Over the past few years there have been countless talented entrepreneurs, each with the ambition of radically improving a space, Insurance, which is traditionally plagued by low net promoter scores, trust issues, and sometimes skewed incentives. These entrepreneurs targeted a wide range of seriously worthwhile spaces, but the problems they ran into were much the same.
Insurance is a tough business, and especially so for a startup.
While it’s become much easier to find a balance sheet partner (startups are an exceptional distribution mechanism for underlying incumbents), the onset startups face a challenge on the unit economics front. Customer acquisition costs have been driven up to all time highs given the high levels of competition, whilst switching costs are lower than ever–which presents a large retention hurdle and hence an even larger problem of lower lifetime values per customer.
Our view is that there’s a fortune of room for disruption as a broker, but it requires creative thinking on the distribution of the product in order to reach scale quickly and minimize customer acquisition cost (CAC)
The above is further amplified by the fact that startups only capture a fraction of the value they create depending on the commission and profit-sharing agreement with the underlying insurer. Unfortunately startups, especially in the early days, only receive a miniscule percentage of the profit share of the underwriting performance, and an even smaller commission for every policy sold.
We’ve seen how tough this space is, where many startups acting as brokers have been forced to bow out of the insurance wallet and contents insurance space. Our view is that there’s a fortune of room for disruption as a broker, but it requires creative thinking on the distribution of the product in order to reach scale quickly and minimize customer acquisition cost (CAC).
We’ve seen founders overcome these problems by embedding virality into their offerings and creating collective pots amongst small groups of consumers. An exciting theme that we’ve spent a lot of time considering is embedded insurance–the idea that insurance offerings will find homes in all kinds of unique places across the web via a single API. This enables exceptional scale quickly, and brands enjoy a low CAC given the customer is already present for another offering.
Where real innovation has come, for example with Lemonade, or Hippo, this is done via unique business models, a full stack insurance approach, and with a heck of a lot of money. Profit remains elusive. Insurance is a very long term business. The fundamentals have not changed, and probably for good reason. There will be, as per the examples above, new solutions that can reduce costs, but fundamentally, one is fighting established brands and a loss ratio that does not vary that much. Automation will play a big part, but it remains to be seen if a collective of the insured can be taught to behave differently to obtain lower loss ratios which are the largest contributor to overheads.
