Insurance is one of the only things you buy that you hope you never need. Every year, you spend money on insurance by paying a premium and hope that you won’t have to make a claim, because a claims means a cost to you in time and inconvenience. At the end of the year you pay another premium for another year, probably more if you had a claim, and possibly more, even if you didn’t.

In years you have a claim, you hope the policy covers your losses and thank your lucky stars that you have insurance because it would have cost a lot more if you had to cover the costs yourself. But in years you don’t make a claim, you might occasionally wonder what else you could have spent that premium on. Wouldn’t it be nice if you could give it to charity or a cause you care about? Enter Lemonade.

Lemonade: one of the world’s first P2P insurance companies

Lemonade is a new start-up insurer in New York City which proposes to create an entirely new way for homeowners and renters to get insurance. The idea seems simple enough: you pay your premium, some of it is given to Lemonade for its profits and for reinsurance, some of it will – inevitably – go towards claims. But the fresh twist that changes the game with Lemonade is that part of the premium not squeezed out by the company on costs or claims can be given to a charity near and dear to policyholders in what they call the “Giveback”.

Lemonade doesn’t guarantee that the Giveback will provide money each year and has said, on average, it will be less than 40% of the premium. But for many people the possibility of this money going to a better place will be a big step in the right direction.

Lemonade has lined up reinsurance from the biggest names in the business including, Lloyd’s, Berkshire Hathaway and XL Catlin. The involvement of these organisations suggests a level of financial backing behind Lemonade’s product which will help sweeten the offering for people looking for  insurance.

Looking below the rind

It’s clear Lemonade will have to make significant steps in order to grow further in a competitive market. Money which would otherwise be paid to shareholders or reinvested in the company in a traditional model will instead be paid to charities, which will give their customers a warm fuzzy feeling, but not leave them financially better off.

Another big concern for Lemonade will be spiralling costs of reinsurance and access to sufficient information. Should a series of ‘bad years’ happen, as they put it, their costs of reinsurance will likely become higher than can be supported by the current model while still allowing for Giveback. Without Giveback, Lemonade risks souring their key point of difference.

Lemonade boasts that its model removes the conflict between insurer and insured, but says that they handle and pay most claims instantly. This leads to a number of questions as to what its claims management process will be, and what it will do to protect against fraud. Also, as claims lead to increases in reinsurance rates, it’s unclear how Lemonade will manage that conflict with its clients.

Lemonade stresses that its model of insurance will be fast, affordable and hassle free and it will seek to introduce technology and transparency into the industry. Lemonade promise a model with zero paperwork and instant everything. But like all insurers, Lemonade relies on information, without saying where it gets the big data which it bases its premiums on. And the hassles that insurers make people go through and the tedious forms are usually for a good reason, where taking too many short-cuts or too much risk can create a whole lot of financial pain.

Lemonade is certainly an ambitious start up with a zesty new model, but it remains to be seen:

Lemon or Lemonade?