we take 20% of that, we’ll never take more, we’ll never take less. We use your money to pay your claims, and by reinsurance and make sure it’s all covered, but if there’s money left over it’s your money, not ours.
That’s a kind of approach that says we’re here to provide that as a service for a predictable fee and we’re managing your money and we return that money at the end of the period. It’s something of an insight that kind of germinated and became Lemonade from the very beginning and had survived intact throughout the process.
David: You’ve identified core issues with the existing industry and Lemonade’s solution is this creative business model innovation to offer a flat fee for coverage with return of premium to the consumer. Can you talk a little be more about Lemonade’s business model and sort of what makes you unique and different relative to traditional insurance players?
Daniel: Insurance companies typically make money in two ways. They invest what’s known as the float. I take your money today and I may pay it back to you in the future but in the meantime it’s my money and I’m going to invest it. You see big investors like Warren Buffett and others skewing towards insurance businesses because they produce this float which is investible. That’s the first way.
Then second way is insurance companies make an underwriting profit or at least they strive to which means I collect a certain amount from you. Hopefully I pay you less in claims then I’ve collected in premiums and there’s money left over at the end of the year and I pocket that money.
We at first approximation do neither. We collect premiums on a monthly basis, so the money stays in your bank account earning interest rather than ours. If there’s money left over at the end of the year we don’t take it, we return it to a cause of your choosing. Either way that money is not going to be left in our pocket.
The way we do make money is through a flat 20%, obstensibly a management fee which should be very familiar from platforms like an Ebay or a loads of tech platforms rather than from the insurance sector where this is a very unorthodox way of making money. The benefits of it are though readily apparent which is that I never make money by denying your claim, I’m not in conflict with you. In fact when you make a claim I have every interest to pay it to you because it’s not my money anyway and just letting the claim drag on just puts us at odds for no benefit to me whatsoever.
Hopefully it also changes your behavior. Consumers don’t behave very well in insurance either. The adversarial relationship really brings out the worse in people. Upstanding, law abiding citizens who in other spheres of their life are very well behaved really let the devil loose when it comes to insurance in large part because of that adversarial relationship and the distrust that permeates the whole industry. It becomes a tit for tat kind of relationship where you don’t trust me and now I don’t trust you, I’m going to embellish my claims. 25% of Americans say it’s okay to embellish claims which is pretty outlandish. Clearly more than 75 were brought up better rather than to admit that kind of thing to strangers.
That willingness to embellish claims and to misbehave justifies the insurance companies treating you as a criminal and whoever started this cycle it spiraled onwards and downwards and you end up with an industry in a state that we know it today.
We’ve been working with Professor Dan Ariely at trying to inculcate behavioral economics into the lay fundamental motions of what insurance can be and what Lemonade is. That means neutralizing the adversarial relationship, neutralizing the conflict of interest, establishing a business model that puts your money back in your pocket. Brings out the best in the insurance company hopefully because as we say, “We stand to gain nothing by doing wrong by you.”
Hopefully it also brings out the best driver in you because you know that if you embellish your claims, you’re not hurting some nameless faceless bohemeth with whom you feel you have an adversarial and distrusting relationship but your harming a cause in which you believe. Hopefully we raise the level of trust and that in itself then allows the technology to kick and to require less scrutiny, less policing and more of a streamlined process where claims can be paid in many cases literally instantaneously.
David: You mentioned specifically how you guys are addressing neutralizing the conflict of interest inherent in the current business model. Your website claims that users can get insured in 90 seconds and get paid in three minutes. Can you discuss a little bit about how Lemonade leverages technology such as machine learning or chat bots to enhance the customer experience?
Daniel: Absolutely. The buying process is entirely bit based. Today when you buy homeowner’s insurance or renter’s insurance you’re going through a broker. Even if websites have established some kind, sorry even if insurers have established some kind of website, invariably it asks you long and arduous questions to which you may or may not know the answer, what kind of masonry your building is built of? What year it was built? A whole bunch of very detailed questions of which you may not know an answer at the end of which, rather than giving you of a bindable quote, and being able to complete the process, you’re told a broker will be in touch. That’s kind of the state of the industry today.
With Lemonade, having rebuilt the entire stack from scratch and being an insurance company, not just the technology. We are a licensed insurance company ourselves, we write the insurance on our own paper. We own the full stack the whole vertically integrated business. That means that we can do a lot of the processes that are traditionally done by people. We could architect them from the ground up since we’re legacy free for it to be done entirely algorithmically.
All of our insurance is written algorithmically. The process is done instantaneously, it’s done through a chatbot kind of interface. You go to Lemonade.com or you download the app and literally in a matter of seconds, the process is complete. The quote that you get is a binding quote. You take out your credit card and you’re done. I say if you’re in Starbucks buying a coffee by the time you’ve ordered your latte, if you then take out our app and start the process you’ll buy insurance before the barista has made your coffee. That’s the process.
