Is Insurance Tech Overheated? VCs, CEOs and Insurance Executives Weigh In

At the heart of such discussions was both the rise of venture capital-backed startups in the insurance industry as well as the level of engagement by both insurance incumbents and reinsurers.

Below are perspectives on the insurance tech industry from this week’s conference covering a number of themes including the future of small commercial insurance, lessons from the alternative lending space, insurance structuring, and whether the category is “overheated.”

The commentary

Have P&C insurers left a gap open in the small business segment?

Tom Hutton, Managing Partner, XL Innovate

As banks consolidated into money center banks, they lost their ability to be efficient at making consumer and small business loans if they ever had that capability in small business, they surely did in consumer. Similarly, insurance companies have taken their eye off the ball of the customer experience … where the industry today doesn’t even serve that customer profitably. Brokers don’t make money providing three-person companies insurance policies. It’s not worth driving out to see them, but they still need it.

James Hobson, CEO, Attune

Small businesses tend to not get products that are designed around the small business need. They tend to get either watered down commercial products or trumped up consumer products. I think what I’m excited about for insurance like lending is that if you can build a purposeful product for them and you can really understand their needs, you can serve them exceptionally well and they’ll love you for it. But it’s a really hard problem. There’s a high degree of difficulty and so that means if you can do it, there’s real value in it.

Beth Maerz, The Travelers Companies

Travelers has been very clear around why we thought Simply Business was a good purchase for us, which is we could try to build the entire stack ourselves and build the technology and the experience or we could look for an opportunity to enter into a direct channel with the small business that fit our business model and fit how we wanted to go to market with another distribution channel and Simply Business represented that. There is an opportunity in the small business market to reach people in a way that the brokers perhaps can’t profitably so how do we make sure we both have the channel and the product to do that.

What are some lessons from the alternative lending space for insurance?

James Hobson, CEO, Attune

Small business owners are passionate and energetic and they really are the backbone of the economy. I think if you look at what was needed to really transform lending at a fundamental platform level, it’s a risk business and insurance is ultimately a risk business. So I think there are a lot of corollaries in the type of data that we’ll be able to bring in and the way that you need to build a platform and service the full-stack. At OnDeck, I was encouraged by the fact that we had to build the full-stack ourselves because 10 years ago when OnDeck was started, there were simply no places [where] you could get some of the things we thought were fundamentally needed to make a better product. I think in insurance, we have the ability to focus in on some core things.

Ultimately, fintech and the new lenders have always been partners with banks because that’s where the capital came from, but you’re seeing the partnerships deepen. I think you’ll see those partnerships continue to deepen. I think you’ll see them happen faster in insurance.

Tom Hutton, Managing Partner, XL Innovate

I think the lending experience has helped as well because it’s convinced the investors that financial services is an area they can have an impact in and entrepreneurs have been convinced they can enter a sector where they don’t necessarily come from insurance and can have a big impact. I think the first few ventures I spoke with four or five years ago all wanted to be the Lending Club of insurance so they had in their mind.

As a startup selling insurance products, how did you think about insurance structuring?

Dan Preston, CEO, Metromile

We made the decision (to acquire a carrier) not lightly. We had identified a number of the biggest challenges for our customers and their experience with us. Going back to the point of what millennials are really looking for in an insurance product, the pricing that we created initially was adapted to that need, but then what we discovered was the claims process in being done by a traditional carrier has all of this friction associated with it. So a big strategic decision for us was to actually deliver that claims experience by our staff and ultimately through our technology. And the only way to truly enable that was to do that from top to bottom. And some of the challenges in the industry is that there are these incentives set up between carrier and agency that are not well aligned sometimes and so in order to do the full stack, you need to actually hold the risk. And so in order to bring that claims experience to market, we needed that carrier in house as well.

Jamie Hale, CEO, Ladder

We have started out with a partner carrier, but we wanted to make sure that we could have a full-stack solution so we rebuilt everything from claims, payments, administration, and policy management to be a fully digital experience. So that we can both take the cost out of the process and enhance the customer experience. It’s something you can’t do by putting a front end on top of old-school pieces of back office technology.

Vivek Garipalli, CEO, Clover Health

The basic thesis in terms of how we think about insurance or healthcare is that we got into health insurance because we saw an opportunity for alignment with our customer. So if you take life insurance for example, I view that as an industry where there’s alignment, where as a life insurer you have a vested interest in seeing your customer live as long as possible. As a health insurer in Medicare Advantage, we tend to have a pretty long customer life and if you think about most of the businesses in healthcare today, the business models are pretty misaligned with the consumer. What we saw with health insurance especially in privatized Medicare was the ability to collect premiums on a risk-adjusted basis, meaning the premiums we get from the government are tied to someone’s diagnoses and their age. So now when you think about managing care, you have a direct correlation with improving someone’s long-term outcomes and generating higher margin.

Then when we look at existing players, it’s a very transaction business. You sell the policy, and you’re kind’ve done. So if you talk to some of the folks who run large health insurers, they look at their profits in terms of annual income per member, it’s not a LTV notion and that changes the whole makeup of how an organization operates. If we went into UnitedHealth and took out their tens of billions of dollars of legacy architecture, infrastructure and acquisitions they made over time and take out all their data silos that had been created over time and tried to rebuild everything from scratch, there’s still the DNA issue of the company where they haven’t set up their personnel to actually drive improved outcomes and focus on clinical interactions and creating those feedback loops.

Is insurance overheated as a category for venture investors?

Satya Patel, Partner, Homebrew

Insurance is an area that we think is way overheated. There’s a lot of snake oil being sold by insurtech companies. You have a lot of companies that are effectively lead generation or traffic arbitrage companies reselling someone else’s product or you’ve got a company [with] 100% platform dependency on a carrier or reinsurance partner. We think the equity opportunity is in building fully integrated, vertically integrated insurance carriers, but that’s a very long-term game and a very capital-intensive game. But that’s a less common model than some of what you’re seeing in insurtech, which I think is going to lead to a rash of companies in the first generation falling by the wayside so a second generation can emerge.

Tom Hutton, Managing Partner, XL Innovate

There was a comment that insurtech was overheated. There were probably more insurance-related ventures formed in the bubble of 2000 than there have been in the last year, by the way. They were all selling auto and life policies online, there were hundreds. But the lesson I think is that there have been a couple waves of insurance technology, one of which was catastrophe modeling in the 90s, one of which was the bubble, and now. And this one, there has been a lot that has come into alignment including the industry’s willingness to support. There’s been opportunities in insurance for as long as I’ve been around it. There are times where it is particularly appealing to invest in new things. I think we will see cycles of frenzy when activity is greater than at other times. I think there will be interesting companies every year.

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