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Startup Lemonade wants to squeeze the insurance industry

Popular startups in the finance sector have taken on lending, mobile payments and even investment management, but few have successfully attacked the insurance sector yet. Now that's starting to change.

New York-based startup Lemonade said on Tuesday it had raised $13 million in seed funding from two venture capital funds, Sequoia Capital and Aleph, to create a peer-to-peer insurance offering. Similar to the peer lending model, Lemonade will seek to bring together people in need of insurance and investors with capital to back them.

The deal marks one of many for insurance-focused startups in 2015 after years of quiet. Such startups  raised more than $2.4 billion in the first nine months of this year, more than triple the amount raised in all of 2014, according to CB Insights.

Details about Lemonade's business are scarce so far, but the company says it intends to have products on the market early in 2016. Lemonade's insurance policies will be cheaper and easier to use than conventional products, says co-founder Daniel Schreiber.

"It's unusual to find a sector as vast as insurance largely untrammeled by the digital era," Schreiber says.  "You see the same basic business models chugging along."

Of course, there are a few major hurdles that have prevented disruptive forces from wreaking havoc in insurance. First and foremost is the complex and fragmented state regulatory regime that oversees the industry. Varied rules govern the sale of insurance as well as the management and risk-taking of insurance companies, for example.

"One of the biggest questions is how to handle the regulatory aspects," says Forrester analyst Ellen Carney, who tracks the insurance sector.

Startups in some locally regulated businesses like car service Uber and apartment rental site AirBnb have taken an aggressive, even hostile approach. Lemonade is using the opposite approach—seeking out a few key regulators and trying to find common ground before offering any products.

"Very early on we reached out to regulators," Schreiber says. "We've been very up front and very transparent, and we've been rewarded in kind. Our experience has has been very positive so far."

Schreiber and co-founder Shai Wininger won't say what kinds of insurance Lemonade plans to offer or how the company's policies will be structured. While the big money is in life, home, and health insurance policies, some prior startups focused on smaller niches like cars or personal possessions.

Instead of detailing his business plan, Schrieber offers a history lesson, noting that the famed Lloyds of London started in a 17th century in a coffee shop where like-minded business people joined together to share risks.

"The social covenant is a lot of what the sharing economy ethos like AirBnb is about," he said.

Some other startups are farther along. U.K.-based Guevara lets groups of people insure their cars together by pooling their resources. Friendsurance in Germany gathers groups to insure home contents, private liability, and legal expenses in combination with more traditional insurance coverage.

But none are anywhere near the size and maturity of lending startups like LendingClub (LC) and On Deck Capital (ONDK), which both went public this year.

It's still early days for Lemonade, as well. But the company's vision is certainly expansive. "We want to reinvent insurance from the ground up," Schreiber says.

For more details, stay tuned.