I was on a panel a few weeks ago at the Dreamforce InsureTech Summit and one of the first questions asked was why insurance startups are getting so much attention from investors right now. All of the panelists, including me agreed that there were a number of factors contributing to the recent excitement, ranging from:
- A shift in consumer expectations
- New ways to measure risk
- The sheer size of the opportunity
- The industry’s legacy software infrastructure
- Legacy customer acquisition channels
- The overall design of the system from a cost standpoint
In fact, there may not be another industry in the US right now where by leveraging technology, costs could be reduced by such a high overall gross figure (In a 2014 report, BCG and Morgan Stanley estimated this number to be between $62 and $102B, representing between 5–9% of global non-life premiums).
When a market this ripe for innovation catches the attention of founders and investors alike, the question then becomes whether or not disrupting or enabling existing players is the correct way to approach the market. With regards to insurance in particular, we have differing thoughts when it comes to the various lines and segments of the market.
In the small commercial market in particular, we believe that there is a massive opportunity to enable existing players with momentum coming from all sides of the market. Roughly ~96% of small commercial polices are still sold through a broker. There is a school of thought that this isn’t sustainable, especially when you consider that, after all of the various stakeholders are paid out and the cost to underwrite a smaller policy, the carriers wind up with an extremely low profit margin (or even a negative one depending on how long the customer stays with the same policy). This dynamic has led to certain carriers (most notably Berkshire Hathaway) setting up their own direct online channels.
Carriers are facing a serious dilemma given their high expense base that’s unsustainable over the long term. The current broker model leaves an opening startups leveraging technology and scale to acquire customers and capture economic value previously only available to offline brokers. This creates an interesting game theory conundrum as carriers are faced with the dilemma of whether or not to stick with the status quo or enable certain digital intermediaries. This has opened up the floodgates for startups as we’ve seen several companies raise money to build digital brokerages and MGA’s.
With that being said, if you’re taking this path, it very well may wind up being incredibly difficult to compete with carriers that have massive customer acquisition budgets and brand name recognition (according to a 2016 McKinsey report, there is a surprisingly strong correlation between the amount spent on personal lines marketing and small commercial consideration from end customers).
Broker’s actually acquire customers quite efficiently, and it may be difficult or impossible to acquire customers online at the same cost that brokers do through more traditional means. SMB acquisition generally works best when verticalized or localized — most brokers, local to their area and experts in specific products, fit that mold.
At the same time, aggregating the policies online as a digital brokerage and taking the customer through the journey to find the coverage they need has its own series of challenges away from customer acquisition. These are very complex policies and it’s incredibly difficult to commoditize them to such an extent where anyone can figure out what they do/don’t need for their unique business by answering a series of questions online without feedback.
There are issues with the carriers going direct as well. The biggest being around trust. If multiple large brands are seeking out customers to sell their policies to directly, who would you trust as an end customer? In a world of radical transparency and empowered end customers, oversimplifying a complex product could lead to an abundance of choice and resulting paralysis by analysis.
Unlike in other insurance verticals, small commercial is an incredibly personal sale. It’s not an added benefit or a commodity like auto but rather it’s protection for a small-to-medium sized business owner’s livelihood. Why wouldn’t that business owner use a free resource like a trusted advisor to figure out what they do/don’t need and make sense of the complexity, noise and choices that they’re bombarded with?
This point is amplified by something Nobel Prize winner Daniel Kahneman said in conversation with Michael Mauboussin at the Sante Fe Institute in 2015,
When you have an advisor selling a sandwich on behalf of somebody else or buying a sandwich on behalf of somebody else, that effect is gone, there is no loss aversion. That’s really important.
Loss aversion is emotional, the reluctance is emotional, and if I’m making a decision on behalf of somebody else, I don’t feel that emotion, which means, by the way, that advisors are likely to be more rational in the long run because loss aversion is costly.
As consumer expectations and preferences change, brokers will need to add more value than just acquiring customers. It’s our belief that the activity in the market will lead the best brokers to spend more of their time providing a better experience for their customers. Brokers will act as a trusted advisor to those that know that they need coverage but aren’t sure who to trust or how to make sense of what they’re being sold. The broker’s value then will be in making these distinctions for the end customer.
Current broker tools aren’t nearly sufficient for this level of service. Hence why I’m thrilled to announce our investment in Indio, a SaaS platform for commercial insurance brokers. Indio empowers brokers to spend less time negotiating and going back and forth with wholesalers, carriers and their customers. They do this by automating client data collection, workflow, centralized quoting and comparison shopping. This enables brokers to spend more time acquiring customers and providing the best experience for their customers in a similar fashion to the way Marc Andreessen spoke about bank tellers and doctors in an interview with Vox last month,
The other thing that’s been growing for decades is bank tellers. That one might actually finally begin to decline. But bank teller jobs have continued to grow for the last 30 years as ATMs and online banking were rolled out exactly for the reason you said. Which is all the sudden there’s an opportunity to differentiate by providing a higher level of service by providing a person.
Vinod Khosla has written all these stories about how doctors are going to go away. He thinks computers are going to be so much better at diagnosis that there’s no room for doctors any more. And I just think he’s completely wrong. I think the job of a doctor shifts and becomes a higher-level, more important job that pays better as the doctor becomes augmented by smarter computers.
We couldn’t be more thrilled to be working with Mike, Matt, and the rest of the Indio team. As technology continues to permeate all industries, we spend a lot of time thinking about whether or not total disruption or enablement is the right approach.
As outlined, when significant barriers exist to completely disrupt incumbents such as complex end products that are difficult to navigate (and as a result commoditize), brand equity of incumbents, and the sheer amount of capital incumbents have to spend on acquiring customers, we get most excited about startups that are enabling existing players to access the same tools and customer experience we’re used to using with the consumer products we turn to on a daily basis. This is especially true in cases where stakeholders are faced with the pressure to innovate or face irrelevance.
In this market in particular, we believe that brokers will become trusted advisors bolstered by technology and software in order to provide the highest level of service and expertise to their customers.