I, like many other IJ readers, have expressed my doubts about Lemonade and, really, all other InsurTechs. The technology side of the equation and service delivery models are fantastic and amazing. The problem with these organizations gaining the kind of scale and revenue necessary to maintain and grow a publicly traded company is not the “Tech” but rather the “Insur”. They are just like everyone else in the P&C business, they are unable or unwilling (or both) to handle real risk. You just cannot make a go of it selling pet and renters, there is not enough premium or profit to get your investor money back let alone make profits, pay dividends, grow, prosper, etc. Until and unless they can manage to “bite off” some real risk, all these InsurTechs will just be a cute novelty that sells small risk, small premium policies.
Tiger88 – Lemonade, Hippo, Next etc are just on the cusp of the changing buying habits for consumers. Those renters and pet insurance people of today are the home owners, auto, umbrella owners of tomorrow. COVID has forever changed buying habits for consumers. Insurance is one of many industries that will be impacted. The ecommerce, financial institutions of today are looking for additional engagement and revenues from their already existing, loyal customer base. InsurTech’s simply have to plug in their technology to a company like Amazon or Walmart to provide homeowner quotes and customers will buy. Banks, mortgage entities are today integrating to offer homeowners insurance at the point of the mortgage process. A farmers or state farm agent is not adding value to the bank, mortgage provider or customer in this equation and thus will not be in consideration for the future partnerships that all ecommerce entities will seek out. Homes are becoming more connected and some exposure are becoming manageable via sensors and or smart devices. Let’s not forget the significant amount of data that flows through Lemonade’s platform. That is a goldmine in and of itself as that can be used for years in the future to improve Lemonade’s targeting and remarketing campaigns. I see a bright future for InsurTech’s and so do brokers and carriers as they are buying these entities up in the pandemic era. They know what is coming.
Actually, Lemonade and the other technology-dependent startup insurance firms will fail and probably fail spectacularly.
Financial success in the insurance industry depends entirely on meeting, if not exceeding, the profitability metrics of the insurance line(s) of business the firm is involved with. No line of insurance is a commodity.
The loss ratios and combined ratios of these technology-dependent startup insurance firms are atrocious. Insurance regulators should pull these firms off of the insurance market.
Whether the technology is plugged into Amazon or Facebook or other large non-insurance firm is irrelevant. Whether homes are becoming more connected is also irrelevant except for the growing cyber-risk they generate.
Regarding data: incumbent insurers have significant more data than the startups could ever hope for. But the data is not the issue; neither are the models that are built from the data.
What matters is meeting the financial requirements of each insurance line of business – as defined by the insurance line of business and NOT by whatever technologies the startup firm uses to get-and-keep customers.
BTW There is no legal, insurance regulated entity called “InsurTech.” There are startup and incumbent insurance firms. Full stop !
(What’s coming?: the flame-out of these startup insurance firms!)
Barry – combined ratios will be the determining factor for Insurance Risk bearing entities. Lemonade will improve their numbers. Lemonade has the ability to reach millions and millions of consumers without having to pay any commissions to sales agents. They financially save in the long run by cutting out the middleman. Lemonade will continue to add new consumers and with that growing spread of risk will improve those combined ratios significantly.
InsurTechs have the ability to reach millions of customers via one partnership. Millions and millions of customers. Each policy they write they own and don’t have the commission expenses. They don’t have the expenses for the large staff that is needed to manage agent relationships. They don’t have the real estate expenses associated with housing the thousands of employees. With the millions of customers that they touch even if they convert at a lower level they will add significantly to their client base. Ultimately they will be purchased by a large carrier for the very things that you are saying are not valuable. Data is gold. Carriers have the best data for actuarial tables etc. They can offer very little data on buying behaviors, cx, conversion metrics because a bulk of their business is dependent on agents. This data is key to D2C models.
Lets not also forget that InsurTech’s do include Digital Brokers who have access to a full marketplace of carriers. They also offer the avenue of phone engagement with a licensed agent. So choice and convenience are lumped into one area. Lemonade will eventually partner to fulfill for the large swath amount of customers that they see. They simply take the risks that they want and send the rest to a partner or to several partners. Digital marketplaces like CoverWallet, CoverHound and others were considered valuable and were purchased by large incumbent brokers. What do you think they are buying them for???????
