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Business Operations Business Models

How Does Lemonade Insurance Make Money (Business and Revenue Model)

The Lemonade Insurance business model

How Does Lemonade Insurance Make Money?
Here’s what you should know:
  • What is Lemonade Insurance, and how does Lemonade Insurance work?
  • How does Lemonade Insurance make money?
  • Net Premiums Earned
  • Ceding Commissions
  • Net Investment Income
  • Additional Commission and Other Income
  • Lemonade Insurance’s profit and revenue
  • What is the Lemonade Insurance business and revenue model?
  • Lemonade Insurance’s funding and market cap

How does Lemonade Insurance make money if it’s so cheap? Here is a full, in-depth, breakdown of their four (4) revenue streams and the different products and services they offer, as well as the Lemonade Insurance business model, their year-over-year revenue, and how Lemonade Insurance works.

What is Lemonade Insurance, and how does Lemonade Insurance work?

Lemonade is, as Lemonade describes it, a “full-stack insurance company” that currently offers renters, homeowners, life, car, and pet insurance and uses artificial intelligence to do so.

Founded in 2015 by Daniel Schreiber, Shai Wininger, and Ty Sagalow, Lemonade began trading on the NYSE on July 2, 2020, under the symbol “LMND”. Since that time, Lemonade Insurance now has over 1.2 million insured customers.

How Lemonade Insurance works is: Lemonade operates on a peer-to-peer (P2P) business model, which is a bit different than the traditional insurance business model of business-to-customer (B2C). So instead of making money on the unpaid claims, Lemonade charges a flat fee and the policyholders insure one another.

Some of Lemonade Insurance’s competitors include Root Insurance, Hippo Insurance, and other non-traditional insurance companies.

Lemonade Insurance App in Apple App Store | Lemonade Insurance Business Model | How Does Lemonade Insurance Make Money?
Source: Apple App Store | Lemonade Insurance

How does Lemonade Insurance make money?

According to Lemonade’s 2021 Q2 Form 10-Q, the company now has over 1.2 million insured customers. So how does Lemonade Insurance make money off of all those customers?

Below is a breakdown of how much money Lemonade Insurance makes and its revenue model. Including all revenue streams and how much they charge for their services.

Here are the 4 ways of how Lemonade Insurance makes money (in 2021):

Lemonade Insurance has a revenue model that makes money in four (4) ways – net premiums earned, ceding commissions, net investment income, and other income

#1. Net Premiums Earned

Lemonade Insurance makes most of its money off the premiums. In fact, $77.3 million or 81.9% of Lemonade’s total revenue came from Net Premiums Earned in 2020.

So, how does Lemonade Insurance make money from this? As an insurance company, Lemonade underwrites the insurance policies and receives gross written premiums for each policy written. Of which, Lemonade earns a portion of. Which is referred to as the net earned premiums.

In 2020, Lemonade received $214.4 million in gross written premiums. Of that, $77.3 million became net earned premiums, which is roughly 36%.

Lemonade Insurance Cost | Lemonade Insurance Business Model | How Does Lemonade Insurance Make Money?
Source: Lemonade

Note: 81.9% of Lemonade’s total revenue came from Net Premiums Earned in 2020.

#2. Ceding Commissions

In addition to net premium revenue, Lemonade Insurance also made $15.3 million or 16.2% of its total revenue from ceding commissions in 2020.

The way this works is, as Lemonade describes it on page 19 of Lemonade’s 2020 Form 10-K, “We have proportional reinsurance covering 75% of our business. Under the Proportional Reinsurance Contracts, which span all of our products and geographies, we transfer, or “cede,” 75% of our premiums to our reinsurers. In exchange, these reinsurers pay us a “ceding commission” of 25% for every dollar ceded.”

Lemonade’s Ceding Commissions:

  • 25% for every dollar ceded

Note: A ceding commission is a fee paid by a reinsurance company to, in this instance, Lemonade to cover administrative costs, underwriting, and business acquisition expenses.

#3. Net Investment Income

Lemonade Insurance also makes a portion of its money through its investments. Which resulted in an additional $1.5 million for Lemonade in 2020.

According to page 81 of Lemonade’s 2020 Form 10-K, net investment income is recognized as “interest earned from fixed maturity securities, short term securities and other investments, and the gains or losses from the sale of investments.”

#4. Additional Commission and Other Income

Lastly, another small share of their total revenue, but revenue nonetheless, came from what Lemonade calls “commission and other income”.

The additional commission income refers to the commission Lemonade earns for policies placed with third-party insurance companies. And other income consists of the fees collected from policyholders linking to installment premiums.

Note: This segment of income totaled just $300 thousand in revenue for Lemonade in 2020.

Lemonade Insurance’s profit and revenue

In 2020, Lemonade Insurance reported $94.4 million in revenue.

Note: Because Lemonade, Inc. is a publicly traded company, under the Securities Exchange Act of 1934, they must file continuous financial filings with the U.S. Securities and Exchange Commission (SEC). You can find all of Lemonade’s publicly released financial reports, including annual reports, through Lemonade’s investor section on their website.

What is the Lemonade Insurance business and revenue model?

Lemonade Insurance makes money through a few revenue models that they combine within their company, they are:

  • Peer-to-peer (P2P) business model
  • Commission based business model
  • Interest revenue model
  • Fee-for-service (FFS) business model

Lemonade Insurance’s funding and market cap

According to Lemonade’s Crunchbase profile, Lemonade Insurance has raised $481.5 million over 11 rounds and has a market cap of $4.76 billion as of September 2021.