Lemonade has already upset the traditional insurance model with its ‘Giveback’ to charitable causes and record-setting speed for paying claims. Can the VC-backed startup revolutionize the way car insurance works?

Lemonade made quite a splash when it debuted its homeowners’ and renters’ insurance for New York residents in September, 2016. Since then, the radically transparent, upstart “B-corp” has expanded to a nearly nationwide presence, and the firm will soon be offering auto insurance, as well.

Can Lemonade auto insurance live up to the hype? And what’s all the hype actually about, anyway?

What Makes Lemonade Special?

Most insurance companies make their profits by taking more from customers in premiums than they pay out in claims. This creates an adversarial relationship between the company and its customers, and some big insurers have been charged with an unscrupulous strategy of Delay, Deny, and Defend (the “three D’s”).

Customers expecting to get the runaround from their insurers are more likely to exaggerate their claims, and insurers anticipating this from their customers become even more obstinate. Lemonade seeks to break this cycle of distrust by better aligning the incentives of everyone involved.

How can Lemonade do this?

1. Instead of relying on unpaid claims as the source of company profits, Lemonade takes a flat 20% fee – that’s it.
2. Individuals insured through Lemonade select a charitable cause for the company’s “Giveback” program. All customers pledging to a particular cause become part of a “peer group.”
3. Premiums collected above Lemonade’s 20% fee are pooled to pay claims – and whatever money’s left over at the end of the year goes to a charitable cause, not Lemonade’s bottom line.

Lemonade is banking on the idea that its customers will be less likely to cheat a good cause than a soulless corporation. That makes sense.

The Truth About Dishonesty

Lemonade also requires its customers to sign an Honesty Pledge. This may sound trivial, but Lemonade’s Chief Behavioral Officer Dan Ariely, best known for his Ted Talks and the CNBC documentary (Dis)Honesty: The Truth About Lies, has conducted experiments in which he reduced cheating to zero by simply asking folks to recall the Ten Commandments. Since none of the participants could actually name all ten, it’s unlikely they were an overly religious group – and yet, even being asked to think about morality caused them to act more morally.

Dishonesty is a big problem for the insurance industry – on both the customer and the corporate ends. Significantly reducing fraud, even if it can’t be eliminated, would allow insurers to offer much more attractive rates to their customers, and/or pay out legitimate claims with much less hassle. Lemonade has already set an (unofficial) world record by paying a customer’s claim in three seconds.

Will Lemonade’s Model Work for Auto Insurance?

Lemonade’s homeowners’ and renters’ insurance has been on the market for just over 100 days, but all indications are that the VC-backed firm is in excellent financial health. Nevertheless, selling auto-insurance could present challenges not evident in Lemonade’s existing markets.

For instance, 87% of Lemonade’s customers are first-time buyers of homeowners’ or renters’ insurance. This shows the company is reaching a market that traditional insurers have been unable to reach. But everyone has to buy auto insurance, making the market much larger – and more inclusive of “poor risks.” These poor risks may be more willing to exaggerate their claims, even if doing so takes away from a cause. Of course, Lemonade reserves the right to deny coverage to poor risks – and doing so should keep premiums low for the rest of its customers.

When Will Lemonade Offer Auto Insurance?

We don’t have a specific answer to this question yet, but Lemonade auto insurance should be coming soon – to at least some states.  Insurance is regulated at the state level in the U.S., and this means Lemonade will probably target a few states to begin with, just like they did with their homeowners’ and renters’ insurance.

The traditional insurance model has long been in need of a serious shake-up, and Lemonade is at the vanguard of reforming and improving the industry. It’s safe to assume that Lemonade’s auto product will have the same “Giveback” feature as its homeowners’ and renters’ packages, and a flat 20% fee to ensure the company will pay claims on the basis of merit, rather than Delaying, Denying, and Defending.

Once Lemonade auto is available, be sure to try out the comparison form available at the top of this page. When you do, be sure to consider more than just the monthly premiums: You may pay less with other insurers, but will they be as quick to pay out claims when they retain, as corporate profits, whatever they don’t pay?

Teens ages 16-19 account for over 12% of car accidents a year though teens are about 10% of the US population.  The scarier statistics include a fatality rate of 5,000 teens a year and 400,000 teens a year being seriously injured.   Due to these facts, car insurance costs are significantly more expensive for teen drivers and driving school is significantly more important for your teen.

