With an innovative business model that aims to transform the insurance industry, Lemonade is attracting customers and investors with its technology- and transparency-driven products. Rooted in its values as a Certified B Corporation and public benefit corporation, the startup insurer builds its business on a give-back system that allows customers to select nonprofits that receive any unused premiums.
Lemonade cofounder and CEO Daniel Schreiber says that by donating that money rather than keeping it as profit, the company produced more than $1 million in donations in 2020. It’s a practice that he says goes against the industry’s traditional relationship with customers.
“I don’t think about what we’re doing as being charitable in the traditional sense of the word,” he says. “We do give money to charity, we do partner with charities, and in so doing we are solving an absolute business challenge, which is that insurance companies are deeply distrusted.”
The New York City-based company made waves last summer with its debut on the New York Stock Exchange as the second public benefit corporation and B Corp to do so. In addition to this investor attention, Lemonade is attracting customers looking for a new way to insure their homes and lives. The insurer finished 2020 with over one million customers, a milestone that Schreiber says takes other companies much longer to achieve. Lemonade also is growing geographically, with expansion to Germany, Holland, and France in the last 18 months, and adding products such as term life insurance and pet insurance.
Schreiber says Lemonade’s intention to do insurance differently gets at the conflict inherent in the product.
“There is an asymmetry of power: You’ve given me the money; I have it. You feel disadvantaged because it’s not a level playing field. I’ve been collecting your premiums for the last 10 years, now you’re trying to get them out. There is an asymmetry of information: You don’t really know what the policy says; I do,” he says. “That’s what we were contending with in founding Lemonade: How do you create a trusting and trustworthy brand in a domain where the fundamentals of the business are designed for conflict of interest?”
As part of my research on purpose-driven business, I recently spoke with Schreiber about Lemonade’s intentional approach to doing insurance differently and why that strikes a chord with investors and customers. Below are excerpts of our conversation.
Chris Marquis: How did the concept of Lemonade’s Giveback program originate as a new model for the insurance industry? And how does it enable collective impact and large-scale giving for your customers? Does this product tend to attract younger customers or a range of ages?
Daniel Schreiber: Coming into the sector, we were trying first of all to determine why insurance companies are so deeply distrusted. We have plenty of data that show people don’t trust insurance companies, and this can elicit nefarious behaviors — a willingness to lie, to defraud — by upstanding citizens. For myself and my co-founder, who didn’t come from the world of insurance, that was perplexing and intriguing. When we started the company, I talked with a Nobel Laureate in game theory and another one who has a Nobel Prize in behavioral economics. We ultimately reached the conclusion that the problem isn’t with the players, it’s with a game. There’s something structural about insurance that produces these predictable results.
Just saying, “Oh I’m going to be better behaved, trust me because I’m a good guy,” doesn’t get you anywhere. Broadly speaking, if you understand incentives, and you are running the insurance company, you’d get the same kind of behavior patterns emerging pretty quickly. The fundamental problem is I make money by denying your claim. So I have a fundamental interest in you not being paid. I’m simplifying things, but it’s a zero-sum game: One of us is going to be $1,000 richer, one of us is going to be $1,000 poorer, and so long as that’s the case there’s a problem.
But we joined forces early on with Professor Dan Ariely, who became our Chief Behavioral Officer. He wrote a book called The Honest Truth About Dishonesty. He spent 10 years researching what it is that makes us willing to lie and be poorly behaved and reached the conclusion that, if you set out to create a system to bring out the worst in humanity, it would look a lot like the insurance market. All the things that his research found made us feel fine with lying or stealing were manifested in insurance companies.
That’s where the Giveback came in — to change insurance from a conflicted bilateral game to a trilateral game. By adding a nonprofit to the room, we change the very fundamentals of the dynamics and other incentives. We tell you up front that our profit is not going to depend on how many claims we pay. We’re going to take a flat fee from the monthly premiums, 25 cents on the dollar, that’s how much we’re keeping. The rest we’re going to use to pay your claims. OK, but what if there’s money left over? We’re not going to pocket that, because that is the very money that poisons the well. If there’s money left over, it’s going to go to a charity of your choice. That changes my incentive, because I don’t make money by denying your claim.
We also want to pay claims pretty quickly because we don't want a protracted process that wastes money. Therefore we pay about a third of our claims in three seconds — algorithmically, automatically — and that also changes your behavior. If you’re coming to make a claim against a nameless, faceless behemoth in a conflicted relationship, you may feel entitled to embellish a claim. But if you feel like you’re going to be taking money from the soup kitchen where you volunteer on Sundays or whatever it is, that will moderate your behavior; that is what it’s all about.
