How new technologies are changing the insurance industry

No one likes dealing with insurance companies. But imagine one that will pay your claim in seconds rather than weeks or months. That’s the promise of Lemonade, the standard-bearer for new insurance technology (insurtech) companies trying to disrupt the sleepy, conservative insurance industry. In 2017, Lemonade broke a new world record for settling a claim in just three seconds.

A New Yorker named Brandon had his $1,000 Canada Goose coat stolen on a freezing January night. So he opened the Lemonade app on his iPhone to report a complaint and recorded a one-minute video report of where he bought the coat and what happened. Three seconds after clicking submit, the claim had been accepted by the company’s anti-fraud algorithm and the money was in Brandon’s bank account.

He couldn’t believe it – and neither did the worried chief executives of traditional insurance companies in New York and London when the news started to spread. On July 2, 2020, Lemonade made its initial public offering (IPO). The company was backed by top tech investors including SoftBank and Baillie Gifford. By the end of the day, the stock price had reached over $69, up 139% from the IPO price of $29, prompting market commentators to state that the bankers had woefully underestimated the upheaval that Lemonade and its auto insurance peers Metromile and Root would bring to the old-fashioned insurance market.

Lemonade was the new Amazon taking on insurance-weary Barnes & Nobles. By August 2021, Lemonade’s market capitalization had reached $10 billion. Metromile, a pay-as-you-go car insurer for occasional drivers, and Root, which bases its prices on driving data collected from policyholders, both went public in the United States soon after.

Growth slows, losses are not

A lot has changed in the 20 months since. The big three disruptors failed to make the breakthrough that analyst cheerleaders predicted and all three are now trading around 80-90% below their peak prices. Part of the reason is that “jam tomorrow” tech stocks such as Lemonade are out of fashion, as investors prefer companies that are profitable today.

But, more importantly, it seems that selling insurance isn’t as simple as selling books, or even providing a banking service to small business customers. So what went wrong and what do the current numbers look like? All three continue to increase their revenues, but growth is slowing and they remain an insignificant share of the $1.3 billion U.S. insurance market.

Unfortunately, losses are increasing at a much faster rate. When an insurer has undervalued its business, it is very difficult to correct that while maintaining growth. Rising prices are driving business away, and the younger clients of these insurtechs are particularly price-sensitive. It is also an industry with limited economies of scale.

The most significant cost is the payment of claims and this increases proportionately with the number of customers. Lemonade had to raise additional funds, diluting shareholders and causing the stock price to plummet.

The concept behind these companies’ business models was to use technology to accurately assess insurance risk, understand claims trends, and facilitate more effective price targeting to maximize sales.

They are looking to employ more coders and data specialists than underwriters, claims and call center staff. To use the Canada Goose example, if your tech can confirm certain elements of the claim – such as whether the store where the coat was purchased is a registered retailer and the price seems correct – then you don’t need to employ expensive claims adjusters. to process the complaint.

Three Fundamental Mistakes

Unfortunately, Lemonade and the others made fundamental mistakes in their business models. While it might seem obvious to target tech-savvy millennials, in practice they make bad customers for insurers because they have so little to insure. They are part of the light working generation who rent their homes, use Uber and Zipcar instead of owning a vehicle and even rent their music collection on Spotify. Lemonade has also decided to have a “zero everything” offer with no guaranteed rate increase and no deductible applied to claims. This only encouraged customers to use their police like an ATM, claiming every little scratch. The timing of the launch and expansion of these challengers also coincided with the absolute bottom of the insurance pricing cycle after several years of declining prices. Taking market share from incumbents meant further reducing already depressed prices. Insurance is also a highly regulated industry, especially in the United States where pricing must be filed and agreed upon with the state insurance commission.

Finally, selling insurance is not like selling books. Insurance is an intangible product, a promise to pay in the future if something bad happens. For this reason, reputation and brand recognition are more important than for most other industries. Will a silly-named start-up really be there for you when you need it – when your house is flooded or when you get sick on vacation?

Knowing that your policy is underwritten by a long-established company helps you sleep at night. If Lemonade and the others had had more people with insurance industry experience on their management teams and boards, some of these pitfalls might have been avoided.

Lessons for the industry

The future looks difficult for these new insurers. They had to raise significant additional funds to make up for the losses, which drove down their stock price. In November 2021, Lemonade announced a merger with Metromile, which is expected to complete this year.

This will allow him to develop and diversify his activity. However, in many ways this lack of success is a shame, as there is much to learn from these businesses for traditional insurers. Their marketing and branding is exceptionally smart, and the apps and websites are very intuitive and easy to navigate. The focus on data analysis, process automation and streamlining the underwriting process is significant.

Traditional insurers are finally rising to the challenge and are increasingly working with technology companies, from small start-ups to giants such as Alphabet, to help them create sophisticated pricing models to automate much of the subscription. These can be linked to big data companies such as Experian and automatically bring risk data linked to a company name or address. This can include construction details, flood exposure and local crime statistics, all of which can help assess risk and calculate the required premium. By combining the latest technology with a deep understanding and experience of underwriting these risks, many traditional insurers are now better equipped to face and beat the new challengers.

Better times for traditional insurers When I last looked at the insurance industry in MoneyWeek early last year, I predicted better times for traditional insurers. The price cycle had turned decisively in their favor and price levels continued to rise at a steady pace (see chart below), with five-year compound increases of around 60%. Unlike insurtechs, many of my recommendations have had impressive results. For example, commercial insurance giant AIG (NYSE: AIG) reported a pre-tax profit of $12 billion for 2021 versus a loss of $7.3 billion in 2020, impacted by Covid-19. The stock price is up about 50% since my board.

In the UK, the London insurance market remains the preeminent global market for commercial insurance of all kinds. It centers on the Lloyd’s Market in London, where some 80 syndicates compete for business. Lloyd’s recently signaled a major reversal of fortunes for the market by announcing overall profit for 2021 of £2.3bn after a loss year in 2020.

Some Lloyd’s syndicates are backed by major global insurers, others by pension funds or private equity and a few are publicly listed. Among listed companies, Beazley (LSE:BEZ) has also seen a significant change in its fortunes with a profit of £370m in 2021 after a loss of $50m the previous year. Its Lloyd’s counterpart, Hiscox (LSE: HSX), achieved its best result in five years.

Only Lancashire (LSE:LRE) disappointed due to high exposure to catastrophic events last year and investor concerns over possible war losses from the Ukrainian conflict. My favorite Lloyd’s of London game remains Helios Underwriting (LSE: HUW), which I own.

This company holds stakes in several of the top syndicates in the market, has a highly diversified portfolio and a long history of outperforming the broader market. It has grown considerably over the past year by raising funds from institutions such as Polar Capital, specialists in the sector. He used the capital to acquire syndicate capacity from private investors at Lloyd’s.

I expect insurance industry results to be even stronger in the coming year as the benefits of higher premiums trickle down to the bottom line. If traditional insurers can learn the right lessons from insurtechs, the outcome could be even better.

About Nancy Owens

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