Paying premiums and submitting claims.
We all understand the concept of paying premiums and submitting claims. Insurance providers pool all the premiums paid into a stockpile which is used to pay out all the claims from consumers and businesses. The remainder of the money, referred to as premium income, is then free to be used at the company’s discretion. Traditional insurance companies generally re-invest this money or treat it as income. So, there is an ulterior motive for insurance companies to pay as little money to claims as possible.
For this reason, there are strict rules and regulations in place to stop insurance companies from refusing to pay out claims in order to maximize profit. Question still is, how can consumer interest ever really be at the heart of a business model that profits from denying them financial assistance
Coincidentally, the power of the free market is another safety measure that protects clients. Since the market is highly competitive companies are forced to be reasonable towards their customers. If an insurance company is too greedy and doesn’t pay out claims, then customers would simply switch to another provider. But what we generally see is that the objectives of the insurance providers and their customers are not aligned. A gap in the market that Lemonade saw as their cue to enter the market.