The claims process is similar. You’ll speak to a bot and it’s a chat interfacing, you should give it a try even if you’re not in the market for insurance, just go to Lemonade.com and give it a try and see what’s involved. The bot will ask you a few questions. When did the damage happen? What was it? Was it a burglary or flood, what happened to you? If you have a police report you just take a photo of it. If you have a receipt, take a photo of it. Otherwise just point the camera at your face, your mobile phone and just speak into the camera. No paperwork, no faxes, just tell in plain English, tell us what happened.
In the majority of cases the artificial intelligence will be able to process all of that information, replicate the process that a claims agent would have gone through and often times approve the claim and pay it instantaneously. Literally within three minutes you can definitely submit a claim but often times within that same three minutes, the claim would have been processed and quite possibly approved.
That won’t be true of all claims. The bot might flag things that it sees is suspicious and will require human oversight. For many claims your computer was stolen while you were looking away in the coffee shop and other instances like that, the claim may well be able to be paid instantaneously and we’re hoping that that will be the medium time for settling claims will be measured in seconds not months.
That would be a pretty big departure from the state of the industry today and it relies on both the behavioral economics getting to a higher level of trust but also clearly on artificial intelligence and algorithmically being able to process a ton of information that up until now has required a lot of paperwork, a lot of people’s oversight.
David: Just to follow up on the claims innovation that your business model brings, has this informed your decision to launch renters and homeowners insurance as sort of key products i.e. high volume products? Do you think that sort of artificial intelligence driven claims adjustment would also work for more complex products?
Daniel: I don’t know, we don’t have deep expertise in any other domain. We’ve really thrown ourselves into homeowners. It may be that other sectors are very different indeed. I think that within property insurance, with starting with homeowners but you can see variants of other property insurance, the same would apply. This has I think brought applicability it would have vary somewhat but I think that the lesson of look at what humans are doing and see which aspects of that really need to be done by people, which can be automated. Automate those that can be is something that is happening across industries and insurance isn’t immune to it and shouldn’t be. It does a lot of goodness for consumers when you can lower costs and get rid of paperwork and bureaucracy in the process.
David: Can you talk a little bit about the consumers that Lemonade has targeted. Obviously given the fact that you leveraged technology over the web to drive your platform versus selling your insurance products via brokers, you probably attract a younger demographic than average. Can you talk a little bit about what your consumer base looks like and if it’s what you guys anticipated it would be?
Daniel: Yes, Lemonade clearly does skew towards younger folk. It’s not exclusively younger folk. We saw in our very first day, so you’ve got to be a pretty early adopter to buy from an insurance company on its first day. On our very first day a 72 year old gentleman from the suburbs bought home insurance on his valuable property. The number and the range of people who today like to use technology to do stuff is obviously very broad.
Having said all of that this does skew younger. We’re seeing amongst our users many in the 25 to 35 kind of range. Urbanites by in large and renters more than homeowners. What we’re finding which is pretty interesting is that over 80% of the folks that are coming in and buying insurance from Lemonade are renters insurance from Lemonade are first time insurance buyers. It’s not that they’ve just moved in it’s just that they were turned off by the legacy insurance companies, didn’t want to buy insurance from them and now they’re buying insurance for the first time.
It’s managing to expand the market. We’re appealing to folks who until now were non-consumers and through Lemonade, through the process that we described, through the lower price points, Lemonade’s homeowners insurance for renters starts at $5.00 dollars a month which is often times, 70, 80, or even 90% less than you’ll pay for legacy carriers. For many folks it’s much less expensive, much less burdensome, and therefore it does appeal more to the young urbanites then to the older consumer or people who are already invested in an insurance policy in the suburbs.
That kind of 70%, 80%, 90% savings is due to an oddity of the way insurance works today and it is particularly pronounced for renters. With homeowners, the more property you have the less dramatic are the savings from buying Lemonade insurance. That’s really to do with our overhead. Insurance companies working through brokers and through human intense process and through very high costs of acquisitions, billions spent on advertising, there’s such a high overhead that it’s very inefficient for them to sell relatively cheap insurance policies and they have to burden those policies with their overhead and they end up with a very high cost relative to the amount of insurance being sold.
It’s an unfortunate side effect of the way the insurance industry works because it means the people who need insurance the most, those who are lower down the social-economic spectrum, end up having it the least and paying the most per quantum of risk. Whereas with Lemonade because our overheads are lower, because our cost of acquisition and servicing our customers approach zero dollars, we’re able to burden our policies with far less overhead and get much closer to the real expected losses that people have than any of the competitors can and that translates into much lower entry level costs for renters.
For all of those reasons the technology, the cost, the behavioral economics, the distribution platform, this is something that appeals to younger people more than to others.
