Peer-to-Peer Insurance Explained: How Lemonade & Others Work

Insurance is designed to protect people financially after an unexpected event. Although it’s important to have enough money to cover an incident, there’s also a chance you will pay insurance premiums throughout your life and never need to file a claim.

With a traditional insurance company, premiums not used to pay claims become profit for the company. But the peer-to-peer insurance model works differently. If you’re shopping for insurance, you might find the transparency of P2P insurers and insurance products appealing. Here’s what you need to know about this new frontier of insurance and about a company called Lemonade in particular.

In this article

• What is peer-to-peer insurance?
• How Lemonade works
• Peer-to-peer insurance vs. traditional insurance
• Pros of peer-to-peer insurance
• Cons of peer-to-peer insurance
• FAQ
• Bottom line

What is peer-to-peer insurance?

The P2P insurance model is gaining popularity in what’s known as the insurtech era, but the concept dates back to the origins of insurance. This type of insurance simply involves a group of individuals contributing to a pool of capital that becomes accessible to any individual from that group who is experiencing a covered loss. These groups are typically formed from like-minded individuals, friends, or family members who agree to combine their resources in case one member of the group incurs a loss.

For example, Friendsurance, the original fintech startup to use the model in Germany, allows you to set up a group with friends but can also connect you with other customers with similar needs and risk profiles. The company offers cash back to groups that stay claim-free, keeping costs low. Teambrella is another P2P company in the insurance sector that allows groups known as teams to keep their funds in a digital wallet and retain any money not used to pay claims.

In the U.S., insurtech startup Lemonade has brought the concept to a larger scale and combined it with some of the conveniences of the traditional insurance model. You don’t need to pull together a group to get coverage through Lemonade — you can purchase a policy online as you would from a traditional insurer. Nevertheless, Lemonade draws from the P2P model to achieve lower insurance premiums and greater transparency. Let’s look at how Lemonade works in more detail.

How Lemonade works

Lemonade is a P2P insurance company founded in 2015 that has been expanding to more states over the years. The company offers three types of insurance coverage: renters insurance, homeowners insurance, and pet health insurance. You can get a discount for bundling your best pet insurance with your homeowners or renters insurance.

Instead of profiting from not making payouts on claims, Lemonade takes a flat fee from customers’ premiums to run the business. The rest of the money in the pool goes first toward paying claims, and anything leftover at the end of the year is donated to the cause of your choice. Lemonade groups you with other policyholders who are interested in contributing to the same cause. However, your premium is determined from individual risk factors alone.

This approach means Lemonade has nothing to gain from denying claims, so the claims process can be much faster than with traditional insurance carriers. The company also uses blockchain technology to instantly verify as many losses as possible. If a claim is approved using this technology, the policyholder could get their money in seconds.

Lemonade’s peer-to-peer insurance model also allows the company to charge affordable rates. For example, Lemonade renters insurance policies start at just $5 per month, a far cry from the average $15 per month charged by companies in the industry (as of Jan. 29, 2021).