Keep Calm


It’s been an interesting few months. Several players have thrown themselves into our world in an attempt to join what is clearly the sexiest industry on the planet.

Zenefits and Lemonade are just the newest would-be disruptors to emerge, but we can certainly expect more company soon. So how should we react? Let’s stay calm. In fact, let’s approach this situation with gratitude.

Why? Innovation is a funny thing. While sometimes there’s a big aha! moment that leads to a new breakthrough, innovation is usually much more mundane under the hood. It’s often obvious, actually—so obvious that the new idea eludes us until somebody stumbles across it. Or it simply represents the application of an old idea in a new space. In a profitable industry like ours, even if you identify an innovation, it’s often easier to just stay the course, because the risk of change is high—not just the risk of losing the investment, but the risk of breaking something that already works.

Lemonade is a scrappy new peer-to-peer carrier whose founders never worked in insurance and love talking about how they worked on their idea for months while intentionally avoiding any mention of silly details like, you know, how the industry actually works. So what is Lemonade? Details are scarce, but I’m betting it’s a Kickstarter-ish, LendingClub-like, overly social take on selective pooled coverage. Why do I think this? I work in insurance, and I work in technology. I know how both work, and I can mentally mash them together just like anyone else. Take a successful idea proven in another space and apply it to a new industry. Copy and paste, pick a weird name and bang the drum. Boom! Boom! Boom! Change is a-comin’!

The big question: Will it work? Will buyers care? Even if execution is spot on, which is unlikely in the first iteration, will it actually provide an advantage to the buyer over standard markets? That’s the $13 million question, and Sequoia Capital is willing to risk it. The reason large private equity initiatives swing for the bleachers is that their backers have a lot of room to pivot. Mounds of cash have a way of making risk irrelevant. During the build-and-hype phase, the company valuation will be established (often arbitrarily) and the second-round frenzy will leverage the initial investment. They simply play a different game.

So why should we approach this development with gratitude? Mainly because someone else is willing to spend a bundle to market test a new idea. Well, technically it’s not a new idea, even in our industry. Domestic carriers and brokers are thinking about peer/social insurance, but nobody has pulled the trigger in the United States.

Peer insurance is already happening in Europe. It’s really more of an alternate take on a mutual insurance company, which is a model that’s been around for decades.

Besides, peer insurance is not such an innovation that Lemonade will lay waste to the entire market. It’s more likely that if the concept catches on, it will exist as an alternative approach to traditional placements for people who want to be pooled with their friends. (Not me, thanks. I prefer to be pooled with risk-averse people.) The real value will be in any interesting new approaches to processing, collaboration and customer experience that arise from the venture.

In the mid-1990s, every techie I knew was working with an Internet bank startup. These hotshots were going to destroy the banking industry and take over the world. They took a lot of risks and built out a lot of innovative features that are commonplace today—at big banks. What happened? The banks didn’t panic. They watched, they listened and they moved when the value became clear. Flexibility, patience and strong execution always favor the established players.