Lemonade adds Cayman & Bermuda captive reinsurance vehicles at renewal

Lemonade, Inc., the high-profile insurtech, has successfully renewed its reinsurance program for the year ahead, keeping its quota share cession flat this time at 55%, but seeking efficiencies elsewhere by adding both Cayman and Bermuda based captive reinsurance structures.

Lemonade had reduced its quota share reinsurance cession rate down to 55% a year ago, saying this was more appropriate for its growing and more diversified book of business than the 70% and 75% quota share cessions it had in place in the years prior.

This 55% quota share protection remains the “centerpiece” of the reinsurance program, Lemonade said today.

The reinsurance program renewal was led by the same tier-one carriers as last year and Lemonade said its renewal was “oversubscribed on all dimensions.”

The variable ceding commissions are forecast to be roughly the same as under the expiring reinsurance agreements and this renewal sees Lemonade covering all of its businesses globally, now also including Metromile, the company it acquired in 2022.

“It says a great deal when some of the world’s largest and most respected reinsurers choose to stake their capital on the performance of our business,” commented Daniel Schreiber, Lemonade co-CEO and cofounder. “These partners allow us to operate in a very capital light mode, and focus our resources on expanding our customer base across all of our products and geographies, while harnessing our technologies to get ever more efficient, and ever better at matching rate to risk.”

In the hunt for greater reinsurance capital efficiencies, Lemonade has looked to the captive reinsurance structure in 2023.

Lemonade has established a new risk-bearing entity named Lemonade Re in the Cayman Islands, in which it plans to hold some of its retained risk.

Also in advance of this renewal, Lemonade has set up a captive cell at a Bermuda transformer vehicle, with plans to use this to retain most of its windstorm exposure.

Lemonade explained that “while windstorm reinsurance capacity was available, this structure was determined to offer a materially better cost/benefit profile.”

Lemonade does not disclose the size of its reinsurance tower and with these changes and the retention of risk under the Cayman and Bermuda captive reinsurance vehicles, it’s very hard to know if Lemonade actually has more, or less reinsurance in place.

Of course, the 55% quota share cession grows in-line with the insurtech, so that expansive type of reinsurance cover remains a growth area, in terms of premiums covered.

But, on the excess of loss side, which is where the captive reinsurers seem to come into play, it’s possible Lemonade is now retaining more risk.

However, it’s important to also note, that Lemonade could be funding some of that, as it would be possible to bring in outside capital to collateralize some of the risk in the captive entities and perhaps part of the motivation for setting these up is with one eye to the future and how Lemonade could introduce third-party capital to its reinsurance arrangements in years to come.