Shortcomings with Lemonade’s model

 Lemonade relies on a “Peer-to-peer” insurance model wherein lemonade underwrites and

pools policy-holders with similar risk profile into common pools based on the additional
filter of policy holder’s choice of charity to which their unclaimed insurance premiums flow.
The approach is very similar to the traditional model and the P2P wording is misguiding at
best.
 Lemonade’s claim of “behavioural economics” helping them to reduce fraudulent claims
also doesn’t function well. They have similar levels of fraudulent claims in comparison to
their underwriting pool just as any other insurance company.
 Lemonade also is at a data advantage as their machine learning and AI algorithms can
easily be spoofed by fraudulent claims as the algorithms do not have sufficient human
interactions to build their decision models effectively.
 Lemonade had significantly higher “Loss Ratio” and poor operational efficiency compared
to the traditional players.

Is Lemonade a Financial Innovation?

Despite its shortcomings, we feel that Lemonade insurance is a financial innovation

on account of the reasons below:
 Lemonade is transforming an industry stagnant for decades through innovative
machine learning, lower costs for customers and easier claim settlement
process.
 Donating unclaimed premiums from pooled customers to charities actually
works. So far, lemonade has donated $631,000 in water/ sanitation projects,
immigrant rights, childcare, cancer research, vaccinations across countries and
continents.
 Even Lemonade financials, which appear considerably worse than traditional
players, have improved significantly and both Loss Ratio and operating
efficiency has improved considerably.

In view of the disruption that Lemonade has created and the benefits the stakeholders
at large have received, we think that Lemonade is a worthwhile financial innovation.