Fixing insurance distribution: three schools of approach

I have met a lot of insuretech businesses over the last couple of years, mostly in Europe but with a burst in the US around Insuretech Connect

The majority of these businesses are trying to find a new way to reach and acquire customers (be they consumers or businesses). There are a bunch of other interesting areas in insurance around software, claims management, fraud, capital structure, broker tools etc. — but I will save that for another post.

Any VC looking across many companies in a sector needs to find a way to impose structure and differentiate between approaches. This can be tough as there are lot of common threads.

Many companies talk to me about their use of machine learning; new data sources; flexible SaaS platforms; ability to iterate product much more rapidly than incumbents and mobile-first approach. Many companies want to start with a broker model and evolve to an MGA, often involving partnering with a reinsurer (usually Munich Re, but others are catching up). Most companies want to improve the claims process. No-one wants to rely on adwords for acquisition.

What I try to do is find important axes on which startups differ. Lots of ways to look at this but I find myself coming back to the following:

Concierge vs. Bundling vs. Pull

One school of startups want to become your trusted concierge for all your insurance needs. Insurance is a world that most of us don’t fully understand, and we want to outsource decision making to a third party. Once they have built our trust we will happily buy all our insurance through them, creating long lifetimes, and amortizing acquisition cost across many different products.

The second school of startups see this as wishful thinking. They see insurance as a low-engagement purchase which is almost always triggered by a major purchase or life event. The obvious way to sell such a product is by bundling it in at point of purchase. Any other acquisition channel will over time become too expensive (who sells warranties as a standalone product?). If they resist the temptation to reduce coverage or jack up prices every year they should be able to fix for high churn.

The third, and smallest, school believe that you can get people to care enough about insurance that they will buy it proactively — pull not push.

None of the above schools is proven, and the right answer probably varies by line of business. Going into each of them in more depth:

Concierge

This is obviously the original insurance broker model, which continues to be strong in many countries and globally in business insurance.

The first disruption here was the price comparison websites, which work really well for ‘grudge purchase’ price-focussed insurance (e.g. car and home). There is still plenty of mileage in PCWs. The UK and Germany are the only large mature markets, with multiple $B+ businesses created: Moneysupermarket, Check24, Confused and Compare the Market. The US market is evolving rapidly here with the likes of Coverhound and Compare.com. CompareAsia and CompareEurope are rolling out rapidly across markets. Starting to get traction in SMB sector as well with the lies of SimplyBusiness.

The next evolution of this is the ‘online advisor’ which takes a more detailed look at your personal circumstances and recommends what cover you should and shouldn’t have, then helps you buy it. PolicyGenius seem to be making this work well for life insurance. Embroker and Coverwallet are taking on the SMB market.

Taking that a step further are the ‘mobile insurance wallets’ such as Financefox, Knip, Safe, Brolly and Clark. They start by pulling all your insurance policies into one place, then they make personalised recommendations to you to improve your cover. Currently fairly manually but automating and adding AI over time.

The end game would be an AI that could pull all your insurance together in one place, optimise it on your behalf, and only ask for the occasional approval (“Congratulations on your new baby Rob. I would recommend to increase your life insurance by 25%”). Or it could be an ‘umbrella’ policy covering all your risks in a more cost-effective way.

The common challenges in this area are:

• Insurers being uncooperative. Mostly as they are protecting their broker channels. Also as they worry about being commoditised. Need to show them the potential for real revenue upside.
• Building consumer trust in a cost-effective way. Requires a perfect product, over-communication, and a bit of brand-building
• Maintaining that trust over time. Claims process is vital, as is price transparency and competitiveness

Bundling

In this model insurance is bundled in at point of sale. The art (and science) is in making this as smooth as possible, to maximise conversion rate and size of sale. An analogy I use here is PSPs such as Adyen and Stripe, which have taken share from the likes of first-gen PSPs such as Worldpay. The other opportunity is in expanding PoS insurance to new categories.

The first big category here has been extended warranties and product insurance, which made Asurion and Assurant big companies. Simplesurance are the leading European player.

The real stand out player so far is Zhong An who have achieved phenomenal traction for their return shipping insurance through Taobao and Tmall: Four billion policies sold since they started in 2013.

Travel insurance has been a lucrative area for OTAs, but has often been done through direct partnerships with insurers. Covermore probably the biggest player, with newer entrants including Hepstar and Covergenius.

Other sectors are opening up for this as they move the purchase online. Cross-selling insurance offline was tricky as it involved paperwork and an untrained person giving regulated advice. Online channels really open this up. It will be fascinating to see what online new car sales and connected cars do to sales of auto insurance at point of purchase. Several of the big auto manufacturers seem to be gearing up for this.

The other opportunity opening up is cross-selling insurance through employee portals and benefits providers. Zenefits the obvious example but others such as Alan in France will be interesting to watch

The biggest challenge for the bundlers is competitive differentiation. What stops their partners shopping around every two years for lowest margins? Can they find exclusive pricing, build an ‘intel inside’ type brand, or create a portable profile for users? Can they build the widest and fastest set of integrations with insurers’ back ends? Can they build new products that stand out from the crowd?

The other challenge is avoiding the temptation to slip into selling poor or expensive insurance products. PPI insurance sales in the UK are a cautionary tale.

Pull

This is the most ambitious and hardest model.

Trov is the stand out example to date, with $46M of funding. Their aim is to bring millennials into the insurance world by getting them to insure the products they love with a mobile app experience that they also love. However recent comments by the CEO that they are also building a platform for other insurers seem to indicate a desire to hedge against this not working out.

Lemonade is the other obvious example, offering a strong price and great on-boarding experience to woo young people into buying renters insurance.

The best circumstance for any pull model is a market disruption that generates renewed interest in insurance. Oscar benefitted here from Obamacare. Telematics car insurance benefitted from soaring premiums for young drivers. Cyberinsurance is the current hot category in business insurance.

The challenge is obvious — getting customers to care. We need to always remember that insurance is a long way down most people’s to-do list.

I am agnostic on which of the above will produce the next $B success story. All three approaches have potential and am interested to hear from European insurtech startups in all of them (and from those which are hard to categorise).