Business woman showing insurance document over white desk at office
After a hiatus because of the COVID-19 pandemic, the IPO market has come roaring back. Just look at yesterday’s offering for Lemonade (NYSE:LMND). The shares spiked by 139% to $69.41—putting the market cap at over $3 billion.
Part of the success has been the overall bullishness in the equities markets. But there is something else that is important: Lemonade is a next-generation AI company. The technology is all-pervasive across its operations.
The AI Foundation
Keep in mind that the insurance industry was actually the first industry that was data driven. The roots go back to 1662 when John Graunt helped to create modern statistics, which he used to calculate the probabilities for life expectancies for those living in London. The framework would lead to the creation of Lloyd’s of London.
The result is that the insurance industry has turned into one of the most valuable the world has ever seen. As of today, property, casualty and life premiums represent a whopping $5 trillion and account for 11% of the GDP in the US.
Yet the insurance industry has lagged with AI, as the legacy IT systems have been a burden. So yes, Lemonade’s founders saw this as a huge opportunity.
Here’s what the company has built:
AI Maya: This is an engaging virtual assistant that collects information, provides quotes and handles the payments.
AI Jim: This is the claims bot. For the most part, he has been able to handle roughly a third of the cases. But even when a case is passed along to a human, the claim is generally much easier to work out because AI Jim has already done quite a bit of work on the matter.
CX.AI: This is the bot that answers customer questions.
“Lemonade’s revolutionary model has completely changed the way we think about an antiquated industry,” said Nick Liuzza, who is the CEO and co-founder of Beeline. “By implementing artificial intelligence and machine learning directly into its model, the company can keep its costs low and bring savings back to the customer—and this result rings true across many industries.”
More Than About AI
Lemonade also has built something called the Forensic Graph, which uses AI and behavioral economics to predict, detect and block fraud. So far, the company has avoided millions in potential losses.
“In the case of Lemonade, we’d expect the company’s loss ratio and customer acquisition cost to be superior to legacy insurance carriers as a result of its AI technology,” said Nima Wedlake, who is a Principal at Thomvest Ventures. “To date, that isn’t the case, though. For example, its loss ratio in Q1 2020 was about 80% vs. about a 50% industry average. However, Lemonade is still in its early days and I expect its unit economics to improve as the company scales. If Lemonade can prove that it is more effective at underwriting risk using AI vs. legacy approaches, I expect more carriers to adopt similar approaches. Many are already leveraging AI or ML as part of the underwriting process.”
Yet there are skeptics. In other words, AI may be more hype than substance.
“At best AI could only help the company improve its actuarially ability, not see into the future and predict loss, which is of course, by definition, unknowable,” said Kristopher Marsh, who is the editor of Discoverdando.com. “Otherwise there would be no need for insurance in the first instance. On the claims side, there may be some ability to automate payments, but this comes at the cost of leakage without human oversight. If the company can process information to an above average quality, there may be a slight pricing advantage. Otherwise, their true advantage lies is in being able to operate without high labor overhead—particularly in underwriting.”
Regardless, Lemonade does show that an immersive digital approach can be effective with customers. Besides, when it comes to AI, there continue to be many breakthroughs. The industry is still in the nascent stages.
“Lemonade’s successful IPO is about a new generation of digital insurance carriers coming to market and giving insurance incumbents, handicapped by technology constraints, a run for their money,” said Michael Yang, who is the Managing Partner at OMERS Ventures. “Lemonade is leveraging new consumer interactions and creating data sets that allow it to offer the right product to the right person on the right proportional risk basis that the incumbents can’t. Whether that’s through AI or not, or alternatively, through a pretty user experience or not, is less the material point. It’s that Lemonade eschews the traditional broker and agent channel and has a direct relationship with the insured, which affords it more flexibility to innovate.”
Tom (@ttaulli) is an advisor to startups and the author of Artificial Intelligence Basics: A Non-Technical Introduction and The Robotic Process Automation Handbook: A Guide to Implementing RPA Systems. He also has developed various online courses, such as for the Python programming language.