The New Age of Insurance Aggregators

Tech innovation is coming to insurance, but where and when it strikes is uneven.  Auto and health insurance have been facing serious disruption, for instance, but for very different reasons (self-driving cars and telematics, vs. the ACA and hospital mega-mergers). Life insurance and commercial P&C are only now feeling it. Reinsurance and annuities are following behind.

To see trends, then, it can be instructive to focus on specific insurance functions rather than the type (market vertical).

Distribution — that is, sales and marketing — is one area that has been especially active compared with other functions such as underwriting, risk, investments, admins/support or claims.

Why disrupt distribution?

 It’s where the money is. In general, when a P&C or Life insurer gets $1 in premium, 40 cents goes to distribution (marketing/sales costs, i.e. the agent) and 50 cents goes to everything else (underwriting, claims, service/support, risk, fraud, product, executives, etc.). Only 10 cents is profit. The largest distribution cost is usually agent commissions, which range from 50% to 130% of a policy’s first year premium.

It’s easy for carriers to work with alternative distribution channels. Insurance carriers are used to third-party distribution. They have been using independent agents, wholesale agents, and affiliates (e.g., sales through AARP) for years. Systems are already in place to easily take on new distribution outlets.
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The rise of insurance aggregators

Aggregators are simply comparison shopping sites — like kayak.com for insurance. They allow consumer to easily compare product features, carriers, coverage and price.  They aren’t the only distribution disruptors, but new developments are making them more potent.

Comparison sites come in three general flavors: Lead generators, call-center based agencies and digital agencies. From their websites, it can be difficult to tell them apart, but they operate differently and appeal to different investors.

Lead generators — such as InsWeb, NetQuote and Insurance.com — use a comparison shopping format to entice insurance shoppers to provide personal information. They then sell these leads, often to traditional brick-and-mortar insurance agencies. Lead generators specialize in either gathering lots of leads cheaply, or curating data to sell fewer but higher-value customer referrals. Lead generation is a specialized technique, an art even. But it’s mostly unrelated to emerging technology. It is difficult for non-lead-gen experts to assess the quality and sustainability of lead-gen platforms.

Call-center agencies can develop leads or purchase them, but their call centers employ licensed insurance agents who make sales.  A classic example: SelectQuote, founded in 1985 and known for its early TV ads, is now the largest direct channel for life insurance. Goji is doing this well in the auto insurance space and now has several hundred licensed call center insurance agents. Call-center agencies are also great businesses; their core competency, however, isn’t technology, but HR hiring and training. Hiring and training a large sales force and managing its churn is growth-limiting. A commissioned call center sales force might reach 300 agents, but it is almost impossible to get to 1,000 or beyond high quality agents. Crucially, too, the model does not leverage technology so margins are reliant on commissions remaining high.

Digital agencies allow customers to shop and buy entirely (or nearly so) online. Without a human sales force, they must create well-thought-out user experiences that make the process of buying insurance transparent and understandable. Typically this requires building sophisticated interfaces into multiple carriers’ systems so that the customer experience is unrelated to the company selected. In general, digital agencies hire developer talent rather than sales talent. Esurance, one of the first successes in the space, was bought by AllState for $1 billion in 2011.  A more recent example (and AXA Strategic Ventures portfolio company) is PolicyGenius, which is bringing this digital model to life and disability insurance.

I believe digital agencies are the future. They focus on technology to sell policies without the aid of a commissioned human agent. This is a crucial distinction because while both call-center agencies and digital agencies generate income from commissions, call-center agencies have to split that commission with their licensed call center agent while digital agencies do not.  This means that at scale, digital agencies should have higher profit margins.  In fact, it is likely that digital agencies will actually look to lower commissions to drive sales and to provide more competitive pricing than human agents or call-center agencies.

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Insights from the UK

The UK insurance markets adopted the aggregator model earlier than U.S. carriers, which gives us a window into their potential future. What’s happened there shows us three things.

