STARTUP

No One Likes to Buy Home Insurance. This Startup Wants to Change That

Lemonade wants to reach 90 percent of the U.S. by the end of the year. Expanding to California is a crucial step in the process.

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BY Kevin J. Ryan - 11 May 2017

PHOTO CREDIT: Getty Images

Not many people love the insurance industry. Lemonade wants to change that.

The New York City-based startup has created a new model for selling home insurance. Instead of keeping the money it doesn't need pay in claims, the company takes a fixed rate of its customers' premiums and donates any unclaimed money to charity at the end of the year.

Lemonade started selling policies in New York state in September, then expanded to Illinois in April. The company's strategy is to start in some of the toughest regulatory markets first. "If you can pass regulators in New York," co-founder Daniel Schreiber tells Inc., "you're in good shape."

Next up for the startup: California. As of Wednesday, Lemonade is available to customers in the Golden State. That means the product is accessible to 22 percent of the U.S. population. Schreiber says it wants to reach 90 percent of the country's population by the end of 2017.

"We're looking for a blitz across the nation," he says. "Certainly all the big states."

California, New York, and Illinois contain some of the country's largest urban areas, where Lemonade's target demographic primarily lives. While the company's app is simple enough for anyone, its tech platform and low rates have a special appeal to young city-dwellers. Thanks in large part to low overhead costs, the company is able to offer rates as low as $5 for many of its renters policies.

Instead of human brokers and underwriters, Lemonade uses a custom-built artificial intelligence platform, which calculates monthly rates for potential new customers in seconds. The company tells customers up front that it will keep 20 percent of their annual premium.

Upon signing up, new customers choose the charity to which any of their unpaid money will be paid. At the end of each year, any money from the remaining 80 percent that hasn't been paid out in claims goes to support that cause.

This creates a new dynamic, in theory, in which the insurance company has nothing to gain by denying its customers' claims. "There's a reservoir of ill will towards insurance companies," Schreiber says. "When every dollar that I can deny you in claims is a dollar more to the bottom line, it poisons the well."

Schreiber, a former Sandisk exec who at one point worked as an attorney ("20 years clean," he says), founded Lemonade in 2015 along Shai Wininger, co-founder of online business marketplace Fiverr. The two have a combined four decades of experience in the tech sphere, which Schreiber says has helped the company find employees and capital. "Because we're not 19 years old," he says, "we've got some people who we trust, and who trust us."

Still, it's likely not going to be an easy battle to scoop up customers in an industry dominated by big, well-established players. According to the Insurance Information Institute, State Farm and Allstate own about 20 and 10 percent of the market, respectively. And the bigger hurdle might be luring customers who don't have insurance at all.

The company has $60 million in funding from investors including Google and General Catalyst. Its $13 million seed round in 2015 was the largest seed round of any company that year.

Lemonade currently stands at 36 employees--a surprisingly low number for a company that expects to reach so many customers by the end of the year. "We're definitely looking to grow," Schreiber says. "For a team our size, that's stretching pretty thin."