What is their cost of acquiring a new client and how does it compare to paying an independent agent to do that marketing for them. I have a spoiler alert for you…IT’S MUCH HIGHER.
December 28, 2020 at 4:09 pm
Savant says:
Like or Dislike:
0
5
Mr. Solvent – AdWords buy is expensive. A one time fee to acquire the customer is better than eight years of commissions payments, plus staff and real estate required to service those agents. Every large Insurance company wishes they could go direct. They dare not say it out loud because currently are held back because of all the power that agents and brokers hold. When that begins to shift then lookout below. Small Business Insurance, Personal Insurance are perfect for digital sales and engagement. Adwords is expensive that is not sustainable and has low conversion. SEO, Organic traffic is achievable at a reasonable cost. Strategic Partnerships and Affinity relationships is the Holy Grail to acquisition cost. Partner with Quicken Loans and only tie the compensation back when you are successful with a sale. Share revenues over time. Quicken has a powerful brand and customers will be happy to solve the issue of homeowners insurance placement during the mortgage process. As Lemonade continues to push out the brand name they will get more and more organic traffic. It is inevitable.
December 28, 2020 at 1:49 pm
Agency says:
Like or Dislike:
7
0
This has been talked about for 20 years, it’s gained very little ground, here are the issues:
1. Most Consumers, especially those who have something to lose (average to high networth and businesses) don’t want to do this themselves. They want the hand holding, also they don’t want to make a mistake. This is why these platforms have high loss ratios, they are not attracting the best clients.
2. Loss Ratio, this is what inventors don’t understand, you can offer a competitive product if you don’t have a good loss ratio, it will put a company out of business or it’s ratings will suffer. They will contuse to get bad business because the worst clients don’t care about ratings.
3. This is not a one click transaction like Uber or something people will do on a regular basis. I believe esurance said that 80% of those starting an rating never finish it or never make it to the application.
4. E&O, because consumers do this themselves and think they can cut corners, these platforms likely have a higher E&O loss ratio and have to pay higher rates. They may be in the right, but that doesn’t stop them from getting lawsuits.
Investors don’t understand these variables, they think they are buying the next Uber. However notice how Uber literally took off from it’s inception? How many years has Lemonade and similar companies been around now for? As for displacing agents, it’s not even close to happening. Taxi Cab operators and Retail stores are very concerned about their survival now, but not insurance agency owners.
Agency – We are close to one click transactions for homeowners right now. Large mortgage entities like a Quicken Loans, loanDepot, Wells Fargo etc have all the data that is needed to quote a homeowners policy. You can pull all that data and provide an instant quote and buy option. All of these entities are actually looking to solve their insurance problem. Proof of Insurance holds up the mortgage process in many cases. They solve for that here and then also generate residual revenues via the insurance were as the mortgage is a one time compensation event. An entity called Blend is powering the mortgage process for many financial institutions and has now incorporated Insurance into their offerings. I recently refinanced and the offer insurance was instantaneous. Can you imagine the spread of risk you can get with 300K + mortgages going through the platform on a monthly basis? Lemonade, Hippo and others had to show growth initially so they were less picky about the clients risk. Going forward they can now be much more considerate of the client they want to write. They can then partner with other companies to make money off of the risks they do not want. With any new ventures they shift the approach to maximize the revenues. These companies won’t just stay stagnant and not change. I agree that high net worth clients will want to work with a brick and mortar. The average homeonwer or condo owner will look for convenience and satisfaction.
Progressive still sells over 2/3 of their insurance via independent agents. Despite a very user friendly website and mass marketing spend 66% of customers come from the IA’s. GEICO is opening more and more agencies. This does not bode well for firms like Lemonade. Firms like Cover Wallet that were build to bring commercial insurance direct are now soliciting agents.
While more insurance may go direct, quality business will not. Lemonade will learn that paying $223 per customer averaging $300 annually in premium will be a LOSING proposition.
