Dealing with insurance companies can be unpleasant. Buying a policy is fairly simple thanks to the internet, but lodging a claim still requires human interaction most of the time, which is one part of a lengthy process you have to undergo before receiving your payout.
Insurance technology company Lemonade (LMND 0.83%) is using artificial intelligence (AI) to improve the customer experience and it has attracted more than 1.4 million customers, most of whom have migrated from its much larger competitors.
The company operated in four main insurance segments before introducing car insurance in 2021. Here's why that addition could be a game changer for the company.
Image source: Getty Images.
An expanding opportunity
Lemonade's AI-driven online bot, Maya, can provide a quote for an insurance policy to a potential customer in as little as 90 seconds. And when it's time to make a claim, you can be approved and paid in three minutes or less, without any human input whatsoever in many cases. Leveraging technology in this manner unlocks the potential for unprecedented scale, opening the door to an expansion into new markets.
Before entering the car insurance business, Lemonade's four insurance segments were homeowners, renters, term life, and pet. Together, they represent a total U.S. market opportunity of $1.1 trillion this year, but term life makes up the overwhelming majority of that, with renters and pet insurance contributing just $7 billion combined:
Data source: IBISWorld. Chart by author.
It's a great start for an up-and-coming insurer, but there's no denying how concentrated that picture is. The addition of Lemonade's new car insurance business is therefore very welcome, because it offers another $316 billion in potential market opportunity.
Data source: IBISWorld. Chart by author.
But that's not all. In 2020, there were an estimated 228 million licensed drivers in the U.S., and up to 87% of them have a car insurance policy -- that's a pool of 198 million potential customers for Lemonade. Considering the company had 1.42 million customers at the end of 2021, which was a 43% year-over-year increase, the potential for growth by adding car insurance is staggering.
Car insurance could significantly boost Lemonade stock
The benefits are already flowing. During the fourth quarter of 2021 in Illinois, the launch of Lemonade car insurance generated three times more sales than the launch of Lemonade pet insurance in the corresponding period. And 75% of car insurance customers also purchased an additional Lemonade product, so it offers incredible synergies.
Lemonade's revenue increased 36% to $128 million in 2021 from 2020. But the company lost an eye-popping $246 million at the bottom line, which reflected a major increase in expenses as it continues to ramp up its business.
Entering new segments like car insurance isn't cheap, and it takes time to train AI models to accurately price insurance premiums. It's the reason Lemonade purchased AI-driven insurance broker Metromile, as that company possesses insurance licenses in 49 U.S. states, in addition to a decade's worth of driver data, drastically speeding up Lemonade's transition.
In 2022, Lemonade estimates its revenue will come in at $203.5 million, representing 58% growth, which is a strong acceleration over last year's result. It highlights the scaling up of the business, and although losses could persist for the next few years, it's important to focus on the prize: the truly enormous market opportunity Lemonade has.
