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NAIC CEO questions Lemonade's licensing practices

The head of the National Association of Insurance Commissioners took to social media to express concerns about Lemonade Insurance Co.'s compliance with state laws governing licensing of insurance agents and producers.

Tweets from NAIC CEO Mike Consedine suggest that the NAIC may be taking a hard look at the startup insurer's licensing framework.

Lemonade bills itself as the world’s first peer-to-peer insurance carrier. In an Oct. 10 tweet directed at Lemonade’s co-founder and CEO, Daniel Schreiber, Consedine asked whether the "passive revenue" the company's partners make from insurance sales is considered commission. "Are they going to be licensed producers?" Consedine added.

The NAIC head also tweeted that Schreiber has given state insurance regulators gathered for a conference in Silicon Valley "something to talk about."

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Consedine was responding to tweets from Lemonade broadcasting news of its application program interface which allows companies to integrate the Lemonade platform into their apps and products.

Schreiber replied to Consedine that Lemonade has taken all the relevant regulations "very seriously" and is "fully compliant."

Lemonade spokesperson Yael Wissner-Levy reiterated that point in an emailed statement. "[W]e have structured our operations and transactions to date so that both we and our counterparties do not violate producer licensing and compensation laws," Wissner-Levy said.

The NAIC declined to comment, and Lemonade's state of domicile, New York, did not immediately have any comment.

The NAIC's 2005 Producer Licensing Model Act, which has been enacted in various forms at the state level, contains a section that addresses the payment of commissions and governs when an insurance company or producer can pay a commission. Generally, an insurance company or insurance producer cannot pay a commission to a person who is selling, soliciting or negotiating insurance but is not otherwise properly licensed.

"The question really is whether the companies partnering with Lemonade are selling, soliciting or negotiating insurance," a person with knowledge of the situation said of the NAIC's concerns.

Lemonade's focus is on writing homeowners' and renters' policies for "urban dwellers" according to its website, which guides prospective policyholders via "Maya," its "charming artificial intelligence bot." Lemonade touts itself as reversing the traditional insurance model by treating premiums "as if it's your money, not ours," paying claims "super fast” in a simple and transparent platform, and giving back what's left to charities and shared causes identified by the policyholder. It is incorporated as a public benefit corporation in Delaware.

There is a general exception that permits a licensed insurance producer to pay for referrals from an unlicensed entity if that entity or partner's compensation isn't based upon the sale of a policy and the unlicensed entity is not engaged in insurance sales or solicitations.

The New York Department of Financial Services, which first licensed Lemonade to write property and casualty insurance a year ago, stated in a bulletin from 2009 that licensed insurance brokers cannot share commissions with nonlicensed limited liability companies or non-licensee members of an LLC, but can share in the overall profits and losses of the company if it is licensed as an insurance broker "engaged in a bona fide insurance business and not created merely as a mechanism for sharing commissions with non-licensees."

Besides New York, Lemonade has identified its other "active markets" as California, Texas, Illinois, New Jersey and Rhode Island. The company in December 2016 applied for licenses in 46 states. In early August, Lemonade stated that it had received a total of 13 state licenses covering almost 50% of the U.S. population and would launch state-by-state in coming months.

S&P Global Market Intelligence has previously reported that Lemonade's expansion plans have not moved in a straight line, citing concern from some state regulators.

The Department of Financial Services in New York, Lemonade's domiciliary state, is reviewing the licensing situation, according to someone with knowledge of the matter. California, another large state in which Lemonade operates, says the company is in full compliance with licensing requirements there, according to a California Insurance Department spokesperson.