The products and customer mix that lemonade offers will change over time. Progressive is THE gold standard carrier. Why do they continue to invest in DTC marketing? They know that behaviors will shift over time. Consumers take time to get used to doing things a certain way. Let’s wait for the year end numbers to come in for carriers that have DTC model as well. This will be proven out over the next several years. Progressive is also getting further into the partnership / affinity model. Quality business???? Quicken Loans provides mortgages to million dollar plus homes on a daily basis. They see credit scores that are very favorable. This is quality business. Paychex, ADP, Quicken Loans, Intuit etc all have agencies focused on Insurance. They know their brand is powerful and the customer is engaged. They also know that technology is the key to selling these customers. Tell me….. Are these not smart companies? Do they not see the opportunities here. Entities Like Lemonade and CoverWallet can partner with them to handle all insurance related functions. Also Insurance Agencies are inefficient. InsurTech’s see this as an opportunity. They can step in and make agencies more efficient. Thus cutting down the need for headcount. I love it when people argue that InsurTechs are partnering with agents now as if that is a bad thing. Let’s spin it the other way. AGENTS are now partnering with InsurTechs because they see the potential and are looking evolve. No Agent would partner or buy if they did not see the value of DIGITAL DISTRIBUTION of Insurance.
December 29, 2020 at 10:46 am
Tiger88 says:
Like or Dislike:
4
0
My point is not that buying habits haven’t or won’t change, they absolutely will. My entire point is that no matter what the delivery system, insurance companies cannot handle many risk hazards profitably. HO in my area of the world, South Florida is nearly impossible to get on anything but the newest and claim free houses that have owners with great credit. It is the same for other areas and lines of business around the US. There just does not, as of yet, seem to be a profitable way forward for certain lines of business in certain geographical areas. Like I said, “Tech” is awesome but “Insure”…no so much.
Agreed that there is profitability challenges for all Insurance Risk Bearing entities in certain locations. FL and CA are tough writes currently for Homeowners. This impacts all carriers. Your point about buying habits is understood as well. What I am trying to convey is that as the buying habits change InsurTech’s have the ability with a click of a button to “shut off” the faucet in certain locations. They can implement new Underwriting Questions very easily. They are more nimble due to the underlying technology. Would you agree that Operations are big part of an organizations costs. Lemonade probably has a quarter of the costs associated with employees, benefits, insurance, training staff. They don’t pay any commissions, or contingency bonuses or have any staff that is needed to manage relationships, accounting etc. Their back end expenses are a lot less than a traditional large carrier. Thus they can bear the higher loss ratios temporarily. Underwriting will improve as they adapt. They will focus on higher premium products. They will hire the smart people from the traditional carriers. A startup’s goal is to sell as many accounts as possible to show you have a viable product and to raise money. All I am saying is that their focus is shifted from hyper growth to profitability. The results should improve in time. Agents and Brokers offer white glove service. They play the role of Business Consultant, Risk Manager and CFO for many of their clients. There is no doubt about the value that agents bring. What I am trying to say is that there will be an increasing amount of customers that will no longer want or need that value. For them it will be convenience above all else. So yes Insurance will be come commoditized in some ways. An SMB owner or Individual can buy a policy at 10PM at night or on a Saturday when they have some time. That is convenience. Middle market, High Net Worth and consumers that want hand holding will continue to utilize all of the values that Agents bring. There is a place for both business models. The pie will be split and the agents that cannot compete upmarket will have issues. You can say InsurTech will succeed without saying Agents will go away.
I sure hope Savant doesn’t work for one of these publicly traded companies without disclosing it. The language is very similar to the crap spewed in the Lemonade filings.
A comment on the actual content of the article. Interesting to see the relatively large price decline the day before the lockup release but a rebound when pre-IPO shares (or the remaining 2/3 of them) could actually be sold on the 29th. Happy for employees w/ ESOPs. Top holders GC & Sequoia distributed over 2 million shares down to LPs in the 2-3 weeks after the first lockup when the stock was $60-70. And after this second lockup release…crickets. Just execs blowing out through 10b5-1 plans. Still nothing from SoftBank or XL — a bit surprised to not see them join the selling party at these RICH valuations.
