[samfisher83]

It looks like these are the companies that are really insuring you:

Lloyd’s of London, Berkshire Hathaway’s National Indemnity, XL Catlin etc.

Basically they are buying a policy from one of those companies adding 20% and selling it to you.

A insurance company works by spreading risk over a large area. By selling everything in NY they are increasing their correlation which raises risk. One of the reasons for the sub prime crisis was no one expected housing to fall in all markets at the same time.

[h4nkoslo]

There's a difference between insurance and reinsurance. It looks like they're only reinsured through those companies, but the policy itself is underwritten by Lemonade.

Reinsurance is basically insurance for the insurance co, for instance if a hurricane hits NYC and wipes out all of their policyholders at once.

(It's a bit complicated because there actually are many insurance co's that only sell insurance underwritten by a third party (although they may be able to offer lower price than buying from the third party directly because of how they target their customer base or handle claims), or sell insurance strictly on commission and outsource servicing claims, and there are varying forms of reinsurance that cover everything from huge tail risks to flat percentages of claims, or exotic circumstances like your corporate HQ burning down or massive lawsuits.)

[huac]

It's funny you chose a hurricane as your scenario where an insurer needs coverage. A lot of insurance companies are issuing their own, more creative, instruments to avoid going through the reinsurance markets - especially 'catastrophe bonds,' which offer higher interest rates than normal bonds, but do not pay out in the event of a catastrophic event such as a hurricane.

[Spooky23]

NYC is a useful place to start in that it's a huge market and has some of the toughest regulation in the country.

If you're rental focused, stuff like hurricanes aren't as big a deal because most perils are excluded or out of scope. The roof is your landlord's problem.

[samfisher83]

You are right I guess they could be covering a majority of the claim, but I would guess their reinsurance percentage is probably a high percentage.

For example if the probability of fire is 1%, but due to their limited geographical focus they were covering an entire building of 30 apartment and their coverage is 100 dollars well their rate should be 1 dollar + x%, but if their is a fire their payout will be 3000 dollars due to that correlation of all the apartments burning down. In that case the reinsurance company would have to cover that. If I were Berkshire I would have to price the policy higher for the increase risk.

[BillinghamJ]

Reinsurance isn't generally done on a percentage basis. It's generally done on a "the value of any single claim above X amount" basis. "X" is commonly around 1 million dollars.

The insurer pays 0-X, then the reinsurer (and their reinsurers respectively) pay X onwards.

[6stringmerc]

What you've noted does exist, but the second line is more like building a 'tower' which is still in the primary layer. There's quite a bit of diversity in the reinsurance market so you're right about certain types, usually purchased by small businesses with large vehicles (cement mixers) who can't get enough in the primary.

But, in insurance companies buying insurance, there's some differences.

I'm not licensed but I do know the "Quota Share" structure is quite industry accepted for a few different lines (property being one, casualty, auto). So the % of risk retained versus ceded at various points to reinsurers is exactly the contract structure. Within that structure there are some limits and retentions that get hammered out during the contract and negotations ($XXX,XXX per occurrence of X, Y, Z, etc). But the point of this is that yes a company can retain XX% and reinsurers, usually several, split up dibs on the other XX%, sometimes in layers as well.

It's pretty interesting stuff and the numbers of what's out in the markets for underwriting is definitely an eye opener.

[6stringmerc]

Just noticed, yeah you're right on the difference. I'm curious to what AM Best might rate Lemonade. Or how their numbers line up against some peers. A small part of me wonders how AM Best would look at the fraud potential versus other approaches - make a difference? Maybe no, maybe yes. Just thinking out loud.

[nerdponx]

They're not adding 20%, they're charging you a flat 20% and then paying for the policy on the back-end.

In that sense, it's like a buyers club for insurance. Lloyd's isn't insuring every Lemonade customer individually, they're insuring the entire Lemonade business, which with enough buy-in becomes a very diversified risk pool.

[h4nkoslo]

I'd be really surprised if their entire risk was reinsured; that tends to lead to severe incentive misalignment since they would have every incentive to sell to the riskiest customers they could find.

[nerdponx]

Good point. Although again, adverse incentives on Lemonade's side are supposedly handled by the fact that they're a nonprofit.

[SmellTheGlove]

I'd be really surprised if they could get reasonable terms to reinsure their book, good decision or not.

[gilsadis]

that's well said!

[ojgeojaga]

Their street address is the Goldman Sachs building.

And Geico's overhead is closer to 15%.

So... do what you want with that info.

[omarish]

No, this is absolutely wrong. The housing crisis happened because people did not appropriately price risk and subprime mortgage bonds with poor underlying mortgages were rated highly and then leveraged 30:1 by banks like GS and BoA. An extra billion dollars in insurance exposure to the greater NY area will not precipitate the another financial crisis.