Rent-to-Own? Is renters insurance just a wedge into bigger categories?

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In June, we published our first sector report on Renters and Homeowners Insurance startups. This update provides an opportunity to do two things:

1. Reflect sector changes — new companies, financings, management changes, etc — since last quarter’s report. Here, such changes include:

Financings:

Management changes:

  • Ken Eisman left Bungalow Insurance, where he was Director of Sales and Partnerships, in July 2017. We note that now Bungalow has three fulltime employees listed on LinkedIn, two of which are its co-founders.
  • On September 15, 2017, Hippo announced three new hires to its management team. Angela Carter joined as Head of Compliance and Legal, Sergio Iastrebner joined as Head of Design, and Andrea Collins joined as Head of Marketing

2. Go deeper. Separately, an update also gives us an opportunity to delve into the motivations of the startups and speculate on their longer-term plans. Of the 6 startups competing in the renters and homeowners insurance sector, all sell renters or homeowners insurance directly to the consumer. All but one (Lemonade) are MGAs. These startups are competing for a renters insurance TAM we estimate to be $8.2b, twice the size of the current estimated market of $3.3b, but a sliver of the homeowners insurance TAM of $91b.

The market opportunity in renters insurance is considerably smaller than that of homeowners insurance. By a factor of 30. And yet, 3 of the 6 companies in the sector today only offer renters insurance (a fourth offers both). Why?

Less crowded (good) neighborhood.

There are some clear reasons why renters is an “easier market.”

  1. It is much less penetrated than homeowners. 60% of renters do not have renters insurance, while 5% of homeowners do not have home insurance.
  2. It is much more fragmented. State Farm has ~1% share of the renters insurance market. Comparatively, in 2016, State Farm had the leading share in homeowners insurance with ~20%, while the top 10 providers had a 62% share of premiums written.
  3. And there’s less competition for customer acquisition and retention. Because studies show a benefit to spending on advertising, larger carriers do A LOT of it. In 2014, as an example, State Farm spent $844m on advertising.

One can see how with penetration lower, competition lower, and similar consumer problems (bad customer experience, one-size-fits-all products and pricing), many startups are choosing the “easier” route.

And yet.

Neither route is easy. Becoming a U.S. insurance carrier is costly and is subject to numerous regulations. Regulations vary state-by-state, and increase the cost of and time related to entering new markets. As this piece from the Rocky Mountain Insurance Information Association notes, a state’s job is straightforward: to ensure the long-term solvency of insurance companies but also to protect consumers from inadequate or excessive rates. Still, because insurance is regulated by the state, and each carrier must get state-level approval before launching in a particular geography, this creates significant friction for startups looking to disrupt the industry (primarily time, but also money).

To date, 2–3 years after their foundings, none of the startups in this sector are licensed in every state. The closest is Quilt, which is now licensed in 40 states. As the table below shows, the number of states is less important than the % of the population and SAM being addressed.

The regulatory hurdles to opening a new market lead to different strategies. For example, while Lemonade is the best funded startup by far ($60m in venture financing), given their unique P2P approach, their roll-out has been slower than competitors. In fact, of the six sector constituents, they have the 4th largest SAM today (80m people). Quilt (40 states) and Bungalow (9 states) have the largest SAMs, at 260m and 130m people respectively. It is curious to see a startup like Hippo ($14m in venture financing) focus on a smaller state like Arizona (its second state, with 6.6m people), instead of investing its time and energy behind launching in the biggest states available (CA, FL, NY, TX).

What does this mean, longer-term?

By initially getting licensed as a Property & Casual agent in renters insurance, the 3 companies in this sector focused on renters insurance (Jetty, Quilt, and Bungalow) are positioning themselves to “turn on” homeowners after they’ve built a brand within their initial category.

We speculate this is an easier lift than taking on the more concentrated and more heavily-armed incumbents in homeowners insurance. While the TAM in renters insurance is considerably smaller, as noted, a focus on this niche with its likely lower customer acquisition costs, may allow the companies to scale more sensibly and capital efficiently than peers focused on homeowners or both.