Lemonade's insurance recipe makes some consumers wince
Customer service and reputation, not price, drive renewals in the homeowners insurance market.
Lemonade, the New York City-based InsurTech, made a splash in the insurance industry this year, first becoming the best IPO debut of the year after gaining 140% on its first day of trading in July, and now earning the top spot among renters insurance providers in J.D. Power’s annual U.S. Home Insurance Study in its first year of eligibility.
Both achievements are nothing short of remarkable for a 5-year-old start-up, but those headline achievements belie some deeper shortcomings that could stunt the growth potential of this Wall Street darling. Ultimately, Lemonade’s long-term success will be determined by its ability to convert renters insurance customers to homeowners’ insurance policyholders.
And on that front, Lemonade has a long road ahead.
Beware the low-premium siren song
First, let’s look at what Lemonade is doing well. In our study — which evaluates overall customer satisfaction with homeowners and renters insurance on criteria such as interaction, policy offerings, price and claims — Lemonade performs at about average or above on most metrics.
Where the company really excels, though, is on price. In fact, the price component of Lemonade’s overall satisfaction score is higher than any other insurance offering analyzed by J.D. Power. Lemonade outperforms its nearest competitor in the study on price satisfaction by 54 points on our 1,000-point scale.
Does that mean Lemonade found a magic wand for risk pricing that has eluded its competitors for decades? Probably not. When we dig deeper into their performance, we see some key differences between Lemonade and the rest of the renters insurance market that make it clear how they are achieving these results.
Industry-wide, just over half (52%) of renters select a brand based on price. For Lemonade, however, 71% of their customers indicate that they chose the brand based mostly upon price. Additionally, more than half (55%) of Lemonade customers are only buying renters insurance because their landlord requires it — a measure that is 45% higher than the industry average. Those customers also skew younger and are concentrated in large urban rental markets.
What the data is showing us is that Lemonade provides a simple and quick purchase experience, via their mobile app, at a low price point — creating an ideal product to supply a demand predicated on a necessary, but perhaps not completely desired, transaction. It would appear that consumers aren’t choosing Lemonade for the carrier’s ability to provide great insurance, but rather to solve the inconvenient problem of satisfying a third-party requirement. Further, the customer segment they are serving is likely to be seeking minimum coverages and have fewer assets, which helps to keep the price low.
How to win lifetime customers
Long-term success in the insurance business is about much more than just winning the most price-sensitive segments. Homeowners customers are a highly valuable group of personal lines customers for P&C insurers. They have a significantly higher bundling rate, spend more on total household premiums, and their tenure is significantly higher than other groups of customers.
Put simply, profitability in the home insurance space hinges on lifetime customer value, which means that if Lemonade is really going to live up to investor expectations, it’s going to need to find a way to convert renter insureds into homeowner insureds.
Here again, the data reveals some high hurdles on that path. The most common complaint among Lemonade customers — significantly higher than any competing brand — is that they don’t know how to ‘get ahold’ of Lemonade. In fact, when it comes to customer satisfaction with brand interactions — the top driver of satisfaction among renters — Lemonade is below the industry average. Contact numbers are difficult to find on the app and, if they are found, calls result in long wait times and unanswered questions.
Support is not Lemonade’s strength. Yes, consumers like the app. It satisfies the basic requirements of a transactional relationship. But it doesn’t appear to be developing a stronger relationship with customers. This will be a problem when it comes to making the leap to the significantly more complex policyholder needs within the homeowners market.
As renters become homeowners, policies become more complex (and more challenging to price), often requiring direct engagement through agents and/or customer service representatives who can guide customers through the process. Additional variables such as umbrella policies, flood and/or earthquake coverage as well as special coverage for valuable possessions all start to enter the equation in a homeowners policy, each of which is highly customized and therefore isn’t well-suited to a pull-down menu on an app.
That is why customer service and reputation — not price — are the factors driving the highest level of intent to renew with an existing carrier in the homeowners market. Two-thirds of homeowners insurance customers who’ve selected a brand based on good service experience say they “definitely will” renew with that insurer. A low-price strategy with poor service experience is not the key to success in the more complex homeowners market.
Big infrastructure investment required
It will not be easy for Lemonade to achieve the same results in the homeowners market as the company did in the renters market. Lemonade was built, by design, to be a lean, digital insurance carrier. Satisfying the customer need for dealing with complexity requires contact centers, claims centers and human capital-intensive processes, such as first notice of loss — all of which will likely introduce new and significant fixed and variable costs.
Is it possible that Lemonade will find some unique way to capture the consumer imagination by resolving complexity in a few clicks? We hope so. It would be a much-needed leap forward in the insurance market. But for now, and for the foreseeable future, consumers want to talk to someone when the situation turns complex. It’s what keeps insurance from becoming a commoditized product, and what keeps customers willing to trade slightly higher premiums in return for value delivered via high-quality products and service levels. For Lemonade, that means time and capital. A lot of it.
Kyle Schmitt (kyle.schmitt@jdpa.com) is vice president and global managing director, insurance intelligence at J.D. Power. Robert Lajdziak (robert.lajdziak@jdpa.com) is senior consultant, insurance intelligence at J.D. Power.
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