David Penn, Finovate Research Analyst, looks to the future
What do two of the biggest IPOs in insurtech this year – Lemonade’s $319 million public offering in July and Root’s $724 million IPO in October – tell us about the state of insurtech in 2020?
The Forest
Set to grow by more than $21 billion over the next four years, the market for companies leveraging technology to bring efficiencies and better customer experiences to the insurance industry remains on the upswing. Buoyed by an industry-wide commitment to lowering costs, growing revenues, and providing brand-distinguishing customer engagement, technology is enabling these notoriously data-rich and data-driven businesses to better manage risk as well as offer more customized and creative products to suite their customers’ real needs.
Lemonade, the New York-based insurtech founded in 2015 and newly-public as of this summer, represents one of the innovators in the home and rental (and pet health) insurance business. The company is known for its AI-powered bot, Maya, which helps customers find the appropriate insurance product for their needs, and offers plans starting at $5 a month for renters insurance and starting at $25 a month for home insurance. Lemonade seeks to distinguish itself with its fast service (90 seconds to get insurance), fast payments (three minutes to get paid on claims), and a philanthropic policy of taking any difference between its flat fee and the money paid on insurance claims and donating it to a charity of the customer’s choice. This year alone, the Giveback program has doled out $1.1 million to charities such as the ACLU and March for Our Lives.
Root, also founded in 2015, but based in Columbus, Ohio, specializes in providing automobile insurance to car drivers in 30 states in the U.S. The first non-health care insurtech to reach unicorn status, Root has its customers take a driving test, monitored via Root’s mobile app, in order to qualify for premium pricing on car insurance. The company says this approach enables them to insure good drivers only, which helps keep costs low.
Last fall, Root extended its offerings to include renters insurance – available for as low as $6 a month. Upon launch, the coverage was initially available only to the company’s auto insurance customers in Missouri, Ohio, and Utah. Root has since expanded its coverage to Kentucky, Tennessee, Georgia, Arkansas, New Mexico, and Nevada, and offers customers a 5% discount on their rental quote if they bundle their coverage with auto insurance.
The Trees
So how sweet are Lemonade’s opportunities in the insurance market? The company is not without its detractors. A recent analyst report from Credit Suisse took issue with the company’s valuation, predictably enough, but also cited more pressing issues relating to customer service and acquisition costs. The analyst noted that Lemonade had received lower-than average customer satisfaction rates in areas like claims and onboarding. Critically, the rates were lower than those from rival Progressive.
Another concern comes from the question of scale. Faizan Farooque, a financial writer, noted recently that Lemonade’s automated processes, which help the platform facilitate claims processing and payout, will come under increased pressure as the company’s customer base – and the volume of claims – grows. “Lemonade wrote $115.8 million in premiums in 2019, less than 0.1% of the property and casualty insurance market,” Farooque wrote. “So, the company still has to undergo a stress test before we know how good it is handling large claim values.” Does any of this help an insurtech like Root, which raised $724 million in its late October initial public offering?
One criticism of Root’s method is that personalized pricing, while fairer to individual, “good” drivers, can result in excluding all other drivers (from average to not-so-good) from more affordable insurance. This could potentially result in more drivers opting to avoid carrying coverage or to purchase a policy that is inexpensive, but will likely not cover any claims of significance in the event of an accident. Marc Rubinstein, discussing Root on the eve of its IPO, admits that the company is not yet anywhere near this problematic point – though it does have a goal of relying on a “fully behavioral pricing model” by 2025.
At the same time, if Root can successfully manage this balance, the rewards could be great. One analyst argued recently that it was the company’s ability to leverage enabling technologies like telematics to continuously improve its ability to manage risk that separates it from other insurtechs which, in some ways, are still traditional insurance companies. Root also has the opportunity to continue to expand beyond its origins in auto insurance and its recent foray into renters’ insurance into other products. And while it likely would not be able to readily leverage its special sauce in these other areas, the company’s emphasis on mobile technology and ability to bundle offerings with its signature auto insurance product could give Root a longer-term competitiveness than it may seem at first.
In many ways, the future of insurtech – as represented by two of this year’s most compelling companies – reflects the challenge and opportunity we see in fintech more broadly. Startups will need to ensure that their processes scale to accommodate the growth that their innovations, if successful, will attract. Similarly, startups will need to be mindful of customer acquisition costs, and find creative ways to not only onboard more customers with less expense, but to keep them as loyal customers and minimize churn.
Lastly, as with all companies in the technology space, responsibly wielding the technologies that make their innovations possible will be key. Whether its Lemonade’s emphasis on accelerated claim resolution or Root’s leveraging of powerful, behavioral analysis, the ability to manage unintended consequences and respond promptly to consumer – and now, for both, investor – concerns will help determine how successful these and other ambitious insurtechs will be.
Read more from David Penn on the Finovate blog >>
