Ask These 3 Questions to Find the Right Market

When my co-founder Lucas Ward and I were in early talks about the kind of business we wanted to build together, we weighed our ideas against three questions:?

• Could it scale quickly?
• Is the industry overly intermediated?
• Are there new data sources available?

We both have backgrounds in fintech and knew we wanted to use technology to streamline a cumbersome financial product. That’s how we landed on homeowners insurance:

• It’s a huge market ($105B and growing).
• Most homeowners insurance is still sold through agents, which inflates costs.
• There’s a ton of publicly available data to help automate underwriting.

These three questions can help you find similar characteristics.?

How Quickly Can You Scale?

When looking for opportunities to scale quickly, focus on the margins of the market. Legacy companies tend to avoid riskier areas partly because they aren’t flexible enough to address the issues profitably. That creates an area of opportunity you can influence fairly quickly.

Probably the most important thing to look for is an initial market that is both big enough for you to grow and homogenous so you don’t have to piece together lots of niches. For Kin, homeowners insurance fit the bill. Homeowners products are pretty standardized, and the market itself is huge.

A sizable market means you have room to grow, but the real opportunity appears if you can find a portion of that market that’s hungry for what you’re selling. That’s what led us to Florida. Climate change has made hurricane season too volatile for legacy companies to insure profitably, causing many to leave the state and making coverage difficult to find for Florida homeowners. However, our ability to collect and analyze more data for each property means we can accurately evaluate the risk and provide affordable coverage.

Are There Unnecessary Intermediaries?

When assessing business opportunities, find an industry with a low competitive bar that’s overly intermediated. For example, the insurance distribution model for homeowners insurance relies almost exclusively on retail agents, and that keeps the expense ratio high –?nearly 30 percent. By simply going directly to the consumer, we realized we could undercut price and maintain high margins.?

Source: Insurance Information Institute

Aside from maintaining a competitive pricing advantage, going direct also opened a door for us to deliver on customer expectations. As I’ve written about before, customers are less and less interested in intermediaries. They are used to conducting their financial business online –?from paying bills to banking. Why should home insurance – a cornerstone financial product and virtual good –?be any different? The realization validated our decision to build an online, direct-to-consumer insurance company.

Can New Data Sources Give You a Competitive Edge?

Part of creating a positive customer experience involves using technology to make processes easier and more efficient. New data sources are becoming available every day, and if a market is overrun with legacy companies, there’s a good chance they aren’t leveraging these resources efficiently.

For example, large insurers have notoriously old technology and have had little motivation to improve it – despite the availability of new data sources for pricing and underwriting. Our technology makes use of this data so we can win on risk selection.

It also allows us to distribute our product digitally, another unique feature in the home insurance industry. Few carriers have achieved fully digital distribution, even though this is what the market wants. By using technology to eliminate manual processes, we speed up the two major touchpoints consumers have with their insurance carrier: buying coverage and filing claims.

There’s no foolproof way to find the right market for your business, but these questions can help you take advantage of big opportunities that support your ambitions and fit your skills.