I, like many other IJ readers, have expressed my doubts about Lemonade and, really, all other InsurTechs. The technology side of the equation and service delivery models are fantastic and amazing. The problem with these organizations gaining the kind of scale and revenue necessary to maintain and grow a publicly traded company is not the “Tech” but rather the “Insur”. They are just like everyone else in the P&C business, they are unable or unwilling (or both) to handle real risk. You just cannot make a go of it selling pet and renters, there is not enough premium or profit to get your investor money back let alone make profits, pay dividends, grow, prosper, etc. Until and unless they can manage to “bite off” some real risk, all these InsurTechs will just be a cute novelty that sells small risk, small premium policies.
Tiger88 – Lemonade, Hippo, Next etc are just on the cusp of the changing buying habits for consumers. Those renters and pet insurance people of today are the home owners, auto, umbrella owners of tomorrow. COVID has forever changed buying habits for consumers. Insurance is one of many industries that will be impacted. The ecommerce, financial institutions of today are looking for additional engagement and revenues from their already existing, loyal customer base. InsurTech’s simply have to plug in their technology to a company like Amazon or Walmart to provide homeowner quotes and customers will buy. Banks, mortgage entities are today integrating to offer homeowners insurance at the point of the mortgage process. A farmers or state farm agent is not adding value to the bank, mortgage provider or customer in this equation and thus will not be in consideration for the future partnerships that all ecommerce entities will seek out. Homes are becoming more connected and some exposure are becoming manageable via sensors and or smart devices. Let’s not forget the significant amount of data that flows through Lemonade’s platform. That is a goldmine in and of itself as that can be used for years in the future to improve Lemonade’s targeting and remarketing campaigns. I see a bright future for InsurTech’s and so do brokers and carriers as they are buying these entities up in the pandemic era. They know what is coming.
Actually, Lemonade and the other technology-dependent startup insurance firms will fail and probably fail spectacularly.
Financial success in the insurance industry depends entirely on meeting, if not exceeding, the profitability metrics of the insurance line(s) of business the firm is involved with. No line of insurance is a commodity.
The loss ratios and combined ratios of these technology-dependent startup insurance firms are atrocious. Insurance regulators should pull these firms off of the insurance market.
Whether the technology is plugged into Amazon or Facebook or other large non-insurance firm is irrelevant. Whether homes are becoming more connected is also irrelevant except for the growing cyber-risk they generate.
Regarding data: incumbent insurers have significant more data than the startups could ever hope for. But the data is not the issue; neither are the models that are built from the data.
What matters is meeting the financial requirements of each insurance line of business – as defined by the insurance line of business and NOT by whatever technologies the startup firm uses to get-and-keep customers.
BTW There is no legal, insurance regulated entity called “InsurTech.” There are startup and incumbent insurance firms. Full stop !
(What’s coming?: the flame-out of these startup insurance firms!)
Barry – combined ratios will be the determining factor for Insurance Risk bearing entities. Lemonade will improve their numbers. Lemonade has the ability to reach millions and millions of consumers without having to pay any commissions to sales agents. They financially save in the long run by cutting out the middleman. Lemonade will continue to add new consumers and with that growing spread of risk will improve those combined ratios significantly.
InsurTechs have the ability to reach millions of customers via one partnership. Millions and millions of customers. Each policy they write they own and don’t have the commission expenses. They don’t have the expenses for the large staff that is needed to manage agent relationships. They don’t have the real estate expenses associated with housing the thousands of employees. With the millions of customers that they touch even if they convert at a lower level they will add significantly to their client base. Ultimately they will be purchased by a large carrier for the very things that you are saying are not valuable. Data is gold. Carriers have the best data for actuarial tables etc. They can offer very little data on buying behaviors, cx, conversion metrics because a bulk of their business is dependent on agents. This data is key to D2C models.
