Metromile, Oscar, Verifly and more recently Ladder Financial… in the field of digitally-based insurance, the number of startups is growing, including those firms developing niche products. So what sort of relationship do they have with young people? What is the US-specific angle on the sector? L’Atelier takes a look at the Insurtech business in the United States.
Just like several other sectors, it’s $4.5 trillion insurance industry turn to be disrupted by the new technologies. Technology-led insurance startups, known as Insurtech players, are now managing to raise lots of capital. Newly-launched startups in this field raised close to $900 million in investment during the first nine months of 2016, according to Dow Jones VentureSource, i.e. a jump of 84% compared to the same period the previous year. There are at least two reasons for this boom, says Matthieu Soulé, Senior Strategic Analyst at L’Atelier BNP Paribas North America. “The insurance business generates thousands of billions in revenue. This appeals to startup founders, who reckon that even if they were to take only 1% of a sub-segment of the overall market, that could still be highly profitable. And the Fintech wave has shown that new entrants can carve out a place for themselves, even in a regulated market,‟ he points out.
US Insurtech companies have two basic strategies. “These are highly digital players and so they naturally set out to demonstrate that, with their help, obtaining insurance is getting far easier and more user-friendly,‟ stresses Soulé, explaining: “With startups working in car or home insurance, you can sign up for a policy very fast online and when you need to make a claim, the claims process is also very fast via your mobile device.” Their second argument is that they offer the same cover as the traditional insurers but at a much lower cost.
Step 1: targeting young people early on
These are two very persuasive arguments for young people. Millennials and Generation Zers grew up using the new technologies, are often more at ease when online, and they tend to have less money available. So it is hardly surprising that they want to obtain banking and insurance services online at a lower cost. Nowadays these groups are the prime users of electronic wallets, according to a recent survey conducted by Harris Poll on behalf of American financial services technology provider Fiserv. Demographics will soon also make them the largest group of Insurtech customers. A Boston Consulting Group/Morgan Stanley report predicts that by 2020 “over 60% of US small businesses will be owned by Millennials & Gen-Xers, who prefer to arrange and purchase insurance digitally.”
In addition, Millennials often find the standard customer experience in the insurance sector “outdated and daunting,‟ writes Patricia Vowinkel, Executive Editor of insurance industry publication Best’s Review. This is yet another reason for them to turn to an Insurtech startup. We may wonder if Millennials are actuelly being targeted by these startups. “Absolutely”, says Dan Preston, CEO of Metromile, a startup which offers ‘pay-per-mile’ insurance. He explains: “Millennials, particularly those living in cities, use cars differently… when they have one! They get about using various means: they take public transport, share rides using Uber and Lyft, they cycle or walk, and only use their own cars when they go away for the weekend or want to whizz down to the supermarket. This shift in the way people use their cars calls for a change in the way a vehicle is insured. Insurance companies need to think about providing a service which makes owning a vehicle smarter, less costly, and more convenient.”
In addition to adapting to the needs of young people and offering them products that suit their lifestyle, Insurtech companies are targeting them with advertising. “Their marketing approach has always been tech-oriented and, because these young people are technophiles, they target them as a matter of course. Then as the young company grows, its target audience will broaden and get older,‟ Matthieu Soulé underlines, adding: “And it’s certainly a good idea for the market to focus on Millennials and Generation Z. They are now reaching the age when they’ll be taking decisions about their future, including decisions about the financial services they’ll need. You open your ears to what’s going on when you need to choose an insurance policy for the first time.‟
Insurtech companies betting on UXP
Like banks, insurance companies know how important it is to onboard clients early and win their loyalty as customers tend to stay with their financial services providers. “No-one gets up in the morning and says that they’re going to change their insurance company that day or that they’ve been dreaming of getting a new insurance policy,‟ points out the L’Atelier strategic analyst. “Once they’ve signed up for the policy, as long as the premiums are reasonable and the process straightforward, nothing will change the customer’s mind… apart from more aggressive pricing, perhaps.‟ And that plays into the hands of young firms who can attack the market with more competitive rates. In order to compete with the traditional players and attract prospective customers, Insurtech companies focus on “customer experience, technology, and the speed of dealing with claims,‟ says Matthieu Soulé. This is Dan Preston’s winning recipe. “Insurtech companies often provide a better user experience, with signing generally completed very easily online. These companies are also very hot when it comes to marketing, they use all the latest codes and the latest media channels to sell their services,‟ Soulé underlines.
