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Lemonade's AI Advantage in the Insurance Business

By Matthew Frankel, CFP® and Jason Moser - Feb 18, 2021 at 6:53AM

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Here's one of the key reasons why Lemonade is such a disruptive threat to traditional insurers.

Insurance disruptor Lemonade (LMND -1.82%) uses artificial intelligence technology to make the entire process of obtaining and using insurance faster and easier than ever before. However, many investors don't understand just how big of a competitive advantage Lemonade's technology is. In this Fool Live video clip, recorded on Feb. 8, contributor Matt Frankel, CFP, and Industry Focus host Jason Moser talk about Lemonade's AI advantage and what investors need to know about it. 

Jason Moser: That brings up a good question, I think, because I used to work with Travelers (TRV -0.63%) Insurance long before I moved up here to start working with the Fool. For a little while, I worked in an auto claims department. The philosophy there was, let's do all the hard work on the front end here, investigate these claims correctly, thoroughly, and let's pay what we owe. The idea was that we didn't want to leave these claims outstanding and we didn't want them to go to subrogation or where insurance companies start fighting each other because one insurance company says they owe something and the other says they don't. Then you have this long drawn out subrogation process that involves attorneys and just inflates those costs, and ultimately those costs end up going back to the consumer in the form of a higher premium at some point or another. I wonder with Lemonade. Lemonade gets a claim, they pay that claim out, and ultimately that responsibility then goes onto a reinsurer. I guess I'm wondering out loud here. I just wondering what kind of recourse does that reinsurer have when it comes to Lemonade? If a reinsurer goes back to Lemonade and says, hey, Lemonade, you shouldn't have paid this claim out. Then what happens? I guess that's where really their AI comes into play here. That's where that secret source really benefits them.

Matt Frankel: The AI doesn't just let them process applications and process claims quickly, it gives them an advantage when it comes to detecting unusual activity or fraud in cases. I don't know. I mean, I'm not AI apparently. [laughs]

Moser: Of course, you are not.

Frankel: They've put out a lot of cases on their website, where they've been able to detect situations of fraud that human insurance representatives were not able to detect. There's something to be said there. Anytime you're paying out claims quickly, there's going to be some element of fraud.

Moser: Yeah.

Frankel: They're doing a great job of detecting it and still getting people paid on time. It's a really disruptive model so far, and the early results have been really, really strong. If they can translate that to even 1% of the life insurance market, that would be a huge deal.

Moser: Yeah. I imagine that as time goes on, it's just the system gets smarter and smarter or something. Certainly, a lot of potential there. I can understand why they're trying to gain entry into those additional markets because really that can help them scale up and give them a lot of capability, and that ultimately brings more data into their model and makes their AI smarter.

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Stocks Mentioned

Lemonade, Inc. Stock Quote
Lemonade, Inc.
$21.07 (-1.82%) $0.39
The Travelers Companies, Inc. Stock Quote
The Travelers Companies, Inc.
$168.24 (-0.63%) $-1.06

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