David: You mentioned a couple of statistics. I think Lemonade has published for the first 48 hour results on your medium account and shared that information with the world. According to the Medium post, Lemonade sold 142 policies and generated $14,300 in gross driven premiums in its first 48 hours. Can you talk a little bit about Lemonade’s communication strategy and whether you’re concerned at all about sharing competitive data with future competitors and or existing traditional insurance players?
Daniel: Sure we’re concerned, sure we’re concerned. The kind of policy or transparency that we began with that post and will be continuing with has serious downsides. There’s a reason companies like to be private right? Companies go public because they want to cash in on their stock options and investors want liquidity, they don’t do it because they want to have to publicize all of their information. They’d much rather keep that private and they don’t want to step and their missteps publicized. They want to keep their steps from their competitors, they want to keep their missteps from everybody else.
Those advantages of being a private company, would accrue to us as well. Clearly the advantage of not broadcasting to our competitors and being selective in what we share with our customers has an appeal. I think the costs of doing that are too great for us. We spoke about the distrust that pervades the industry. We’re really trying to live up to a different kind of dogma if you like. We’re laying claim to moral high ground. We’re saying that we are trusting and trustworthy. Getting to that level of trust is something that you have to earn, you can’t just demand it.
We feel like to do that requires a greater level of transparency than tech companies usually give, or an insurance company usually provide. We hope that the benefits of being transparent or publishing data about how we’re doing, sharing some of the insights of how we’re thinking about things. Some of the statistics, some of the analysis, we hope that that will signal the kind of culture that we have adopted for ourselves and that that will permeate through the relationship with our perspective and actual customers as well. We think that you can trigger a virtuous cycle that it’s entirely possible to signal their trustworthiness and that consumers will ultimately repay that in kind. You pay it forward. You start off, it’s not only about transparency, it’s also about social impact.
We incorporated even though we are a for-profit company, we’re backed by a venture capitalists like Sequoia and Google and others. We are also a public benefit corporation which means that while we are for-profit we are not only for-profit. We’ve actually received B-Corp certification which means that we’re living up to and committing ourselves to high standards of transparency and social responsibility.
We are hoping that by putting the business on that kind of footing we’re not sacrificing any of the upsides in financial terms. We’re building a company and a franchise that will ultimately be more valuable because of the difference to the incumbents because of it’s ability to broadcast and inculcate a culture of transparency and honesty.
If you consider how much the insurance is burdened by distrust. Let’s open parentheses here for a second. Nobody knows for sure how much fraud hurts the insurance industry. Wikipedia quotes studies saying anything from 10% up to 38% of the money in the industry being consumed by fraud. Whatever the number is the dollar amount understates the true cost to the industry because the existence of fraud on a such a pervasive scale is a harbinger, it’s an indicator of a deeper malaise that really plagues the industry.
Fraud typically is carried out by some hacker in Eastern Europe breaking into your system and that’s who you’re guarding against. In the case of insurance it’s anomalous, it’s your customers who are defrauding you. It is they who are embellishing their claims, it is they who you treat as a criminal and they return the favor in kind. That is highly unusual.
That comes back to what we spoke about earlier is that they did that insurance companies at least in part, make money by denying claims. They are at odds with their consumers. That’s really odd, I’m going to be a little bit hyperbolic but in short a company typically makes money by delighting their customers. You buy an iPhone because you think it’s delightful and that’s how Apple makes staggering amounts of money. That’s great, that’s what capitalism is all about.
Here’s the hyperbolic part, insurance companies make money by disappointing their customers, by being at odds with them. That part breeds this kind of distrust and the fraudulent elements that we discussed the cost of which we discussed a minute ago. That cycle really results in low loyalty, high cost of acquisition, people not wanting to buy insurance when they don’t absolutely have to.
The costs radiate out far beyond the actual cost of the fraud itself into an experience that is cumbersome, distrustful, and unpleasant. For us, kind of close parenthesis and come back, for us to build a successful different kind of insurance company, it’s got to be about more than just finding a cool app. It’s got to be about putting the entire business on a different footing. On a footing that brings out the best in us, the best in you, and then allows technology to create a delightful experience because there isn’t this overhang of me trying to delay or deny your claim and there isn’t your overhang of you trying to embellish your claim to cheat the system.
Publishing posts like the first 48 hours post, and on an on-going basis being more transparent and radiating honesty if you like, is ultimately we hope and we believe the core part of building a different kind of insurance company, a new kind of insurance brand, and we expect will return the favor and give us a return on investment also in just pure financial terms as well.
David: Can we dig just a little bit deeper on Lemonade’s social mission? You mentioned that the company is a certified B-Corp and the unclaimed money goes to social causes that policyholders care with it? Can you talk a little bit about some of those causes that you’ve seen policyholders invest that unclaimed money into and how you vest those social causes.