Lets not also forget that InsurTech’s do include Digital Brokers who have access to a full marketplace of carriers. They also offer the avenue of phone engagement with a licensed agent. So choice and convenience are lumped into one area. Lemonade will eventually partner to fulfill for the large swath amount of customers that they see. They simply take the risks that they want and send the rest to a partner or to several partners. Digital marketplaces like CoverWallet, CoverHound and others were considered valuable and were purchased by large incumbent brokers. What do you think they are buying them for???????
What is their cost of acquiring a new client and how does it compare to paying an independent agent to do that marketing for them. I have a spoiler alert for you…IT’S MUCH HIGHER.
Mr. Solvent – AdWords buy is expensive. A one time fee to acquire the customer is better than eight years of commissions payments, plus staff and real estate required to service those agents. Every large Insurance company wishes they could go direct. They dare not say it out loud because currently are held back because of all the power that agents and brokers hold. When that begins to shift then lookout below. Small Business Insurance, Personal Insurance are perfect for digital sales and engagement. Adwords is expensive that is not sustainable and has low conversion. SEO, Organic traffic is achievable at a reasonable cost. Strategic Partnerships and Affinity relationships is the Holy Grail to acquisition cost. Partner with Quicken Loans and only tie the compensation back when you are successful with a sale. Share revenues over time. Quicken has a powerful brand and customers will be happy to solve the issue of homeowners insurance placement during the mortgage process. As Lemonade continues to push out the brand name they will get more and more organic traffic. It is inevitable.
This has been talked about for 20 years, it’s gained very little ground, here are the issues:
1. Most Consumers, especially those who have something to lose (average to high networth and businesses) don’t want to do this themselves. They want the hand holding, also they don’t want to make a mistake. This is why these platforms have high loss ratios, they are not attracting the best clients.
2. Loss Ratio, this is what inventors don’t understand, you can offer a competitive product if you don’t have a good loss ratio, it will put a company out of business or it’s ratings will suffer. They will contuse to get bad business because the worst clients don’t care about ratings.
3. This is not a one click transaction like Uber or something people will do on a regular basis. I believe esurance said that 80% of those starting an rating never finish it or never make it to the application.
4. E&O, because consumers do this themselves and think they can cut corners, these platforms likely have a higher E&O loss ratio and have to pay higher rates. They may be in the right, but that doesn’t stop them from getting lawsuits.
Investors don’t understand these variables, they think they are buying the next Uber. However notice how Uber literally took off from it’s inception? How many years has Lemonade and similar companies been around now for? As for displacing agents, it’s not even close to happening. Taxi Cab operators and Retail stores are very concerned about their survival now, but not insurance agency owners.
Agency – We are close to one click transactions for homeowners right now. Large mortgage entities like a Quicken Loans, loanDepot, Wells Fargo etc have all the data that is needed to quote a homeowners policy. You can pull all that data and provide an instant quote and buy option. All of these entities are actually looking to solve their insurance problem. Proof of Insurance holds up the mortgage process in many cases. They solve for that here and then also generate residual revenues via the insurance were as the mortgage is a one time compensation event. An entity called Blend is powering the mortgage process for many financial institutions and has now incorporated Insurance into their offerings. I recently refinanced and the offer insurance was instantaneous. Can you imagine the spread of risk you can get with 300K + mortgages going through the platform on a monthly basis? Lemonade, Hippo and others had to show growth initially so they were less picky about the clients risk. Going forward they can now be much more considerate of the client they want to write. They can then partner with other companies to make money off of the risks they do not want. With any new ventures they shift the approach to maximize the revenues. These companies won’t just stay stagnant and not change. I agree that high net worth clients will want to work with a brick and mortar. The average homeonwer or condo owner will look for convenience and satisfaction.
Progressive still sells over 2/3 of their insurance via independent agents. Despite a very user friendly website and mass marketing spend 66% of customers come from the IA’s. GEICO is opening more and more agencies. This does not bode well for firms like Lemonade. Firms like Cover Wallet that were build to bring commercial insurance direct are now soliciting agents.
While more insurance may go direct, quality business will not. Lemonade will learn that paying $223 per customer averaging $300 annually in premium will be a LOSING proposition.
