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  #281  
Old 08-29-2018, 08:54 AM
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The shtick may be low expenses. Their rates are so low a low expense ratio would be trick.
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  #282  
Old 08-29-2018, 10:29 AM
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An expense ratio of 32 seems high for this business model. Is that just growing pains (startup costs)?
yes, that is the startup costs which is understandable (and also the giveback)... if they can't get the direct loss ratio below 100%, then you are up a creek because the reinsurance bailout will end on renewal...
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  #283  
Old 08-29-2018, 04:31 PM
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An expense ratio of 32 seems high for this business model. Is that just growing pains (startup costs)?
New Business strain.
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  #284  
Old 08-29-2018, 09:05 PM
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yes, that is the startup costs which is understandable (and also the giveback)... if they can't get the direct loss ratio below 100%, then you are up a creek because the reinsurance bailout will end on renewal...
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New Business strain.
The high expense ratio could also be a product of the reinsurance if it has a sliding scale commission. They may not be getting their full expenses back, so the reinsurance actually increases their net expense ratio above their gross. Can be significant if it's a high quota share policy.
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  #285  
Old 08-30-2018, 07:57 AM
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yes, that is the startup costs which is understandable (and also the giveback)... if they can't get the direct loss ratio below 100%, then you are up a creek because the reinsurance bailout will end on renewal...
Some of their investors are other insurers, and there could be some other investment in play here, such as access to the distribution platform technology, or to the customer base. Or, it could just be "we're investing in the future! #Uber"

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The high expense ratio could also be a product of the reinsurance if it has a sliding scale commission. They may not be getting their full expenses back, so the reinsurance actually increases their net expense ratio above their gross. Can be significant if it's a high quota share policy.
If you look at the ceded loss ratio, this isn't a quota share.
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  #286  
Old 08-30-2018, 03:04 PM
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Seems like the likely strategy is:

1. Under-price to gain market share as fast as possible
2. Rely on reinsurance to stem the losses due to (1)
3. Use investors for any losses beyond (2)
4. Increase rates due to under-pricing for several years
5. Do this quickly so that rates are close to market
6. Use (2) and (3) again to stem losses
7. End result is a company with market share that prices at close to the market rate.

It actually isn't a horrible strategy if you think about it. Insurance has extremely high barriers of entry, and brand name recognition matters. This way Lemonade can become entrenched in the market after only 5-10 years, which is actually pretty fast for a new entrant.
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  #287  
Old 08-30-2018, 04:54 PM
NAMAK NAMAK is offline
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Originally Posted by The_Polymath View Post
Seems like the likely strategy is:

1. Under-price to gain market share as fast as possible
2. Rely on reinsurance to stem the losses due to (1)
3. Use investors for any losses beyond (2)
4. Increase rates due to under-pricing for several years
5. Do this quickly so that rates are close to market
6. Use (2) and (3) again to stem losses
7. End result is a company with market share that prices at close to the market rate.

It actually isn't a horrible strategy if you think about it. Insurance has extremely high barriers of entry, and brand name recognition matters. This way Lemonade can become entrenched in the market after only 5-10 years, which is actually pretty fast for a new entrant.
the problem is that this is admitted business in NY/CA (60%) and FL. Some of these tough DOI's it can take years to get your rates up because they have stair-steps (CA only allows you to file 6.9% per year or you are subject to a review at your cost) and it looks like their rates need to go up 50%-60% at least. I think this strategy is a tough strategy for admitted business and you will burn through a ton of cash before turning a profit maybe 10 years down the road after you get your rates up. And at that point, will the customers switch?
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  #288  
Old 08-30-2018, 06:38 PM
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the problem is that this is admitted business in NY/CA (60%) and FL. Some of these tough DOI's it can take years to get your rates up because they have stair-steps (CA only allows you to file 6.9% per year or you are subject to a review at your cost) and it looks like their rates need to go up 50%-60% at least. I think this strategy is a tough strategy for admitted business and you will burn through a ton of cash before turning a profit maybe 10 years down the road after you get your rates up. And at that point, will the customers switch?
They will most likely be a bit cheaper than other companies due to the technology they have access to for making claim decisions (which should keep their
expense load lower). Still, it is a risk as they will no doubt lose some customers as they increase their rates
over the next few years.
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