Lemonade (NYSE:LMND) is an insurance company built on modern technology. While today’s industry leaders are much larger, both in terms of market cap and written premiums, most legacy insurance providers weren’t built to capture and deploy big data. That gives Lemonade an advantage.
In this Backstage Pass video, which aired Sept. 27, 2021, Motley Fool contributor Trevor Jennewine discusses exactly how Lemonade uses artificial intelligence and how that technology could give the company an upper hand in the long run.
Trevor Jennewine: Lemonade is an insurance company that’s using artificial intelligence. Its product portfolio now spans from homeowners and renters policies to term life and pet insurance. And there’s auto insurance on the horizon.
To understand why the AI matters, traditional insurance companies rely heavily on human employees; so they have agents that sell policies and actuaries that estimate risk, and set premium prices and adjusters handle claims. The thing that really differentiates Lemonade is its use of big data and AI. It’s not that traditional insurance companies don’t use data — nothing could be further from the truth. They just weren’t designed to capture and deploy the volume and the variety of data that a lot of applications or technologies are generating today. But that’s exactly what Lemonade was built to do.
In fact, management says its platform captures 100 times more data points per customer than legacy systems. Each of those data points makes its machine learning algorithms more intelligent. The company uses AI across its business in several different ways. For instance, when you go to buy insurance or file a claim, you engage with an AI-powered chatbot. I have actually done this, and it makes the experience relatively frictionless and it’s very fast. You can buy insurance in just a couple of minutes. Sometimes, claims are paid in as little as a few seconds.
Beyond that, Lemonade also uses AI to estimate risk, underwrite policies, and detect fraud. Again, it’s replacing the jobs that have traditionally been done by human employees. It’s replacing it with artificial intelligence. The upshot here is that by using AI to more accurately quantify risks, Lemonade should lose less money on claims. Its loss ratio, which is just the percentage of premiums paid out in claims, its loss ratio should be lower than the industry average. It should be lower than its rivals, or it should at least be trending downward, and it is. If you have a lower loss ratio, you’re paying out less money, you should be able to undercut your rivals on price. Lemonade’s entry-level renters policies are typically 50% cheaper than anything else on the market. I think that is playing out as well.
The big picture is that Lemonade uses AI to create a cost advantage. On the other side of that cost advantage, I mentioned AI is replacing a lot of jobs normally done by human employees. Just to put that in perspective, that saves Lemonade some money on payroll expenses. Lemonade employs one person per every 1,700 customers, and they believe that the traditional insurance companies that they compete against employ one person per 150 to 450 customers. Lemonade is able to serve the same size customer base with four to 10 times fewer employees — a much more efficient business model.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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