First, aggregators have captured a material share of the insurance market and are continuing to grow. A recent Accenture survey found that in the UK, “aggregators account for 60 to 70 percent of new business premiums in the private automobile insurance market” and french aggregators have seen “18% average annual growth for past 5 years“. We’re already starting to see this in the U.S.: Oliver Wyman recently reported that “the number of insurance policies sold online has grown more than 400% over the last eight years.” Swiss Re saidmore than half of consumers say they are likely to use comparison websites to help make purchase decisions about insurance in the future.”

Second, aggregators eventually will compete with one another across all personal lines of insurance. U.S. digital agencies today focus on one type of insurance (life, or auto, or home) though they might claim to offer a few others. But almost all UK aggregators compete across all personal line insurance products.

Third, insurance carriers will get into the aggregator game.   Two of the top three UK aggregators sold to UK carriers; GoCompare was purchased by esure and Confused.com was purchased by the Admiral Group.  Only MoneySuperMarket remains independent.  And carriers are looking to create aggregators from scratch. Accenture’s report noted that 83% of UK carriers are “considering setting up their own aggregator sites”.

Startups, tech giants and carriers in the ring

Still, it’s not totally clear how digital distribution will play out here. Multiple startup digital agencies have raised significant capital.  PolicyGenius and Coverhound have raised more than $70 million, $50 million of it just in the last six months. This represents a fraction of what a major tech player (say Google or Amazon) could put toward an effort to enter this market. Interesting, Google purchased the UK aggregator BeatThatQuote in 2011 and launched the California auto insurance aggregator Google Compare less than a year ago, but just announced it was shutting it down.  It could be because Google Compare functioned as lead-gen for CoverHound and Google decided the fee they received per lead was cannibalizing their ~$50 per click ad-sense revenue they received from auto insurance search terms.

Long-term success in insurance, requires focus, deep knowledge of the industry, and deep knowledge of the consumer. Insurance is very different from most e-commerce products and Google’s experience could be indicative of the difficulty big digital brands will have trying to crack the insurance aggregator market.

Finally, most large American carriers haven’t decided what to do. Purchasing an aggregator creates strange incentives, potentially driving customers to a competitor. At the same time, it also gives the insurer the opportunity to quietly select the risk they want to keep and pass off the risk they’d prefer to give up. Progressive has had mixed success.

Final thoughts

I think the U.S. will see trends and dynamics similar to the UK’s, and soon. Within three years the major digital agencies will start to compete fiercely, and within five, one or more will have been purchased by a carrier.

More digital agencies also will tackle the complex insurance products: annuities, permanent life insurance and commercial insurance. Right now, startups are trying — Abaris for annuities and  Insureon, CoverWallet for commercial insurance — but their offerings aren’t yet as developed as Policy Genius or CoverHound.

Finally, I think the rise of digital financial advice platforms (a.k.a, robo-advisors or “robos”) give digital insurance agencies an interesting channel to consumers that will help at least one of them mature and grow to an IPO.

I asked a two digital agency CEOs what they thought the future was going to bring

Jennifer Fitzgerald, PolicyGenius’ CEO said “Consumers are much more self-directed in the digital age, so the focus is giving potential insurance clients the tools they need — instant and accurate quotes, transparent product recommendations, educational resources — so they can go through the process at their own pace. Then it’s important be there for them with an intuitive, easy-to-use platform and service when they’re ready to buy.  That’s the basis for the new wave of insurance education tools like the PolicyGenius Insurance Calculator, and is reshaping how consumers look at insurance.

Matt Carey from Abaris said “I think we’ll soon see a new wave of made-for-online products. Carriers have always gone to great lengths to create products that made sense for a specific channel.  The Internet will be no different. In our business, that probably means very simple lifetime income products that are subscription-based and have low minimums. Until then, I don’t think we’ll reach a tipping point in the migration from offline to online

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The New Age of Insurance Aggregators

The ‘Insurance Tech’ moment is coming

“Insurance is the next FinTech,” is a buzz phrase that has spread through VC circles over the last 12 months. And indeed, insurance technology startups raised over $2.6 billion in 2015.  Among the notable recipients were Oscar, Zenefits, CloverPolicyGenius (portfolio company of ours) and Lemonade.

