Is Lemonade Really Peer-to-Peer Insurance?

Several months ago I wrote a blog post about existing peer-to-peer ("P2P") insurance offerings. I concluded that (1) true P2P insurance doesn't really exist in the United States and (2) "may be the wrong answer to the right question:  how can we make insurance fairer for insureds?"

At the time, I wasn't able to discuss Lemonade, which was still in "stealth" mode. Lemonade recently launched in New York State, and its offerings are now public. Whether or not it lives up to its promise of doing things differently than other insurance companies, it's hard to see what's P2P about Lemonade.

According to the company's website: "P2P reverses the traditional insurance model. We treat the premiums you pay as if it's your money, not ours. With P2P, everything becomes simple and transparent. We take a flat fee, pay claims super fast, and give back what’s left to causes you care about*." (The asterisk links to a disclaimer--more on that below).

Lemonade also touts the fact that it is a "B Corporation." A B Corp is for profit corporation that has as one of its purposes "creating general public benefit." (Specific language depends on jurisdiction. I've quoted here from the D.C. statute, section 29-1301 et seq.) It is not a non-profit.

There are a number of other well-known B Corporations, though Lemonade may be the first U.S. insurer to take this approach. As a recent article in TechCruch observes: "Ben & Jerry’s, Method, Etsy and Warby Parker are among the best known of more than 1,800 businesses in 50 countries that are certified B Corps, meaning they’ve completed a rigorous and sometimes costly process that confirms their claims of being environmentally friendly, socially conscious and worker-friendly. Certification earns them the right to use the increasingly familiar B Corp logo on their cartons, hang tags and websites." [2]

What does this mean? By forming as a B Corp, Lemonade must still focus on generating profit for shareholders but must also incorporate some form of "social consciousness" into its corporate mission. To that apparent end, Lemonade says that surplus premiums won't be retained as profit. Instead, money will be paid to charities that insureds select as part of a "peer" group of other policyholders that they join. It's sort of like how a mutual insurer works, except that mutuals return unpaid premium or give policyholders a credit against unpaid premiums. As the screenshot below from their website suggests, Lemonade seems to justify the P2P name in part because it allows policyholders who "care about the same causes" to join "peer groups."

I'm not suggesting any of this is a bad idea. But this is not P2P insurance in the sense the term is used in computing, from which the concept is derived: "Peer-to-peer (P2P) computing or networking is a distributed application architecture that partitions tasks or work loads between peers. Peers are equally privileged, equipotent participants in the application. They are said to form a peer-to-peer network of nodes." [2].

If you buy insurance from Lemonade do not think for a second that it is your peer or that you are "equally privileged". It's a for profit insurance company. If you're an insured you'll pay a premium to be covered for insured losses defined by your insurance policy.

In the event of a claim, Lemonade will require you to (among other things) give it a videotaped statement, something not all insurers require as a matter of course, after which it will make a claim decision based on policy language that you had no control over drafting. If you disagree with the claim decision, you may need to sue Lemonade, at which point you will discover the degree to which they are decidedly not your peer (hint, they will have a significantly bigger legal budget than you). For a company that has gone to great lengths to portray itself as doing things differently and being honest, it's surprising that they've mangled the term "peer to peer" so completely for marketing purposes.

Lemonade makes the case that because it makes the same amount of money regardless of whether or not it pays claims, there's a greater alignment of interest with policyholders. Whether or not this matters in practice remains to be seen. Mutual insurance companies deny claims too, as do group captives too.[3] Sometimes they are wrong. And sometimes they deny claims for improper financial reasons. This is an admittedly subjective observation about a very complicated area of law, but it's one based on actual experience as an insurance coverage lawyer who represents policyholders. It's an over-simplification to say that insurance companies only deny claims because claim denials are tied to profitability. It truly depends.

And Lemonade hasn't really taken money out of the claims equation. For example, Lemonade's website also touts the fact that it has reinsurance from a bunch of well-known insurance companies, including Lloyds and Berkshire Hathaway. It fails to note that reinsurance premiums might go up and down depending on loss experience. In other words, paying claims that are subject to reinsurance could cause Lemonade's premiums to increase. (Caveat -- I am generalizing about a complex topic. My overall point is that claims experience may have an impact on Lemonade's bottom line. Impact on reinsurance is one place where this may be so).

Lemonade does have a nifty app. (So do other insurers, of course). Paying excess premium dollars to charity is a nice idea. Focusing on human behavior and incentives in the claims process makes a great deal of sense. Insurance companies lose time, money and customers by mishandling claims. It's good business to adjust claims fairly. Lemonade's "Chief Behavioral Officer" is Dan Ariely, a brilliant behavioral economist, whose work I admire. Maybe they'll do things better than other insurers. It won't be hard. It's silly to call something peer to peer when it's not, however.

Oh, about that disclaimer. If you go to the bottom of the page you will see that payment to charity is "[s]ubject to board discretion and the company meeting certain financial standards." Peer to peer? Not if you think peer means "equal."

** This blog posts contains my personal opinions only. They may or may not be shared by past, present or future law firms or clients.

[1]. https://techcrunch.com/2016/10/02/should-your-startup-take-the-b-corp-route/.

[2]. https://en.wikipedia.org/wiki/Peer-to-peer. See also, see also http://www.etymonline.com/index.php?term=peer: "c. 1300, "an equal in rank or status" (early 13c. in Anglo-Latin), from Anglo-French peir, Old French per (10c.), from Latin par "equal" (see par (n.)). Sense of "a noble" (late 14c.) is from Charlemagne's Twelve Peers in the old romances, who, like the Arthurian knights of the Round Table, originally were so called because all were equal. Sociological sense of "one of the same age group or social set" is from 1944. Peer review attested by 1970. Peer pressure is first recorded 1971."

[3]. Captive insurance is way beyond the scope of this modest blog post. If you're an insurance pro and wondering what I mean about captives denying claims, I'm thinking about experiences with group captives.