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Executives speaking at Lemonade’s Investor Day event late last month made several statements suggesting that their approaches to personal lines insurance set the technology company apart from the rest of the personal lines insurance industry.

Executive Summary

What message should investors take away when a CEO asks them to “suspend disbelief”? Lemonade’s CEO Dan Schreiber did just that when he proclaimed that Lemonade, which acquired usage-based insurer Metromile in 2022, is the only auto insurer “doing telematics.”

For me, the most compelling ones focused on the company’s culture built on technology—a culture in which Lemonade “makers” (employees) have no fear of AI taking over tasks they handle at any point in time. I already summarized some of those Investor Day highlights recently in a separate article: “Hiring for Attitude: What Sets Lemonade Apart.”

Other statements, however, left me and other industry observers a bit unsettled.

Are Lemonade’s operating expenses really flattening? one reader asked.

That reader confirmed a reaction I had when listening to the Lemonade event virtually—that financial analysts might struggle with the math presented, which excludes “growth spend” from expense dollars to reveal Lemonade’s expense figures unchanged over the last four years.

Related article: ‘Synthetic’ Agents? Lemonade Says Finance Deal Limits Cash Burn

And GEICO, long-renowned for saving customers 15 percent or more on car insurance, might take exception to Lemonade’s claim to offer “unbeatable prices” as it gets ready to shift into high gear on auto insurance sales.

But here, I’ll focus on what seemed like the boldest proclamation of the event: “We have telematics. Nobody else does,” said Chief Executive Officer Daniel Schreiber. “Suspend disbelief. Take my word for it for a minute.”

Because I’m a personal lover of English literature, Schreiber got my attention by referencing the work of Samuel Taylor Coleridge. But poetic faith isn’t the groundwork for investment decisions, competitive advantage or business strategy. Schreiber needed to provide more support for his claim that nobody else does telematics.

Read on for specifics that Schreiber set out during Lemonade’s two-plus-hour presentation, “Our next 10X: From $1 billion to $10 billion.”

What About Progressive?

“Doesn’t everyone do telematics? Hasn’t it been around since the 1990s? Didn’t Progressive invent it?”

Schreiber verbalized the three questions he thought investors might be asking in response to his assertion about Lemonade’s uniqueness. First addressing the initial question, he said: “It really depends on how you’re using those words. What does ‘do‘ mean and what does ‘telematics‘ mean?”

Asserting that he’s read articles putting the use of telematics in auto insurance across the industry at less than 9 percent (some individual insurers more, some less), Schreiber said Lemonade ‘does’ 10-times more—using telematics data for 96 percent of car insurance policies.

“Those telematics policies of our competitors aren’t continuously in use,” he continued. “Those 9 percent invariably will run telematics for you for two weeks, three weeks, four weeks, and then stop.”

“Doesn’t everyone do telematics? Hasn’t it been around since the 1990s? Didn’t Progressive invent it?

It really depends on how you’re using those words.

What does ‘do‘ mean and what does ‘telematics‘ mean?”

“The Progressive program is called Snapshot because they take a snapshot. They price you and they’re done.”

“So when somebody else says they’re doing telematics, best case, they mean we’re doing it for a couple of weeks, pricing you and then we discontinue it. That’s not what Lemonade means. When we say telematics, for us, for 92 percent of our business, it is continuously generating and streaming data on how you’re driving.”

“This isn’t a 10-times” leap above the industry. “This is 100-times the rest of the industry,” he said, suggesting that only 1 percent of policies across the industry are subject to continuous telematics programs.

In earlier articles published by Carrier Management, executives of Progressive and Root Insurance were among those who addressed the use of continuous monitoring in their telematics programs.

Related articles: Telematics Master Class: How Progressive Offers Competitive Prices; ‘Telematics Is a Tool’: Root CEO Details Changed Strategy for 2023; UBI Basics; Telematics Has Kept the Promise: Allstate’s Journey Continues

Progressive CEO Tricia Griffith, during a fourth-quarter 2022 conference call, told investors and analysts that the auto insurer had started to roll out continuous monitoring in the summer of 2022. Before that, she first provided a history of Progressive’s telematics journey, which began in 1996, and included the introduction of Snapshot more than a decade later, in 2010.

Continuous monitoring is actually more helpful for claims handling than for pricing, Alex Timm, the CEO of InsurTech Root told an analyst questioning the executive about Progressive’s move to continuous during an early 2023 investor conference. Timm told the analyst that Root has had continuous monitoring live since 2016 but hasn’t found driving behavior data beneficial for pricing beyond the test period for new business and does not typically use it to reprice policies at renewal.

