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Lemonade's planned Calif. launch more than 5 months in the making

A newly obtained filing shows Lemonade Insurance Co. is close to expanding beyond its home state of New York.

One month after the company, which has a stated goal of transforming the insurance business through technology and transparency, launched renters and homeowners coverage in the Empire State in September 2016, it filed to bring a similar suite of products to California. The filing represents a key step toward Lemonade's target to "open up for business across the U.S. by the end of 2017," though the company must still address a handful of concerns raised by a California regulator regarding certain underwriting guidelines.

All $179,715 of Lemonade's 2016 direct premiums written came from New York, the company disclosed in its first annual statement. New York and North Carolina were the lone jurisdictions in which it was licensed as of Dec. 31, 2016, the filing said.

In California, Lemonade said in its October 2016 submission, the company is seeking to "establish competitive, yet sustainable" homeowners products. It said its initial product emphasis would be on renters coverage on policy form HO-4. But its full product offering will also include condominium and co-op coverage on form HO-6, as well as standard homeowners coverage on form HO-3. Regarding the latter, the company proposed to initially limit its California writings to homes with replacement values of between $250,000 and $800,000.

"The program will be designed to achieve a loss ratio at or below industry average by targeting, whenever possible, high quality, and low fire risk zones," Lemonade said in the filing.

The filing indicates that the company relied on the ISO to develop the loss costs it plans to use for the program while also looking to competitors for insight into the new market. State Farm Mutual Automobile Insurance Co., Farmers Insurance Group of Cos., Allstate Corp. and Auto Club Exchange Group, each of which ranked among California's top five homeowners writers based on 2016 direct premiums written at the group level, were among the companies mentioned in the filing.

A series of correspondence ensued between the California Department of Insurance and the company, which is not atypical in situations where a carrier is seeking to introduce a program in a new market. Several items remained outstanding as of a March 6 message from the regulator's Ria Zhou addressed to Wesley Pohler, a vice president at Westmont Associates Inc., the firm that submitted the original filing on Lemonade's behalf. Two of the six remaining items listed in the letter pertained to Lemonade's proposed approach to the use of "FireLine" scores in underwriting business.

FireLine, a risk assessment tool developed by Verisk Analytics Inc., produces an overall hazard score between 0 and 30 to gauge the wildfire risk associated with a given property, based on factors such as its location, slope and accessibility. A higher score suggests the property is at greater risk of wildfire. Verisk found in a 2015 report that FireLine considered 15% of California households to be at high or extreme risk.

Under Lemonade's proposed guidelines, the company said it intended to limit its share of California premium in FireLine's zone 3 to no more than 3% of its statewide business volume "to prudently limit our exposure." Zhou asked in the March 6 correspondence if the company would stop accepting applicants from zone 3 if and when the applicable premium hit the 5% threshold. If it planned to do so, Zhou stated, "this would definitely be [a] case of unfairly discriminatory [policy terms] which is not allowed in California."

While the company indicated that it would not cancel business solely as a result of FireLine score changes, Zhou presented a scenario that she also described as "unfairly discriminatory" where an application for a new policy was denied on the basis of the underlying property being in FireLine zone 4 whereas the in-force coverage would remain in place.

Lemonade noted in one of its earlier responses to the regulator's request for clarification about its targeting of zones characterized by low fire risk that its renters product, based on its experience outside of California, "is attractive to urban and suburban dwellers" — customers, it said, who are at low risk for wildfires.

In the last correspondence displayed in the filing, Pohler sought confirmation March 24 that Lemonade could have until April 6 to respond to the regulator's open concerns.

Tables shown in the filing suggest an April 1 effective date for the new program and include projections for earned premium totaling $20.9 million, including $13.5 million from standard homeowners coverage, $5.5 million from renters and the balance from condo and co-op business.

The filing would take effect on approval.