Daniel: Yeah, we have a section on our website, it’s called Fundraise and it invites non-profits to register and to become part of the Lemonade operation if you like. Although we’ve done nothing to promote this we’ve already had well over hundreds of New York causes, we started in New York, register for that. We’ve got some pretty big ones. We’ve got the Robin Hood Foundation and Clean Water and a bunch of others. Meals on Wheels, a whole bunch of household names and then some very small local charities, public schools where the PTA wanted to raise money for a new computer lab in their kid’s school and what they then do is try and create their own little community around that.
We think this is a part insurance going back to it’s core and so much of this sharing economy is about re-instituting modes of behavior that were once commonplace and got lost with organization and with the distrust and the estrangement that the big cities brought a 100 years at the end of the industrial revolution and that’s why the big insurance companies of today do date back to that period. If you go back to insurance 300 years ago, it was a different fair. It was a much more communal affair. We think that by recovering some those elements would be good for everybody.
If you get a note from the PTA, if you’re a parent of young children and you get a note from the PTA saying, “Hey guys, we’ve just registered with Lemonade. If you do your insurance through Lemonade any left over money from your policy will go toward our kids’ new computer lab,” that’s going to be a win-win for every body right? For us it’s a better way of getting a community to adopt Lemonade, it lowers our cost of acquisition which are savings that we can then pass onto the policy holder. For the community it’s clearly self-serving right? It’s a way to raise money for that new computer lab that their looking to build.
Ultimately it also brings out the best in you in terms of the behavioral economics. When you make a claim and we say to you, “David, oh your computer was stolen, no worries that’s what insurance is for but please remember when you make your claim that unclaimed money is going towards your kid’s computer lab.” You’re much less likely to embellish your claim. This is the kind of the virtuous cycle that I was speaking about earlier.
We don’t see giving money causes as some kind of paternalistic act of charity. We see this as a clear minded self interest. Working with non-profits is good for business. We don’t think that we are sacrificing business for being socially responsible, we think that working with social causes and working in a socially forward thinking way is actually good for business as well. We really think of this as a win-win, a win-win-win situation. We win hopefully, the consumer wins and the causes win. We think that brings out the best in all of us.
David: That’s great. A really impressive mission and execution plan that you guys have laid out. It definitely sounds like a win-win for all parties involved. My last question for you and I think you alluded to this a little earlier. You were founded in 2015, you recently raised $34 million in series B funding. You’re backed by big time VCs including Sequoia, Google, among many others. Can you discuss a little bit about future plans for Lemonade? How do you plan to deploy that capital? You publicly announced that you were planning on expanding to California. Can you share a little bit about your thoughts of where Lemonade is headed in the short term, medium term, and long term?
Daniel: Gladly, we are very fortunate to have some very well reputed and deep pocketed investors like you mentioned Sequoia and Google, General Catalyst and others. Insurance is not cheap. Lemonade is unusual I think unique amongst the insure-tech as it’s become known as space because we’re not simply developing technology, we’re actually the insurance company itself.
We, for reasons that we’ve spoken about in the last half an hour, we don’t believe that the existing infrastructure allows for the kind of innovation that we’re hoping to bring to market. It really require rebuilding the very basics that the building blocks, the business models have to be different which means that to do what want to do we don’t believe you can just sprinkle technology on top. You’ve got to build it from the core up differently.
That may sound hugely ambitious but actually in a perhaps contrary kind of way of thinking but I think that it is an easier way of doing it. Effecting change by bringing technology to bare on a 100 years of legacy is incredibly difficult. Starting with a clean slate even though it means you have to build it yourself, I think ultimately stands better chances of doing something meaningfully different and therefore successful.
We are taking on a big challenge in erecting a new insurance company and a new insurance business model. That does require more funding than creating Pokemon Go or something like that. It’s nothing you can do out of your dorm room necessarily. We and clearly our investors think that you create real value by taking on big challenges. You create value by doing hard things. We’re raised a ton of money but we’re looking to build a new kind of insurance company and we have in fact built and launched a new kind of insurance company.
Our ambitions continue to be expansive, both in terms of the lines, the product lines that we want to do. We started with homeowners and renters but you can expect during the course of 2017 that we will expand into other lines of business. We started in New York and you can expect during 2017 to see us expand geographically quite substantially and yes we went out to California and our goals going to be on California too. 2017 will really be a year for us both experiment and iterate on the products but we’ll also start planting the seeds for broader product line expansion and broader geographic expansion.
David: Good and wishing you and your team best of luck with that.
Daniel: Thank you so much.
David: I think that concludes this Wharton info tech Podcast interview. Thank you so much for taking the time to speak with us today. We wish you best of luck with your endeavors.
Daniel: Thank you, thank you. Same to you. Bye for now.
