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Lemonade renews catastrophe reinsurance, cuts quota share again


Lemonade, Inc., one of the highest profile insurtech firms, has renewed a catastrophe excess-of-loss reinsurance treaty at the July 1st renewals and also lowered its quota share cession rate for the second time.

lemonade-logo-insurtechA year ago, we reported that Lemonade had purchased a catastrophe reinsurance treaty for the first time, as its portfolio of risks was deemed large enough to require a layer of protection against major US catastrophe loss events.

Prior to that, insurtech Lemonade had relied on its quota share arrangement, which was a significant 75% of gross premium cession to a panel of reinsurance firms.

In addition, the company had some per-risk and facultative property reinsurance in place.

Lemonade had also reduced its quota share reinsurance cession rate to 70% a year ago, at the same time as buying that first cat reinsurance treaty.

The insurtech did not divulge any details on its 2021 catastrophe reinsurance treaty purchase, aside from to say it covered US catastrophe events.

In 2022, as Lemonade grows its business, the company is looking to both retain more of the economics from its underwriting and moderate, or minimise, the chance of major catastrophe impacts.

The quota share cession rate has now been lowered again, this time to just a 55% of premium rate.

The insurtech explained, “A 55% cession is stage-appropriate for us, as our current IFP is more than 4x where it was two years ago, and we’ve diversified in the intervening years, growing from a monoline business to a multi-product, multi-geography business.

“As was the case until now, we continue to purchase assorted per-risk reinsurance, with a view to mitigating volatility and risk concentration. We expect to continue to revisit our quota-share and other reinsurance agreements regularly in order to optimize our capital efficiency and concentration exposure.”

While Lemonade continues to use reinsurance more for capital efficiency purposes than for risk management, this is perhaps beginning to change a little, as the insurtech renewed a catastrophe excess-of-loss treaty that is clearly designed to moderate the impacts of major US catastrophe events on the Lemonade portfolio.

The catastrophe reinsurance treaty was purchased at the July 1st renewal again and will protect Lemonade against catastrophe events in the United States that cause it losses of greater than $80 million.

As its portfolio of risk expands, while it benefits from diversification Lemonade is also picking up peak peril exposure to a level that now requires capping, to a degree, hence the use of an excess of loss treaty.

Daniel Schreiber, Lemonade CEO and Co-Founder, commented on the insurtech’s reinsurance use last week, “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.

“It tends to be much more about financial optimisation than it does about risk alone.”

As the quota share percentage gets managed down, it’s likely Lemonade will use more excess-of-loss reinsurance and other protections, to moderate the impacts of major events on its business going forwards.

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