Lemonade's shareholder letter reveals the under-reserving impact of complex and longer tail claims. A deteriorating loss ratio.
This despite the use of AI powered underwriting and data mastery. As Lemonade moves into new product markets and new US states this may well get worse.Lemonade states: -
"While we will continue to develop new products and new technologies for many years to come, for the first time we believe we've achieved a critical mass of both, enabling us to shift resources to harnessing our technology and products in new ways. This means leveraging our technology to lower expense ratio through automation, and loss ratio through machine learning, while growing LTV/CAC through cross selling and bundling. None of this is entirely new - we've been investing in all these for years - but in prior years those investments took a backseat to new product launches and technology build out. We expect that the balance will now shift, and over the coming quarters and years this shift will take our business to new levels"
But in the other hand as it extends its product lines it also gets into the same issue that incumbent insurers face. 70% of cash flows through the claims operation and this requires a combination of digital automation and personal engagement on more complex claims. The very issue that has lead to under-reserving at Lemonade.
And the top quintile of incumbents are as able as Lemonade to deploy the best in core technologies and claim technologies to underwrite well and manage claims effectively, efficiently whilst meeting or even exceeding customer expectations.
Just read Ageas benefitting from the deployment of CoreLogic and able to follow the same strategy of Lemonade illustrated below.
Ageas
"The new rapid settlement tool helps our claims handlers assess the damage to a customer’s home and calculate how much it would cost to repair in just minutes – sometimes even seconds.
The data is extremely accurate and even able to factor in differences in labour costs in different areas of the country.
On Friday a customer called us at 2.52pm to tell us some of the tiles had been blown off their roof in the storm. By 3.36pm we had settled the claim and raised a payment to be made to fix the damage. From claim to settlement in less than an hour! "
That is not unique from incumbents adopting new cloud-native and agile claims platforms - even matching the 3 second settlement of Lemonade from simple A&D claims.
Ageas has also partnered with EIS on a strategic digital transformation of its core technologies benefitting from a scalable, micro-services and no-code architecture, large API libraries and tools, native cloud deployment and subscription pricing. Incumbents are not standing still.
The there are the neobanks adding insurance, multiple lines of business just like Lemonade and Metromile, to their offers and large customer bases. They have the same level of technology innovation, same delightful customer experience and same freedom from legacy technology.
Add to this the high cost of customer acquisition faced by the full stack insurtechs and their are challenges ahead. Not to say that a good management team like that at Lemonade will not surmount them. There again Trov had great technology and management of its embedded insurance platform but in the end has been acquired by Travellers. That might be the future for Lemonade
Loss and Combined Ratios must in the end be viable and full stack insurers be able to balance the challenges of cash burn and increasing reinsurance costs and availability to get there.
Further Reading
Deals: Trov Sells Out to Travelers
Bancassurance, NeoBanks and competing with insurers
How incumbent carriers can survive, thrive or will be disrupted.
Our Q4 21 gross loss ratio was 96%, up from 73% a year ago, and 77% in the third quarter '21. A meaningful driver of this sequential increase is an unfavorable prior period development due to a handful of older large losses for which we under-reserved. Notably, there was no spike in our accident quarter loss ratio from Q3 to Q4 .
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