Novelty of next generation insurance business model makes its efficacy unpredictable and susceptible to unintended consequences.
Business model is predicated on behavioral economics. Under Lemonade model, they typically retain a fixed fee, currently 25% of premiums. They use the remaining funds to pay claims (including reinsurance) and, if there are any funds leftover, donate to nonprofits as part of Giveback. While they designed business model to attract users, align incentives with those users, discourage fraudulent claims and allow to offer competitive pricing, business model may not operate as intended over time and on a larger scale.
For example:
False claims or higher than expected claims could cause reinsurers to charge higher rates, refuse to provide reinsurance or provide reinsurance on less favorable terms. While they have implemented control procedures to detect false claims, such procedures may not prevent such claims from being filed or prevent a sufficient number of them from being paid out.
The failure of business model to function as intended could materially and adversely impact financial condition and results of operations.