The products and customer mix that lemonade offers will change over time. Progressive is THE gold standard carrier. Why do they continue to invest in DTC marketing? They know that behaviors will shift over time. Consumers take time to get used to doing things a certain way. Let’s wait for the year end numbers to come in for carriers that have DTC model as well. This will be proven out over the next several years. Progressive is also getting further into the partnership / affinity model. Quality business???? Quicken Loans provides mortgages to million dollar plus homes on a daily basis. They see credit scores that are very favorable. This is quality business. Paychex, ADP, Quicken Loans, Intuit etc all have agencies focused on Insurance. They know their brand is powerful and the customer is engaged. They also know that technology is the key to selling these customers. Tell me….. Are these not smart companies? Do they not see the opportunities here. Entities Like Lemonade and CoverWallet can partner with them to handle all insurance related functions. Also Insurance Agencies are inefficient. InsurTech’s see this as an opportunity. They can step in and make agencies more efficient. Thus cutting down the need for headcount. I love it when people argue that InsurTechs are partnering with agents now as if that is a bad thing. Let’s spin it the other way. AGENTS are now partnering with InsurTechs because they see the potential and are looking evolve. No Agent would partner or buy if they did not see the value of DIGITAL DISTRIBUTION of Insurance.
My point is not that buying habits haven’t or won’t change, they absolutely will. My entire point is that no matter what the delivery system, insurance companies cannot handle many risk hazards profitably. HO in my area of the world, South Florida is nearly impossible to get on anything but the newest and claim free houses that have owners with great credit. It is the same for other areas and lines of business around the US. There just does not, as of yet, seem to be a profitable way forward for certain lines of business in certain geographical areas. Like I said, “Tech” is awesome but “Insure”…no so much.
Agreed that there is profitability challenges for all Insurance Risk Bearing entities in certain locations. FL and CA are tough writes currently for Homeowners. This impacts all carriers. Your point about buying habits is understood as well. What I am trying to convey is that as the buying habits change InsurTech’s have the ability with a click of a button to “shut off” the faucet in certain locations. They can implement new Underwriting Questions very easily. They are more nimble due to the underlying technology. Would you agree that Operations are big part of an organizations costs. Lemonade probably has a quarter of the costs associated with employees, benefits, insurance, training staff. They don’t pay any commissions, or contingency bonuses or have any staff that is needed to manage relationships, accounting etc. Their back end expenses are a lot less than a traditional large carrier. Thus they can bear the higher loss ratios temporarily. Underwriting will improve as they adapt. They will focus on higher premium products. They will hire the smart people from the traditional carriers. A startup’s goal is to sell as many accounts as possible to show you have a viable product and to raise money. All I am saying is that their focus is shifted from hyper growth to profitability. The results should improve in time. Agents and Brokers offer white glove service. They play the role of Business Consultant, Risk Manager and CFO for many of their clients. There is no doubt about the value that agents bring. What I am trying to say is that there will be an increasing amount of customers that will no longer want or need that value. For them it will be convenience above all else. So yes Insurance will be come commoditized in some ways. An SMB owner or Individual can buy a policy at 10PM at night or on a Saturday when they have some time. That is convenience. Middle market, High Net Worth and consumers that want hand holding will continue to utilize all of the values that Agents bring. There is a place for both business models. The pie will be split and the agents that cannot compete upmarket will have issues. You can say InsurTech will succeed without saying Agents will go away.
I sure hope Savant doesn’t work for one of these publicly traded companies without disclosing it. The language is very similar to the crap spewed in the Lemonade filings.
A comment on the actual content of the article. Interesting to see the relatively large price decline the day before the lockup release but a rebound when pre-IPO shares (or the remaining 2/3 of them) could actually be sold on the 29th. Happy for employees w/ ESOPs. Top holders GC & Sequoia distributed over 2 million shares down to LPs in the 2-3 weeks after the first lockup when the stock was $60-70. And after this second lockup release…crickets. Just execs blowing out through 10b5-1 plans. Still nothing from SoftBank or XL — a bit surprised to not see them join the selling party at these RICH valuations.