“We never said, ‘OK, now we’ll turn permissions off.’ There was no reason to do so,” he said, explaining that direct customers earn a quote after a test period. “That’s how you maximize the value of segmentation. But then thereafter we continue to leave the permissions on and we’ve looked at how our risk parameters drift over time. Do they get better? Do they get worse?”

“There’s more limited value to the data at that point,” he said.

On the claims side, however, Timm said during the 2023 event that the insurer “can detect a lot of claims fraud using the mobile device,” he said, highlighting situations where telematics reveal that a car wasn’t at a claimed accident location or where the data reveal driving patterns of a Uber or Lyft driver that wouldn’t be covered under a personal auto policy.

“Lemonade Car promises to have unrivaled experience at unbeatable prices.”

Daniel Schreiber, Lemonade

“That’s really where we see most of the value of the continuous monitoring versus changing prices dramatically on customers term over term,” he said, also noting that surcharges Progressive began implementing for bad drivers a few years ago weren’t nearly high enough. Root, he said, is “actually underwriting out those poorest risks. And we do it very quickly. Some of the worst risks we can identify within a couple of weeks from downloading our app and we can actually get them off our book,” he said.

Schreiber sees a different picture at Lemonade. “It is true that you get some good data in those first 30 days and it’s better than nothing at all. But it’s nowhere near as good as continuous telematics.”

“I can tell you empirically from our data, the telematics score for the median user changes 23 percent between when those 30 days are up and when the first year is up.” He added, “Twenty-three percent is huge in a market as sensitive as ours.”

Like Timm, Schreiber highlighted the benefits of telematics for claims handling. “If you don’t use continuous telematics, then at the moment of impact when an accident happens, you know nothing. You’re back to old school ways of adjudicating a claim.”

“In our case, it’s radically different,” he said referring to “real time, high fidelity, high precision instruments measuring everything that you did at that moment of impact” of a crash. “We get the impact dynamics. We get the location and the timing of the accident. We get the speed and the direction. And we can do a lot with that.”

Highlighting the possibilities of sending help to an accident victim, starting a claim and reducing fraud, Schreiber said, “We radically reduce the time and the cost of adjudicating your claim.”

Earlier this year, Allstate and Progressive each announced that they will offer crash detection and accident response to their mobile app users, including those not enrolled in their telematics programs.

Read also: Allstate’s Telematics Strategy: Responding to Evolving Customer Needs; Telematics Master Class: How Progressive Offers Competitive Prices

Outsourcing Data Science

Layering another aspect of Lemonade’s telematics program onto his case for Lemonade being the only insurer “doing telematics,” Schreiber asserted that Lemonade’s car insurance policies reflect the use of “continuous proprietary telematics.”

“Lemonade’s telematics is proprietary. We are a data science company.”

If “somebody tapped the brake, what risk does that represent? How should I translate that into rates? What does that even mean?” he asked.

“Mapping behavior onto risk is a data science, machine learning, deep learning challenge,” he said, responding to those questions. “To the best of my knowledge, there is only one incumbent in the country out of tens if not hundreds who are using telematics [that has] done this hard work themselves,” he said, without naming the incumbent he had in mind. “Everybody else uses the same off-the-shelf lookup table that we started with as well,” he said, noting that the similar start gives Lemonade “a pretty good sense of how good or limited it is.”

“It does show you some lift. It is better at detecting low risks, [and] better at detecting high risks” than a no-telematics approach, he said, displaying a graph meant to show the “dramatically different” predicted risk curve resulting from Lemonade’s own telematics and an industry standard model.

The graph of predicted risk vs. actual risk displayed three lines: a horizontal line representing a “no telematics” approach, a slightly upward sloping line for the industry outsourced telematics model and a severely sloping line for Lemonade—starting below the industry line in the quadrant representing low-risk drivers, and moving up well above the industry model for high risk drivers (and bending to a flatter curve past the point where the industry telematics and no telematics crossed—landing well above the industry for the highest risk drivers).

“That’s dramatically different,” he said. “We use the same word telematics, but we mean something quite different. This is borne of a structure—the benefit of having a single integrated [AI] system, having our own data science in-house, not outsourcing our core competencies as the rest of the industry is wont to do,” he said, noting that the illustrated gap between no telematics and industry standard telematics is smaller than the delta between industry standard telematics and Lemonade telematics.

The magnitude of the difference on the low-risk end will translate into “killer prices,” Schreiber said, at one point noting that Lemonade’s analysis, “using all of a trillion data points” amassed by Metromile and dating back to 2013, reveals that two-thirds of drivers are low-risk drivers, who are entitled to pay premiums that are 15 percent lower than they’re paying today.