Alcohol and reckless driving have always been an issue for teens but in modern day, we have other factors involved.  Teens growing up nowadays have technology ingrained in their systems.  Though drivers’ education courses cover the use of cell phones while driving, it is important that parents go over the risks with their teens as well.   13% percent of accidents caused by teens are due to cell phone use while driving.

Not all states require drivers’ education but all states have the option available and taking a course can significantly lower the cost of insurance for teens.  There are also options for a second, more in depth drivers’ education course that can lower costs even further.

If you are planning to purchase a car for your teen, getting them a pricey, high-end model, is not the best option due to higher insurance rates as well as the statistics for teen drivers.  As we said, teens are more likely to get in an accident and a higher end model will cost more money to fix.  It is best to go with a cheaper, reliable car to reduce insurance costs.

Another great way to lower insurance costs for your teen driver (though they might not be thrilled with this option), is to hold off on buying them a car until they prove their driving abilities to the insurance company.  Adding your teen to your existing policy on a car that you own as an occasional driver will lower their car insurance costs as well as proving to the insurance company they are a good driver by avoiding accidents.

An excellent program that many insurance companies have in place allows for lower car insurance rates for teens that get good grades in school.  Perhaps they believe that with good grades come more responsible teens.  Most insurance companies that instate this program require your teen to have a B average but some further the discount the higher the grades.  Speak with your insurance provider to find out what they offer for this program.

Driving is a big responsibility for teens and though it’s convenient for parents to have their teens driving themselves around, it is still risky.  We constantly hear of states trying to up the legal driving age.  Earlier, we discussed some of the reason teen insurance is higher and some distractions keeping it at a high rate.  For parents, it’s important to familiarize yourself with all the risks teens deal with in driving.  Let’s discuss some issues that specifically affect teen drivers.

The first issue is speeding.  Teens are more likely to speed than experienced drivers because at a young age, they feel invincible.  Adhering to the speed limit is especially important since teens aren’t used to being on the road.  In fact, you might advise that, in your teen’s first few months of driving, they stay 10 mph under the speed limit.  Speeding accounts for more than 40% of car related deaths for teens.  This is a scary statistic and certainly an issue they are schooled on in driver’s ed.  It’s important that this issue also be discussed between the teen and the parent.

We touched on the danger of using technology while driving but this is another issue important to reiterate with your teen.  With the use of cell phones and advanced technology, there are a million ways your teen can get distracted while driving.  You need to be firm with the fact that anything they might be doing on their phone while driving is not okay.  This includes talking, texting, changing music, Facebooking, Instagramming, and the like.  Even the time spent searching for a contact and pressing send can cause up to 5 seconds of your teen not focusing on the road.  It is best to suggest they don’t listen to music for their first few months of driving but if they will be listening, have them choose the music before they set off on the road.

Teens will naturally want to drive their friends around when they first get their license, but this can actually double the risk of a collision.  A teen passenger accounts for another distraction, as well as the possibility your teen will try to show off in front of them.  This might mean increased speeds, tailgating a car in front of them, or dancing along to the radio—all creating further risks for your teen.

One factor some might not take in to consideration is exhaustion.  Teens have to rise early for school but often stay up late doing homework which can lead to your teen being very tired.  Did you know a tired driver could prove to be as dangerous or more dangerous than a drunk driver?  When you are tired your reaction time is reduced significantly and your awareness is not strong.  Talk to your teen about being aware of their body and allowing someone else to drive if they are feeling too tired.

Another issue seen often with teen drivers is risk taking and statistics show this issue to be more common with male drivers than female.  Young drivers are more likely to take risks such as switching lanes quickly to get in front of a slow driver, tailgating or keeping an unsafe distance with the car in front of them if it is moving to slow, or even driving under the influence though they know it is wrong.  Talk to your teen about the importance of obeying the law and stopping at a yellow light rather than taking a risk and speeding through it.

Though your teen staying safe is the most important thing, the benefit of lower car insurance is a perk of a good teen driver.  We have gone over important tips to keep your teen safe on the road, avoiding accidents, and lowering the cost of auto insurance.  Don’t assume everything has been talked about in driver’s education courses.  Be certain it has been spoken about because you have spoken to your teen about safety.