Marquis: So how does your model account for large disasters, when bigger pools of money may be needed?
Schreiber: What if there’s not enough money? The answer to the question is something called reinsurance. We’ve created a financial structure called reinsurance where we pay 75% of the claims, but if the claims exceed that 75% threshold, the real money comes from reinsurance partners. You as a consumer don’t know this, because you get paid by us either way. It’s behind-the-scenes counting. We will pay every year a little bit to flatten the curve, so that we lose money most years on reinsurance but it is there for those times.
Marquis: As a B Corp that recently went through a successful IPO, your company is often pointed to as evidence of the market’s growing acceptance and shift toward stakeholder capitalism. What challenges did Lemonade face during the IPO process? What unique considerations did the company face as a benefit corporation/B Corp? What advice or tips would you offer to other B Corps considering a public offering?
Schreiber: We’ve been a B Corp since the get go, pretty much. It’s not something I even think about, it is just, “This is what we are. This is what we do.” It’s something that we’re proud of. During our IPO, we talked about it, and it didn’t engender pushback or questions or concerns.
I do think that people should work hard at creating that kind of win-win. It’s good to be able to build a business model where the act of giving something to the wider community isn’t at the expense of your shareholders. Otherwise, you create unhealthy tensions and frankly put a glass ceiling on how much good you can do, because at some point it’s not a social good to take money from one investor and just donate on their behalf. For us, Giveback is not a bolt on like one-for-one giving. There’s the whole “giving a fish versus teaching to fish” kind of dynamic. The more you can match it in your business in a way that becomes self-serving — in the positive sense of the word — that’s good.
Marquis: Lemonade’s S-1 disclosure says B Corp status is crucial for internal culture and the business model, but it also says benefit corporation status may be a negative risk that reduces profit and creates potential takeover opportunities. How do you reconcile this dichotomy?
Schreiber: The S-1 is a disclosure document, where you put in everything but the kitchen sink — every concern anybody could have, because you don’t want somebody to complain later. That’s the nature of the document. Lawyers like covering all the bases: This could go wrong, and this could go wrong, whatever could happen.
Early investors in public markets attract all kinds, but we were issued by Sequoia Capital and Softbank. So these are profit-maximizing investors. It’s not that they don’t have values, but that’s not their primary mission in life.
I actually don’t apologize to our shareholders for B Corp or for Giveback, and I don’t get pushback on this, and this was not a bone of contention on the road show. The S-1 also includes our founders letter, which we call our “Lemonade Stand.” Being a public benefit corporation gives us legal protection against shareholders suing us and saying, “Oh, you gave money to that charity or nonprofit, you should have spent it on more marketing or more technology.” So we do have a legal framework that allows us to think about stakeholders beyond our shareholders, but I’m quite convinced that this is entirely in the shareholders’ interest, ultimately.
Early investors in public markets attract all kinds, but we were issued by Sequoia Capital and Softbank. So these are profit-maximizing investors. It’s not that they don’t have values, but that’s not their primary mission in life.
There’s no question that we’re doing the right thing by customers in engendering trust. I wouldn’t want to be generous with somebody else’s money; I can be generous with my money. We are building shareholder value by solving human problems that manifest in share price. So I don’t have to apologize for the money that we pay to charities, and our shareholders buy into that. Those who don’t believe it don’t buy shares in the first place.
Marquis: The growing climate crisis has experts predicting more severe weather events. What practices/policies does Lemonade have to address climate change and mitigate this risk, some of the conflicts of interest that you mention?
Schreiber: In 2018 we took a stance and published a statement that we will forswear investment in any polluting industries. Insurance companies are big investors; they are the second-largest supporters of the coal industry and other polluting industries in America. It’s stunning — half a trillion dollars of insurance premiums are invested in producing the very problems that they’re insuring against.
If you think about it, it again raises the self-interest issue. The chances are pretty high that the very things that you’re trying to protect me against are made worse through pollution and climate change. We took refuge in the fact that we are a public benefit corporation, and nobody can say anything if we take a strong position on this. Normal corporations could do it as well, but we felt that we actually had a duty, legally, to think this through and position ourselves.
I think we are still the only insurance company in America that has taken that strong position. We did something very similar on guns. We got a tremendous amount of hate mail around this, but following the massacre in Vegas we issued a position that we will not insure automatic weapons, and we will cap coverage of firearms to $2,500; people who have big collections should go to our competitors. We also limited coverage to guns that are responsibly stored and responsibly used.
We do take the B Corp and benefit corporation values seriously. So we take controversial positions on things like climate change and gun control.