With the pending acquisition of Metromile Inc., Lemonade Inc. stands to gain $100 million of in-force auto premiums, 49 state licenses and a team dedicated to digital car insurance. Lemonade executives view those qualities as fuel to help the company accelerate its expansion in the auto insurance space.
"Metromile has implemented seasoned proprietary machine learning models that are informed by real world feedback and iteration at scale," Lemonade CEO Daniel Schreiber said an earnings call. "It would candidly take us years to gather this level of insight."
Lemonade Car, the insurtech's newest venture, will be bolstered by Metromile's telematics technology, and its pricing and underwriting knowledge via billions of miles in driving data, Schreiber said.
"Injecting all the Metromile mojo into Lemonade Car will lead to a product offering that stands alone in the market," Schreiber said. He added that the deal is expected to yield "considerable" revenue and cost synergies and "flatten risk curves" as the company grows its auto offering.
From its inception, Metromile has focused on the auto insurance market. All of its direct written premiums come from this business line. Lemonade began as a renters insurance company, and has since expanded to offer pet insurance, homeowners coverage, term life insurance and now auto coverage.
Metromile and Lemonade share a similar line of thinking when it comes to underwriting auto insurance, planning to rely more on what executives described as a precision-based pricing model, which uses continuous data streams, rather than the proxies that the traditional insurance industry utilizes, such as credit scores, gender, marital status and job history, among other things.
"The fundamental decision to draw is between precision pricing and proxy-based pricing, and we're very much leaning in on the precision side of the house," Schreiber said.
Schreiber said the auto insurance industry has failed to adopt precision-based pricing in a "meaningful way" and is suffering from a "classic innovative dilemma."
"Ignorance is bliss," Schreiber said. "If I were running a legacy company with tens of billions of dollars invested in proxy-based pricing, I might well do the same thing."
If the industry were to move to precision-based pricing, it would probably find out that the large groups being treated as monolithic are actually made up of different risks, Schreiber said. If insurers had to lower rates in their book of business to reflect that new knowledge, it would be a "devastating hit" to the legacy business, he added.
Metromile and Lemonade will continue to be run independently until the all-stock deal closes, which is expected in the second quarter of 2022.