Certainly the insurance space feels a lot like financial services did five to 10 years ago, when startups — including LendingClub (founded 2006), Betterment (2008), Square (2009) and many others — began changing the day-to-day business of finance. The FinTech comparison isn’t completely accurate, but there are some key parallels in terms of the opportunity:

  • Sheer size. The U.S. insurance industry in 2014 wrote new policies worth $1.1 trillion in net premiums and employed 2.5 million.
  • Opaque fees. Almost every area of insurance has complex fee structures that are difficult for consumer to understand.
  • Lack of loyalty. Clients don’t love their existing insurance options; even the top insurance companies have low Net Promoter Score (NPS) ratings compared to other industries.

Many VCs believe Insurance Tech has, like FinTech, the potential to shape the future of a huge industry and they are investing seriously and developing their portfolio companies. But despite a dramatic upswing in funding, Insurance startup investing is dwarfed by current FinTech investment (see chart) but growing quickly.

Insurance vs FinTech

Why has Insurance Tech been slower out of the gate?

Creating a new insurance company is really, really hard. Getting licenses in all 50 states (or even just for New York, Texas and California) is a slow and costly process. Purchasing a shell company with existing licenses is faster but even more expensive — about $2 million, plus $5 million to $10 million in required regulatory capital. Though some have done it (Oscar, Clover and Lemonade) this level of capital is prohibitive for most entrepreneurs.

The industry also still generally believes that insurance is “sold and not bought.” As a result, insurance agents still dominate new policy sales.

Carriers want to take more control of sales for several reasons: The commission structure Agents require make the process expensive an misalign incentives between the carrier and the end client. Agents tend to own their clients. And this aging workforce isn’t replacing itself. Carriers know they have to find better ways of selling policies directly to consumers. Until very recently it’s been clunky to buy insurance online. At the carriers, paper forms remain the norm and it’s hard to find a consumer who uses their insurer’s online portal routinely, let alone enjoys the experience.

Insurances’ inherent leverage makes carriers and regulators skittish of product innovation or changes to underwriting. Leverage is typically associated with banking and debt but insurance is arguably the most levered product in the market.  In almost any insurance contract, the premium a customer pays is many times smaller than the payout. If the underwriting wrong, carrier loses would dwarf revenue.  This has led to conservative regulators and incumbent carriers and innovative products subject to lengthy reviews and skepticism. 

So most Insurance Tech startups need to partner with existing insurance companies. Insurance executives, broadly speaking, are keenly interested in new models, and many feel the need to innovate urgently. Given the industry’s stiff regulation, long sales cycles, and levered nature, they are inherently conservative. A minimally viable product simply will not fly in the insurance space.

The state of insurance innovation today

The good news is that the industry doesn’t have its head in the sand. It is embracing innovation, actively seeking new ideas, and big insurers are investing directly in startups (AXA through ASV, Mass Mutual through MassMutual Ventures, Transamerica through TransAmerica Ventures, AmericanFamily through American Family Ventures, Prudential through Gibraltar Ventures, and more).   Executive understand that the industry is becoming more transparent about fees, digitally enabled, and more focused on the policyholder over the agent.

That said, there’s lots of room for insurance innovation. How fast it can and will happen, however, will vary a lot by market segment. Property and casualty (P&C) has, for instance, moved faster than life/annuity. Health may move the fastest, spurred on by regulatory change.

There will be multiple winners with multiple exit opportunities. Each major segment has room for at least a big winner (like a whole new carrier) and many smaller niche winners (companies providing services to carriers). Given how much capital insurers have and the industry’s history of mergers and acquisitions, insurers are likely to acquire start-ups.

 

Coming up next: Distribution Disruption…

The ‘Insurance Tech’ moment is coming