US Insurtech: car and health insurance first…
Insurtech specialists are now invading all segments of the insurance business, especially in the United States. A report from New York-based technology trend analysts CB Insights reveals that 59% of all funds raised by insurance technology startups last year was by US players, for a total amount of $1.7 billion, mainly from corporate investors. By way of comparison, French Insurtech firms received just 3% of this pot. “These figures are in line with overall investment distribution,‟ points out Matthieu Soulé, explaining: “It’s also because Venture Capital companies are here (in the United States) and because the market is very large.‟
59% of startups raising funds in the Insurtech sector are headquartered in the United States. Source: CB Insights
“In the United States, Insurtech started with car insurance and then health insurance, before getting into the more complex products,” Soulé tells us.
Metromile has probably served as a model for the newer Insurtech startups. The San-Francisco-based company, which was founded in 2011, announced last September that it had just raised $191.5 million. The company’s raison d’être stems from a simple observation. Says the CEO: “65% of drivers pay higher premiums to subsidise the minority, who drive the most”. So his firm enables those who drive fewer miles to pay lower car insurance premiums, since accident risk is linked to the time spent on the road. Unlike traditional insurers, “Metromile invoices retroactively so that customers can pay their bills monthly,” reveals Dan Preston. Metromile also provides customers with a special app that enables them to keep track of their own behaviour behind the wheel, keep abreast of the mechanical state of their car, and geolocate the vehicle. Among Metromile’s shareholders are two traditional insurance companies, one Chinese and the other Canadian.
Meanwhile Insurtech companies are over-represented in the US health insurance sector
“This is closely bound up with the Obamacare phenomenon,” says Matthieu Soulé, explaining: “People started to re-think their health cover situation when Obamacare came into force, and this led to a significant growth in the market. This has generated real interest in the health and health insurance sector.” Oscar Health is an example. Founded in 2013, the New York startup has attracted considerable investment, with $400 million raised in February 2016 – the largest funding round in the Insurtech sector that year in the United States, according to the Financial Times. Oscar is on a mission to make treatment more accessible to Americans whose employer does not provide them with health insurance and who do not fulfil the criteria for cover under the twin government programmes Medicare (for those over 65) or Medicaid (for those on low incomes). Oscar’s health insurance is more affordable and also more user-friendly: potential customers are guided through the process and everything is explained clearly.
Dan Preston cites Oscar, together with low cost homeowners’ and renters’ insurance Lemonade, as companies “where something interesting is happening.‟ Jamie Hale, CEO of Ladder Financial, lists Oscar among “the precursors of the wave of innovation that is just beginning in the Insurtech business.‟ But not everything in the sector is straightforward. “The problem with insurance is, like the loans business, success can only be judged over a number of years. Some startups achieve good revenues compared with Fintech companies, but equally some make huge losses. It’s difficult when a company has made a poor assessment of the risks and more claims have to be paid out than projected, as has happened to Oscar and to almost all health insurers in this market segment in the United States", warns Matthieu Soulé. The segment is also under threat from the policies of the new US president: Donald Trump has already begun to unravel Obamacare.
… before gradually invading all parts of the insurance sector…
Some segments of the insurance industry quite simply began life in response to the new Information and Communication Technologies and new consumer habits. Airbnb hosts and Uber drivers are not always insured in as clear and comprehensive a manner as they ought to be. Both traditional insurers and Insurtech startups have rushed to bridge this gap. New York City startup Slice Labs offers on-demand insurance for these ‘gig economy’ workers, while firms such as California-based Trov provide insurance for connected objects and others including Cyence, also from California, provide cyber-risk modelling to insurance companies.
Verifly insures drones. Source: Verifly
Another piece of equipment in serious need of the right insurance cover is unmanned aerial systems – aka drones. Whether used for goods deliveries, medical or food supplies, in the agriculture sector, to carry out repairs or provide lighting in cities, these flying robots appear to have a bright future, but they do carry with them certain risks. Spotting the opportunity, New York-based startup Verifly has stepped in to insure them, whether they are for commercial or personal use, on condition that they weigh under 15 lbs (6.8 kg). All users have to do is to download the Verifly smartphone app and select the geographic area and time period for which they need cover. Basically one hour’s cover will cost you $10. Verifly offers to cover up to $2.5 million of your legal liability for any injury to people or property damage caused, plus $10,000 invasion-of-privacy insurance. Certain zones are off-limit, such as airports, and some zones will cost you more, for example in areas where there are schools. This insurance niche is still in its infancy and there are very few players. Verifly in fact acts as an intermediary working with international insurer Global Aerospace.
