Last week, the movers and shakers of the insurance industry (yes, that’s right, insurance) descended on Las Vegas for the ‘Biggest Thing To Happen To Insurance Since The Policy’ aka the inaugural InsureTech Connect conference. Naturally, the Core team was there soaking in the energy, meeting new faces, and catching up with some of our favorite entrepreneurs, investors, and insurers. The enthusiasm and momentum for change in the industry is palpable, and we anticipate another great program next year. Until then, we thought we’d share four major takeaways from our 48 hours immersed in insurance tech.
Like a Good Neighbor, Strategics are There
It seems like every insurer now has a strategic venture arm. This makes sense — insurers sit on large amounts of capital that’s relatively less regulated than that of banks. As news of insurance tech startups hits the mainstream, incumbents are understandably concerned about protecting their business model. Investing capital into strategically relevant businesses can be a great way to learn about the startup ecosystem and acquire optionality.
For entrepreneurs, it may be tough to tell the corporate VC arms apart — but they are not alike! Entrepreneurs should get answers to important questions:
- How many deals has the corporate VC done?
- How many of those deals resulted in meaningful partnerships with the business?
- What level of approvals are required from the business to get a deal done, and how long does that take?
Our tip for entrepreneurs: Be wary of onerous terms that require corporate approval for future fundraising or acquisitions, which will typically preclude future financing from traditional VCs and reduce the optionality and market value of your business.
We have co-invested with some fantastic corporate VCs who offer true value-adds to startups. Taking money from the right corporate partner can be a great way to raise capital and accelerate your business, but navigating successfully through the forest requires diligence on the founder’s part to ensure a fruitful partnership, just as one would diligence a traditional VC or a prospective hire.
We’re Sometimes on Your Side: Attacking the Principal-Agent Problem Through Tech
Those of us in financial services are intimately familiar with principal-agent conflict. It arises whenever the interests of a consumer are at odds with the incentives of those advising or influencing their purchase decision. Take for example an auto dealer who receives a commission for loans originated through his dealership. When structured as a percent of loan principal, commissions actively incentivize dealers to sell the pricier car, or promote longer loan terms, even if that strains the buyer’s personal budget. We’ve seen this dynamic play out in asset management, in real estate, in auto finance — and we’re seeing it in insurance.
Principal-agent conflicts are prevalent in the insurance industry. Agencies remain the dominant distribution channel for insurance products, and are compensated based on commission (a percentage of premiums). As rational economic actors, agents will allocate their time and sales efforts toward products that offer the most attractive commissions — or, at least commissions larger than their marginal cost of acquiring and servicing a policy. This means lower premium policies and lines will, net net, be less attractive to agents. In some cases, agents may determine that certain lines or certain market segments are downright unprofitable,where the commission juice just ain’t worth the squeeze of hours required to acquire and book a policy. This is the case for disability, which just 2% of independent agencies offer (and those that do focus on pricey high-premium plans).
Because of these dynamics, significant segments of the market are untapped or underserved, across numerous policy lines. Take disability insurance — which 90 million working Americans lack. Commissions on more modest plans covering everyday workers just aren’t sufficient to offset the time and labor-intensive application and underwriting process. Last week at InsureTech Connect, we saw numerous startups dramatically impacting the economics of distribution. By making it faster and cheaper to sell lower value policies, companies align agents’ incentives with the interests of a broader consumer segment. By driving efficiencies here, we expect insurance tech companies will expand product access, while enhancing agent profitability and carriers’ top lines.
Insurance tech companies are flipping the agency’s cost / benefit equation in several ways:
- MGAs are building more streamlined products that require less data collection and underwriting time.
- SaaS companies are building agency workflow tools that enhance productivity and reduce labor costs by streamlining policy application and automating the carrier-agent interface.
- De novo carriers are coding their back-office,enabling them to drop expense ratios and sustain competitive commissions while reducing premium expense to policyholders.
Ultimately, by slashing the marginal cost of acquiring, underwriting, and servicing policies, tech companies make it rational and profitable for agents to sell lower premium products accessible to a wider segment of the population — and that’s a good thing for carriers, agents, and consumers alike.
Disrupting Insurance Brands Requires Owning the Stack (A 15-minute call is probably not saving you 15%)
There’s been much attention paid to startups promising to revolutionize insurance distribution by offering a more intuitive, transparent, and digital customer experience. By replacing agents, call centers and lengthy forms with code, startups aim to cut costs and drive a better deal for customers while still capturing part of the premium pie. In fact, disrupting distribution is typically referenced as the “low-hanging fruit” of insurance tech.
Unfortunately, disrupting distribution requires rethinking the carrier’s tech stack, and that is not what we would call low-hanging. As a digital broker, your rate of change is determined by your partners’ legacy systems,specifically the carrier’s quoting and underwriting engines. Want to reduce the data points you collect to streamline a mobile app? Good luck. Want API access into carriers’ decision engines? Prepare to wait a long time and build them yourself. Want to let your users buy policies in real time, rather than get kicked to a call center? Be prepared to limit your coverage options.
Digital agents find themselves fighting a war on two fronts: pushing for infrastructure change from the outside in, while battling out the customer acquisition war against well-capitalized incumbents.
For these reasons, we’re seeing more and more startups take a managing general agent-route, working with reinsurance carriers to architect actual product and gain greater control over the back-end specs that ultimately drive front-end experience. These players will be able to deliver more seamless purchase processes than digital brokers, though they will likely be more product constrained in the near term. We’re excited to see this trend of owning more of the stack reach its eventual conclusion: flexible, API-enabled carriers that offer an array of products to meet diverse needs, risk profiles, and purchasing preferences of consumers shopping across numerous channels. When this happens, distribution as we know it will truly be disrupted.
Fully disruptive insurance will go beyond the underwriting and binding process. Most home insurance products use off-the-shelf forms that were developed decades ago and do not offer coverage meeting consumer needs today. How many millennials do you know that have more furs than they have electronics? Incredibly, standard insurance policies have the same $1,000 limit to coverage for each category! Smart startups are innovating on the coverage itself, using tech to deliver better products matched with consumer needs, all while providing improved transparency throughout the purchase process. Teams who build streamlined, transparent, and well-matched products will significantly increase customer satisfaction that extends throughout the lifecycle of a customer relationship. These startups will have the best shot at creating lasting insurance brands.
Let Gibraltar Be Your Rock: There’s Not Enough Risk in the World
As global investment yields have dropped, alternative capital poured into reinsurance seeking higher, non-correlated yields. The influx of capital has pushed returns down for reinsurers, leading them to seek non-traditional risks. This is presenting a unique and arguably temporary window for insurance startups who want to create new products. Startup insurance companies no longer need to incorporate as a carrier, which is highly capital intensive. Instead, startups are partnering with reinsurers who will hold the majority of the risk and signing fronting relationships with carriers to be able to offer insurance policies. This allows for the creation of a nimble and limited-capital firm while still retaining (some) control over product design.
But as global interest rates go up, alternative asset classes become more attractive. Whether we are going to see interest rates tightening — and, how quickly for that matter — is a matter for debate. Regardless of one’s macro point-of-view, the opportunity to start a new insurance company has rarely been better.
But what’s your take? If you made it this far, the odds are good we saw you in Vegas. Share your predictions for the future of insurance in the comments section.
Core Innovation Capital is a FinTech venture capital firm investing in companies committed to empowering small businesses and everyday Americans. Our portfolio companies deliver more efficient, well-designed solutions that save people time and money, create upward mobility, and scale broadly — driving both profit margins and consumer value.