Lemonade CEO on entering the car insurance business: 'We’re coming in as an underdog'

Lemonade CEO Daniel Schreiber joined Yahoo Finance Live to discuss the company's entrance into the car insurance business with its Metromile acquisition and competition in the insurance industry.

Video Transcript

- Welcome back. Well, Lemonade, the company powered by AI and social good, just released third quarter earnings yesterday. Here to discuss that, and a new acquisition, is Daniel Schreiber, Lemonade CEO. Sir, third quarter total revenue $35 million, a 101% year over year increase, gross profit up 60%. How jazzed are you with these results?

DANIEL SCHREIBER: Jazzed! We're very, very jazzed. And it comes on the back of an announcement last week that we've just launched our own car insurance product, Lemonade Car. And then just yesterday, after market close, we announced the acquisition of Metro Mile. So in addition to delivering a very strong quarter, we're just thrilled to be entering the largest insurance market in the United States, the car space. And doing it with a big bang.

- Daniel, why did you choose Metro Mile?

DANIEL SCHREIBER: Well, there are things that Lemonade knows how to do pretty well. We've got, what we believe to be, the most delightful car insurance experience, indeed, insurance experience in general. We've proven-- as we just spoke about that 101% growth in revenue, we've proven pretty capable and growing the business.

Just 16 months ago, when we IPO'd, we were monoline, we only had homeowner's insurance. In the intervening months, we've added pet insurance, life insurance, car insurance. So we're also showing our prowess at adding and rounding up the entire product offering.

But we're new to car insurance, and car insurance is an incredibly competitive market. And we're entering a space dominated by brands like Geico and Progressive, who spend a billion dollars plus on marketing every year. Needless to say, we spend less. And we're coming in as an underdog, because we don't have the data and the experience.

So we can create the most beautiful product, but without having years and years, billions of miles of experience, we know that we're going to have difficulty, as a data driven company, getting the pricing precise and the underwriting precise. And the cost of getting it wrong or considerable. That's where Metro Mile comes in, these guys have been at it for a decade.

They are a data science company doing insurance. They've got several billions of miles that have already been analyzed by their AI. And they really have the heart of underwriting and pricing insurance in the car space down like nobody else. The combination of the two, we think, is incredibly powerful.

- You're right, Dan, you are. These are just two beasts, Progressive, you have Geico with that gecko running commercials, seemingly, every second. I mean, how do you wrestle market share from these companies next year?

DANIEL SCHREIBER: Well, I think we can. Sometimes we're called a disrupter, But what I always tell our team is that it's actually disruption that causes disruptors, not the other way around. And what I mean is the following.

This industry is going through, the car space, mobility space, is going through multiple revolutions independent of Lemonade. We're going for autonomous driving, cars as a service, electrification, loads and loads of transformations. And the connected car is one of them. So suddenly, you've got these staggering amounts of data available for car insurance.

But that's not how Geico or progressive work. Berkshire Hathaway had their annual general meeting back in May. And they spoke there about how Geico has fallen short in using telematics data, these kind of data, for their car insurance. In fact, the actual sentence there was, Geico has entirely missed the bus.

Now why is it? Why would an incredible company like Geico be so slow to use these available data streams for underwriting car insurance? And I think the answer is, it doesn't serve their interests. 95% of policies written by incumbents don't use any of these technologies. And even the 4% that do, do it in a really watered down way.

And that's because, if you've been in the business of pricing insurance based on proxies, like credit score, and gender, and marital status, you're taking wide swaths of the population and treating them as if they are monolithic, and pricing them to the average. And that works until a new technology comes along, which can actually discern the differences. 2/3 of drivers drive less than average, 5% of the worst drivers cause 10 times as many accidents as everybody else.

And so long as you don't know about that, ignorance is bliss and you go about your business. But these new technologies, once applied to an existing book of business, would require something like 30% discounts for 2/3 of their customers. And a huge rate hike for about 1/3 of their customers. And if you're the CEO of one of those companies, that's the last thing in the world you want to do.

So they are dragging their feet in adopting these technologies. Lemonade, and particularly now Lemonade with Metro Mile, coming legacy free, without decades of old fashioned business to protect, allows us to go all in on telematics, all in on data driven insurance. And go not for proxies, but for precision.

And that will benefit 2/3 of customers. That translates into 30% savings and more. And that is a huge advantage in such a price sensitive and competitive market.

- And Daniel, I just want to recap this a little bit, so that I understand. Because I think this gets to the crux of the matter. The purpose of insurance is to pool risk. But if you're so good at pooling risk that you have smaller pools, and you have all these legacy constraints, as a larger insurance company might, then you face pricing difficulties, based on your existing customer base. And that's where you're coming into the market, as a new player. Do I have that, kind of, right?

DANIEL SCHREIBER: The pooling still happens. But the question is, how can I match rate and risk? So even when you have perfect insight into probabilities, you go to Las Vegas, and you can figure out with what probability a particular hand of cards is going to win or roll of the dice is going to produce whatever returns you're betting on. That certainty about probability does not translate into certainty about outcomes.

So one thing is just understanding the probability with precision. And these technologies allow us to do that. You then still pool people's premiums, but their rate will match their risk.

And when you're able to do that, 2/3 of the population wins. But if you have a legacy business to protect, that's devastating to you. It will mean giving up tons of premium from the good customers, and hiking rates for the bad customers, you churn customers, you lose premiums. You're going to be slow to adopt those kinds of technologies.