… including life insurance
Now however, in addition to these insurance needs that arise from the use of the new technologies, Insurtech companies are now getting into more complex areas, where you might not expect to find them, such as life insurance. “It’s not a very easy segment in terms of branding. Clients are investing their money over several decades, and they don’t necessarily feel they can put their trust in a startup for the long term,” points out Matthieu Soulé. Which raises a key issue for these young companies: they need to inspire trust but how can you do so without human contact? “Like the banking business, life insurance touches sensitive areas – people’s savings and their financial security. Having bricks-and-mortar premises and contact people helps to build trust and faith in the reinsurance mechanism which do matter when people choose this kind of service. The more emotion comes into it, the harder it is for new entrants to build and preserve a good reputation,” argues the L’Atelier analyst, warning: “The new players could well need some considerable time before they can achieve a critical mass of business.”
Despite the apparent difficulties, Ladder is trying its hand in this segment. The startup launched in California in mid-January, having raised $14 million from investors in October last year. Based, like Facebook, in Menlo Park, Ladder is directly targeting young people with its life insurance products. Ladder’s target market is in fact young families, people who grew up with the new technologies and are short of time – “today’s consumers, who expect easy-to-understand products that suit their needs and take effect the moment they sign up,” as co-founder and CEO Jamie Hale describes them. Up to now Millennials have been regarded as the population segment least likely to be interested in life insurance, judging the cost to be rather high, according to SoFi, a San-Francisco-based Fintech firm which has recently added life insurance to its product range. However, they are more likely to sign up to a policy via mobile or on the Internet, without any human interaction, as is the case with Ladder’s offering. The service is almost instantaneous: “Customers can obtain cover as fast as they can type on their keyboards. It takes ten minutes or less, so they can get back to their daily lives quickly,” claims Hale.
Ladder life insurance cover ranges from $100,000 to $8 million over 10 to 30 years. Users fill in a questionnaire online, and if need be, a doctor will make a visit at a time and place of the customer’s choosing. The startup is working in partnership with German reinsurance giant Hannover Re. Their partnership “couples Ladder's technology-driven, smart life insurance offering with Hannover Re's risk management and automated underwriting solutions”, underlines the Ladder CEO. Kansas City life insurer Fidelity Security Life Insurance is also one of Ladder’s backers.
Insurtech companies have now also gone into life insurance – Source: Shutterstock
Cumbersome process for US Insurtech firms: a separate licence per state
Ladder is only working in California at the moment, while Oscar is available in just three or four US states. “The insurance market is regulated at state level, with every US state free to grant or withhold the authorisation needed to penetrate the market there,” explains Dan Preston. This being so, Matthieu Soulé believes that US Insurtech companies will take years longer than firms in other sectors to achieve nation-wide scope, i.e. with access to the entire 50-state market. “It‘ll take time and money. Today, Fintech peer-to-peer lending companies are experiencing the same problem. [San Francisco-based] Lending Club is still not operating everywhere. These kinds of companies have to set off on a pilgrimage and apply for licences one state at a time, with no guarantee of obtaining them. For the payments and lending businesses, it takes between six and eighteen months to get a positive answer, with costs that are quite substantial for a startup,” he underlines. The time needed to achieve sufficient market penetration across the US as a whole will therefore take far longer, unless a company adopts Metromile’s clever approach. Using the capital it had raised, Metromile took over another insurer, at the same acquiring its existing licences to work in several new states.
“The good news for insurance companies is that a single populous state such as California or New York, with hundreds of thousands of customers, provides enough business for success,” Soulé points out. So technology-based insurance companies may well have a bright future. “The insurance sector will see more innovation over the next two years than it has seen in previous decades,” predicts Jamie Hale. Last year, Insurtech was already the Fintech segment posting the strongest growth. And it could well carry on in the same vein, especially when you consider that digital natives are the future of this business. The Pew Research Center reported in April last year that in the United States, ‘Millennials [those aged 18-34 in 2015] have surpassed Baby Boomers as the nation’s largest living generation, according to population estimates released by the U.S. Census Bureau.’