Insurtech Lemonade Inc.'s foray into auto insurance could strengthen its relationship with a young, urban clientele but it is also entering an increasingly competitive space.

The New York City-based company is hoping to tap into its young, tech-savvy customer base as they evolve from apartment dwellers to homeowners and newly minted car owners. Through its own app and in-person brokers, Lemonade already offers renters', homeowners, life and pet insurance. The company is positioning itself as an all-in-one personal lines provider with products that are easy to package to customers, Kaenan Hertz, managing partner of Insurtech Advisors LLC, said in an interview.

"You could have one product and you could turn on and off whatever feature you want," Hertz said, adding that it is cheaper and easier for insurtech underwriting startups to tap into their existing customer base rather than acquire new ones. "If they just manage to cross-sell into their own customer base, they're going to do that in a very cost-efficient way."

But Lemonade is also entering a highly competitive space populated with legacy giants like The Progressive Corp., GEICO Corp. and State Farm Automobile Co. and other insurtech companies such as Root Inc. and Metromile Inc. Writing the auto business fits the company's overall strategy to make home insurance a larger, stickier and ultimately more profitable part of its premium base.

On a March earnings call, Lemonade CFO Tim Bixby noted that about two-thirds of the company's growth in premiums per customer during the fourth quarter of 2020 was driven by product mix shift, including cross-selling.

Insurtech without a technology edge?

However, Lemonade could find itself in the paradoxical situation of being an insurtech startup entering a market with no discernible technological advantages over its competitors, according to Hertz. While Lemonade centers much of its sales strategy through an app that deploys algorithm-generated questions, scores of other insurance companies are doing similar things. Tech-based carriers Root and Metromile, which have focused on auto insurance from the beginning, went public within the last few months and legacy carriers have been growing their digitally based offerings. Meanwhile, State Farm is expanding the geographic reach of its all-digital subsidiary HiRoad Assurance Co.

A Lemonade spokesperson said the company will rely in part on the social values it offers clientele, such as the fact that it allows customers to use residual premiums to support charitable causes, in addition to distinct underwriting practices that it says provides customers with greater precision than competitors. Lemonade hopes to attract owners of electric vehicles and other environment-friendly cars, Yael Wissner-Levy, Lemonade vice president of communications, said in an email.

"This is in line with our company values," Wissner-Levy said. "We have a commitment to a public good, and so our products will of course encompass that."

While incumbents spend massive sums on advertising for brand awareness, Lemonade has relied on younger, more urban consumers who are buying insurance for the first time, the company said in regulatory filings for its July 2020 IPO. Lemonade's gross earned premium in the fourth quarter of 2020 came in at $50.0 million, up 92% compared to the prior-year period. The company logged an 87% year-over-year increase in in-force premium earned for the quarter.

Insurtech startups might not spend billions on advertising but they can turn to online brokers like Insurify Inc. to help level the playing field with insurance giants, according to Snejina Zacharia, Insurify founder and CEO.

Insurify announced a partnership with Toyota Motor Corp. to embed its personal lines price comparison site in the auto giant's sales and financing. Insurtech companies do exceptionally well if they have a streamlined Internet purchasing interface, Zacharia said in an interview.

"We only see an upside [with the addition of Lemonade] because generally those platforms have a better and more optimized user experience on average," Zacharia said.

Balancing disaster risk with other benefits

Big established insurance companies have more robust claims fulfillment operations than smaller startups — that's an advantage they have over insurtech companies like Lemonade when it comes to natural disasters and catastrophic events, said Jeffery Arnold, president of insurance broker RightSure Insurance Group, in an interview.

"The bigger companies have these deep, large organizations to bring to bear on any kind of large catastrophe claims," Arnold said, adding that some customers might be frustrated with how smaller startup companies handle these types of events. "These insurtechs are nimble, but they don't have that kind of depth and experience yet."

Still, Arnold said Lemonade would be a welcome offering for traditional agents and he sees other benefits to the company. Brokers who sell in person are enamored of companies that can offer quotes in a minute or less over the more traditional four to 10 minutes. Because car insurance is commoditized, with price the main determinant for consumers settling on a policy, speed and the promise of discounts more readily turn into sales, he said.

"The consumer really gravitates towards this new, shiny thing that is so quick to quote and seemingly puts the consumer in control," Arnold said.