Insurance is designed to protect people financially after an unexpected event. Although it’s important to have enough money to cover an incident, there’s also a chance you will pay insurance premiums throughout your life and never need to file a claim.
With a traditional insurance company, premiums not used to pay claims become profit for the company. But the peer-to-peer insurance model works differently. If you’re shopping for insurance, you might find the transparency of P2P insurers and insurance products appealing. Here’s what you need to know about this new frontier of insurance and about a company called Lemonade in particular.
What is peer-to-peer insurance?
The P2P insurance model is gaining popularity in what’s known as the insurtech era, but the concept dates back to the origins of insurance. This type of insurance simply involves a group of individuals contributing to a pool of capital that becomes accessible to any individual from that group who is experiencing a covered loss. These groups are typically formed from like-minded individuals, friends, or family members who agree to combine their resources in case one member of the group incurs a loss.
For example, Friendsurance, the original fintech startup to use the model in Germany, allows you to set up a group with friends but can also connect you with other customers with similar needs and risk profiles. The company offers cash back to groups that stay claim-free, keeping costs low. Teambrella is another P2P company in the insurance sector that allows groups known as teams to keep their funds in a digital wallet and retain any money not used to pay claims.
In the U.S., insurtech startup Lemonade has brought the concept to a larger scale and combined it with some of the conveniences of the traditional insurance model. You don’t need to pull together a group to get coverage through Lemonade — you can purchase a policy online as you would from a traditional insurer. Nevertheless, Lemonade draws from the P2P model to achieve lower insurance premiums and greater transparency. Let’s look at how Lemonade works in more detail.
How Lemonade works
Lemonade is a P2P insurance company founded in 2015 that has been expanding to more states over the years. The company offers three types of insurance coverage: renters insurance, homeowners insurance, and pet health insurance. You can get a discount for bundling your best pet insurance with your homeowners or renters insurance.
Instead of profiting from not making payouts on claims, Lemonade takes a flat fee from customers’ premiums to run the business. The rest of the money in the pool goes first toward paying claims, and anything leftover at the end of the year is donated to the cause of your choice. Lemonade groups you with other policyholders who are interested in contributing to the same cause. However, your premium is determined from individual risk factors alone.
This approach means Lemonade has nothing to gain from denying claims, so the claims process can be much faster than with traditional insurance carriers. The company also uses blockchain technology to instantly verify as many losses as possible. If a claim is approved using this technology, the policyholder could get their money in seconds.
Lemonade’s peer-to-peer insurance model also allows the company to charge affordable rates. For example, Lemonade renters insurance policies start at just $5 per month, a far cry from the average $15 per month charged by companies in the industry (as of Jan. 29, 2021).
Peer-to-peer insurance vs. traditional insurance
Traditional insurance companies earn a profit from premium dollars that don’t go toward payouts on policyholders’ claims. That means there could be a monetary incentive for traditional insurers to deny your claims. As a result, the claims process can sometimes be complicated, frustrating, and drawn out.
With the peer-to-peer insurance model, it’s the policyholders who benefit when fewer claims are filed, sometimes in the form of cash back, or in the case of Lemonade insurance, by donating to causes they care about. P2P insurance providers don’t profit from denying claims or failing to pay them in full. This can help to create a hassle-free and transparent claims process that sets P2P insurance providers apart from traditional companies.
Pros of peer-to-peer insurance
- Easier claims process: Not only do insurtech companies typically have a streamlined, digital claims process, but P2P providers don’t gain anything from denying claims. This can result in a faster, paperwork-free claims process.
- Premiums can be more affordable: Because P2P insurance companies work to maximize their profits in a different way from traditional companies, they’re able to offer less expensive premiums most of the time. However, you should always compare rates against traditional insurance providers. If you're interested in homeowners insurance, our list of the best home insurance companies is a great place to start.
- Money back or charitable donations: Most P2P insurance companies provide a benefit when the group doesn’t use up all the money contributed to the pool. With some companies, the benefit comes in the form of cash back. Lemonade contributes leftover insurance premium dollars to social good.
Cons of peer-to-peer insurance
- Not available everywhere: Although Lemonade is expanding, it’s still not available in all states, and there are few other options for P2P insurance available.
- Risk of unpaid claims: For some P2P insurance plans, if there isn’t enough money in the pool when a loss occurs, the claim may not be fully covered. However, unpaid claims aren’t likely to be a problem with Lemonade; the insurer has an A financial stability rating from Demotech, a financial analysis firm that has been accurately rating companies since 1985.
- Not always the least expensive option: Several factors go into determining your premium, so some customers may find less expensive rates with a more traditional insurance provider. That’s especially true if you’re getting a multi-policy discount from that traditional provider. Lemonade only offers a few types of insurance, so you can only bundle pet and renters or homeowners insurance. In contrast, other companies may be able to offer significant discounts for a home and car insurance bundle.
Who owns Lemonade?
Lemonade is a licensed insurance provider founded by CEO Daniel Schreiber and chief operating officer Shai Wininger. The two were introduced by a venture capitalist, someone who provides capital to startups in exchange for a share of that company’s future growth. Schreiber and Wininger founded Lemonade in 2015 with the intent of disrupting the insurance industry with a more transparent model that consumers could trust. Ty Sagalow, a longtime veteran of the insurance industry, serves as chief insurance officer.
How is Lemonade insurance so cheap?
Lemonade is inexpensive for a couple of key reasons. First, it uses an application and claims process powered by artificial intelligence to keep costs low. Second, the peer-to-peer insurance model means that Lemonade takes only a flat fee from policyholders. This allows the provider to offer lower premiums.
Does Lemonade insurance pay claims?
Lemonade offers a hassle-free claims process and does not benefit from denying claims. Furthermore, the company is financially strong with an A rating from Demotech, a financial analysis firm. Lemonade is also the top-ranked insurer in J.D. Power’s 2020 Home Insurance Study.
Although these are all indicators of a reputable company, it is notable that Lemonade has garnered more complaints with the National Association of Insurance Commissioners over the past couple of years. In 2019, the NAIC received 25 complaints about Lemonade, more than six times the average expected for a company of its size. That’s up from 0 complaints in 2017. Most complaints to the NAIC surround issues with claims processing and payment.
If you’ve been on the hunt for more affordable homeowners, renters, or pet insurance, Lemonade’s P2P business model could provide you with the low premium you need. However, it’s always a good idea to compare quotes from multiple providers, in case you can get a lower rate elsewhere. That’s especially true if you’re happy with your current auto insurance provider and can snag a multi-policy discount.
Given Lemonade’s initial success, it’s likely we’ll see other options for peer-to-peer insurance pop up in the future. And if P2P insurers aren’t available in your area, sit tight. Lemonade plans to expand to all 50 states with its products in the future.