Confessions Of An Insurtech Founder
Americans need insurance.
As it stands now, it simply costs way too much. In its absence, many are forced to take on “individual” debt to pay for risks that are best tackled by a “societal” safety net.
I have been fascinated by insurance since my time building a healthcare startup. That encounter left me with the crazy idea of starting an insurance company. I passed my insurance licensing test right after graduation and started work on Truedime by the summer of 2017. This is an encapsulation of my learnings over the past two years and why I went from self-professed insurance nerd to questioning the very underpinnings of the industry.
Breakdown of a typical insurance premium.
Only 46% of the premium goes to pay actual claims!
The broker takes the lion’s share of the premium 32%
The Carrier takes 4.5% fee and 7.5% of underwriting profit
the plan administrator 7.5%
Consider this, a world where a majority of people live without an adequate safety net but less than half of the premium goes to pay for the actual risk, is an inefficient world to live in!
Tech companies have been hard at work to remove the so-called “middlemen” i.e brokers who consume the most for supposedly doing the least, i.e solving the last mile distribution problem of insurance. Most of these attempts are essentially fancy front-ends that serve to hide the shit sandwich of a fundamentally broken model. Our tech darlings aren’t removing brokers they are becoming them.
Trust me I was one of them.
Here are some structural reasons why insurance distribution is broken and single payer is the answer!
- Individual underwriting is expensive for all involved
Insurance underwriting works on the basis of the law of large numbers. You take a big enough population and you can rest assured with enough certainty that most risk is uniformly distributed. The challenge with underwriting individuals is self-selection. Every person coming to buy insurance as an individual could potentially have an information asymmetry over the underwriter.
That’s why underwriters prefer larger groups formed for reasons other than buying insurance (like an employer or union) which can balance out this self-selection problem. So you as an individual consumer, regardless of whether you “actually” plan to defraud the insurance company or not, are paying this “cloud of suspicion” tax on each policy you buy. One way to tackle the self-selection problem is to make insurance mandatory for everyone — -like it is for car insurance or the now-repealed individual mandate under the ACA. A single universal payer can solve this issue in similar ways!
- Commission-based models don’t align incentives
Commissions are sub-optimal. They create bad incentives because as an agent I have an incentive to sell you more to make more money. That is why the whole gamut of Robo-advisors offer you zero-commission trading, to remove that incentive altogether. But, insurance brokers still get paid a % of the cost of a policy. That means as a broker my incentive is to focus on higher-value policies that earn better commissions or in case of a low-cost policy, jack up my commission % to meet targets. The ACA tackled this problem by creating an open online exchange that led to the lowering of broker commissions across the board for health insurance policies. This is evidence that efficient legislation can actually lead to lower costs!
- Insurance needs better payload delivery
Insurance is boring. Most folks couldn’t care less about their insurance company until it’s time to claim or renew their coverage. Many insurance startups have tried ways to engage with their users over the lifetime of policy but to limited success. The answer lies in human nature. We don’t like to be reminded of the risks in our everyday life and for good reason. Otherwise, life will be a chore. But what if insurance exists not as an independent relationship but as part of everyday use, in plain sight but inconspicuous. It’s there when you need it, and invisible otherwise.
Just like a universal safety net!
We are building a free safety net at betterbank.app
The past two years have been a learning experience. I owe thanks to the wonderful community of Hartford Insurtech who guided us through the fascinating world of insurance and to the folks at Rough Draft — -Peter, Denali, and others of the NYC team who saw the desire for knowledge behind Truedime and supported us.
