Creating Flo-bots — How Insurance is Evolving Across the Value Chain and Insurance Lines (2/3)
Previous post (1/3): Disrupting Insurance — So Easy a Caveman Can Do It?
In the last post, we talked about the forces upending insurance and how startups are positioning themselves to compete. A lot of money and attention has gone to startups building new insurance brands, largely focused on digital distribution and customer acquisition. This remains an exciting opportunity for innovators and investors, but there are significant hurdles to success. There will be only a few winners building new brands. Truly innovating/upending the insurance business model without touching layers further down the insurance “stack” (e.g. pricing/UW, admin, claims) is really hard.
How easy is it to create a new (consumer) insurance brand?
Advertising ROI is generally not good, and it is expensive to attempt to become effective in a scalable way (see graphic below). A new, trustworthy brand is extremely valuable, especially in a moated industry like insurance, but becoming a household name is costly.
Are other approaches easier?
Businesses building better back-office building blocks can serve both incumbents and new entrants, diversifying their risk with sticky enterprise contracts and reliable growth through less competitive customer acquisition. Brand-loyal customers are more likely to buy from an agent, bundle, or be dismissive of upstart brands. The folks open to new brands care less about brand than about getting the right insurance at the right time with the best price and best user experience.
Opportunities with lower levels of risk and lower barriers to success may be ones we hear less about, but they exist across different insurance lines and different parts of the value chain…
Breaking down the value chain
Distribution: Anything in the distribution space (e.g. sales enablement, marketing innovations) is interesting as a scalable, capital-light approach with little regulatory risk and decent exit potential. New products are hard but have strong exit scenarios, potential for technology impact, and sustainable competitive advantages.
Aggregators: The aggregator space is crowded, but with the level of investor interest, players will start to find ways to add other services or products to their offering. This allows them to avoid competing solely on price.
Incidental insurance: This is insurance exactly when/where you need it. It is an under-explored, exciting opportunity for insurtech. Think of an Affirm model for insurance products, where products are bundled into existing processes to lower mental overhead. Getting a user at the point of need (e.g. I just bought a car and now need insurance) is largely untapped and will represent a growing trend (see AutoPay, a Jump Capital investment). It’s cheaper, and follows from the same logic that argues agents aren’t going away (i.e. insurance is sold, not bought). New companies are more likely to integrate themselves with platforms to gain initial traction and footprint.
Software services: Companies building products in core insurance administration, cloud applications, claims efficiency, and predictive analytics continue to have an interesting investment profile. 80%+ of dollars in insurance go to claims and claims processing. There are well-documented testimonials of bloated operations at big insurers screaming for technology help. The explosion of data feeds directly into the predictive analytics engines that can use A.I. (I promise we’ll only use this particular buzzword once) to streamline and improve underwriting and pricing, claims fraud detection and adjudication, customer service (e.g. chatbots), and a whole host of other more granular tasks. A Towers Watson report (graphic below) shows the planned use cases of analytics by (P&C) carriers. Additionally, these companies can more easily avoid the pitfalls and risks of regulatory complexity.
Becoming an insurance carrier is expensive, risky, and time-intensive. It undoubtedly creates exciting exit opportunities, but given the capital-intensive nature of the investment, returns could sputter out. Taking balance sheet risk gives pause to lots of investors. There will be a few success stories, but potentially lots of costly failures.
We think peer-to-peer insurance models may face bigger hurdles, but like our commentary on carriers, we expect a few winners in the space. In the long-run, in an industry where profits are already slim, it will be challenging to create a sustainable model which carves out value for additional stakeholder(s).
Analyzing insurance lines
“Lines” is insurance industry terminology, but it’s just a sensible grouping of different types of insurance (e.g. property vs. life vs. commercial). The U.S. market for insurance is ~$1.2T.
These numbers immediately make us think about the amount of activity we’ve seen in home/renters (e.g. Lemonade, Slice, Hippo, Swyfft, Bungalow…) compared to health (which is almost 10 times larger as a market). There may be a good reason for this.
The regulatory environment in a line of insurance can also dampen entrepreneurial and investor interest. However, this is a double-edged sword, since the few that do make it over the hump will have a built-in, quasi barrier to entry. Regulatory environments are the worst in auto, health insurance, and life, due to longer cycles for approval, higher scrutiny from departments of insurance, and complexity of products. Commercial, cyber, and possessions/travel are more attractive for the opposite reasons.
Dollars in auto are shrinking with the rise of safer/autonomous vehicles, but does it go to zero? Probably not. We believe there will be a residual insurance market as a hybrid steady-state equilibrium emerges of human and autonomous on the road.
The auto insurance market may be shrinking in the long-term, but it had 2.8% annual growth from 2011–2016. Life insurance and annuities, as well as home insurance, grew an average of ~3% annually in the last 5 years. Health insurance is growing at a more formidable clip (~5–6%, depending on how it’s calculated), and cyber insurance is exploding (projected to grow from almost nothing a few years ago to $20B+ by 2020).
Scalability and incumbency strength varies across lines as well. As we all know from the barrage of TV ads we see, auto, home/renters, life, and health insurance are extremely competitive, but commercial insurance is relatively fragmented.
Identifying the opportunities in insurtech is only one side of the investor coin — the other side centers on exit potential, which we explore in the next post.
Next post (3/3): Scooping up the New Geckos — Who Buys Insurtech Companies?
This post was written by Prashant Shukla and Peter Johnson from Jump Capital. Prashant focuses on insurtech at Jump Capital, and was an early employee at Metromile. Peter leads fintech and insurtech investing at Jump Capital. We both thank all those who contributed to these posts.
Note: The above analysis employed information, insights, and data from Company websites, press releases, CBInsights, Towers Watson, Thomvest, Mintel Group, TechCrunch, Dig-In.com, WordStream, III.org, IBISWorld, E&Y, Coverager, Statista, Vertafore, WSJ, and InsuranceJournal.
