Lemonade seen amassing more reinsurance capacity than it needs
Insurtech start-up Lemonade has extended its reinsurance programme to a capacity of $325m, greater than its underwriting activities suggest is necessary. The company has signed agreements with multiple global reinsurance firms, stating that it generated around $433,000 in earned premium in H1 2017 alone, indicating gross premiums underwritten standing at around $10m to $15m. It's thought the additional reinsurance capacity has been taken on to iron out claims volatility, to give the company a buffer for expansion and to help keep its balance sheet light.
Insurtech start-up insurer Lemonade, one of the most high-profile companies to come out of the insurance technology wave, has recently completed an expansion to its reinsurance program, which sees the firm with a huge $325 million of capacity backing it.

Lemonade is utilising reinsurance capital as one of its backers, it seems, with a much larger reinsurance program than its underwriting activities would suggest it actually needs.

“I’m happy to report that we signed a new reinsurance contract a month ago, and many of the leading insurance and reinsurance companies from across the globe joined in,” explained John Peters, Lemonade’s Chief Insurance Officer, in a blog post.

“This includes two of the top three global reinsurers; expert specialists that reinsure and even write homeowners themselves. From New York, Bermuda, and London, these partners are in the hubs of insurance knowledge and capital,” he continued.

“We now have up to $325M in reinsurance protection: A LOT for any company, let alone one our size,” he wrote, which we would agree, as based on the underwriting activity at Lemonade the reinsurance program capacity seems perhaps excessive.

The company said that it has generated $433,000 of earned premium in the first half of 2017, which would suggest gross premiums underwritten of somewhere around $10 million to $15 million, we would presume based on Lemonade also saying that they turned down $10 million of premium by not quoting nearly half of their customers.

So $10 million of premiums coming in and now $325 million of reinsurance protection, which is way more coverage (more than double) than a small insurer writing that amount of premium (or $2m of revenue as Lemonade claims to have) would typically need to buy.

But Lemonade is clearly buying reinsurance for numerous reasons, not just for when it faces really major loss events.

It’s using its reinsurance partners to take attritional claims volatility out of the business, helping it to keep its loss ratio lower and ultimately add efficiency to its operations as a result.

It’s also using the reinsurance as a buffer to allow it to grow more rapidly, having the program in place will give it the ability and confidence to expand more rapidly we’d imagine.

It also seems to be using the reinsurance as one of its capital levers, as a way to keep its own balance-sheet a little lighter than a traditional insurer which will be essential for it to compete against industry stalwarts as it grows.

Reinsurance is key for any start-up insurer, but perhaps more so for an InsurTech start-up like Lemonade which has a particularly high level of spend on marketing and acquisition, as well as its technology costs, from the start, but a smaller capital base and balance-sheet.

Peters said that the reinsurers participating in this expansion of the Lemonade program have signed on for multiple years and that the placement was oversubscribed