Growing insurtech Lemonade has secured catastrophe excess-of-loss reinsurance to protect its business at the July 1 2022 renewals.
The insurtech company continues to utilise reinsurance more for capital efficiency reasons than for risk management, but the catastrophe excess-of-loss treaty is clearly designed to moderate the impacts of major US catastrophe events on the Lemonade portfolio.
Recall, Lemonade has largely relied on quota share reinsurance through its formative years, but has now begun to dial that coverage back.
Lemonade began with a quota share program that saw 75% of its premiums ceded to reinsurance partners.
This move helped to manage the business through its formative years as it worked to reduce loss ratio volatility and expand its portfolio, adding diversification as well.
A year ago Lemonade reduced the quota share cession rate to 70%, a first sign quota share reinsurance might become less important over-time to the insurtech.
Then, as we reported last week, the insurtech revealed in its second-quarter 2022 results that the cession rate for the quota share has been reduced further, to now 55% of its gross premiums as of July 2022.
The company purchases per-risk excess and facultative property reinsurance and then a year-ago bought its first catastrophe reinsurance as well.
Now, Lemonade has renewed a catastrophe excess-of-loss reinsurance arrangement at the July 2022 renewals, to buffer its business against the effects of any major industry loss events.
The catastrophe reinsurance treaty will protect Lemonade against catastrophe events that cause it losses of greater than $80 million.
As the insurtech expands its business its exposure to large catastrophe events, across the portfolio, grows and so excess-of-loss reinsurance can provide certainty in capping the loss impact of any major events that occur over the next year.
Daniel Schreiber, Lemonade CEO and Co-Founder, discussed the insurtech’s use of reinsurance during its recent earnings call.
“For us, reinsurance tends not predominantly to be about risk management… Perhaps an even larger driver for us in recent years has been just capital efficiency,” he explained. “It tends to be much more about financial optimisation than it does about risk alone.”