Lemonade Shifts Into High Gear on Auto

“This is not a niche play. This is the big game. This is the game,” Schreiber said. “If 15 percent has a ring to it, it’s because somebody built a 40, $50 billion business promising that they could save you 15 percent in 15 minutes…..

“Fifteen percent is a game changer. It’s how leadership is established in this market,” he said, without naming competitor GEICO directly at this point.

Earlier, during introductory remarks at the Investor Day event, Schreiber reported that 2025 is the year that Lemonade shifts into high gear on auto insurance. “While renters and pets were able to propel us to 1 billion, car has to start revving up in order to propel us from one to 10.”

The two-plus-hour Investor Day event was titled “Our next 10X: From $1 billion to $10 billion”—a reference to the idea that Lemonade’s in-force premiums are on track to reach $1 billion in early 2025, and that the company aspires to reach the $10 billion in-force premium level by 2035. Schreiber and Chief Business Officer Maya Prosor set out a road map to get there, noting that Lemonade expects to grow car insurance through cross-sales from existing renters and pet insurance customers under age 35 and the next generation of insurance buyers. While picking up on GEICO’s “attractive selling proposition that centers around value and savings,” Lemonade aims to attract their preferred customers without spending billions on advertising or introducing a cute mascot, Prosor said.

Schreiber noted that while Lemonade bought Metromile two years ago, “we have not rushed to scale this business. We have been biding our time. We have been building, experimenting, tinkering, and perfecting….

“We’ve been busy absorbing all of their data, all of their experience,” he said. “It’s been a huge unlock.”

“While Lemonade car has played a supporting role in our financials to date, it has been primary in our investments for some years now. Behind the scenes, we have invested far more in car—more engineers, more insurance specialists, more product and design people, more data scientists than in any other line of our business,” he reported. Framing the most important takeaway for investors, he said all the spending and tinkering has led to one place: “Lemonade Car promises to have unrivaled experience at unbeatable prices.”

By Lemonade’s calculations, “a 10 point change in price can yield a 50-150 percent in conversion” for car insurance customers. “This is incredibly price sensitive market. Being able to get to price leadership has massive dividends for whoever can pull it off.”

Admitting that Lemonade’s auto insurance business today, at roughly a hundred million dollars, pales in comparison to the likes of GEICO and Progressive’s tens of billions, he asserted that outpricing them is possible given Lemonade’s uniqueness. “We have telematics. Nobody else does.”

What say you Progressive? Allstate? Root? IoT Insurance Observatory? Any other interested insurance carrier representative? Did Schreiber make his case?

Send me your reactions (at ssclafane@carriermanagement.com or by commenting on a post referencing this article that on LinkedIn)

***

What About Loss Ratios?

While Schreiber promised investors soaring growth in premiums as the company attracts price-conscious auto insurance customers, he did not promise that Lemonade will have lower loss or combined ratios than competitors.

First, he reiterated that the precision of telematic-based pricing means Lemonade can accept low risk customers at prices lower than competitors without adversely impacting Lemonade’s loss ratio. But Lemonade’s second competitive advantage—a culture of automation—could mean higher loss ratios than competitors, he said, showing the example depicted below to illustrate that this is an acceptable result.

(See related article, “Hiring for Attitude: What Sets Lemonade Apart,” for a discussion of the various ways in which Lemonade uses artificial intelligence)

Here, Schreiber offers an illustration of Lemonade vs. Acme Insurance, with Lemonade’s telematics advantage fueling a premium that’s 15 percent lower than Acme, and it’s automation platforms translating to a 33 percent expense advantage.

With losses coming in at the same level for both companies, Lemonade’s loss ratio is a 70 vs. 63 for Acme. “If this is the prism through which you look at companies like ours, you’ll come off quite disappointed. [But] if we are able to price 15 percent less than the rest of the industry and deliver the same net margins, this is a company on a rocket ship [to] a $50 billion business,” Schreiber suggested.

“The company on the right will have growth dynamics that the rest of industry doesn’t know. [As] investors, if you get to choose which of these two companies to invest in, 10 times out of 10, you want to invest in one with the worse loss ratio,” he asserted, going on to explain a flywheel that starts with price leadership propelling growth leadership and ultimately yields a large pool of profit.

“High loss ratios can, of course, be a signal of bad underwriting. More often than not that’s what they are. But they can also be the telltale sign of extraordinary efficiency,” he said.

Photo credit: Schreiber photo by Ben Kelmer