An Explorer’s Map of Insurance (part 1)

To keep this article digestible, it has been broken into two parts, this is part 1 — the northern hemisphere (urgent need insurance products), and was originally posted over here on Medium. Part 2 — which covers the southern hemisphere (procrastination prone products) will be posted later.

The need for an Explorer’s Map of Insurance

When most consumers hear the word Insurance, they group all types into one homogenous clump — with all the hostile or cynical baggage. This hinders entrepreneurial explorers from charting promising areas to sail off and build new companies.

There are many excellent overviews of the global insurance market here, here, and here. While these reports may be crucial for annual planning at traditional incumbents, for entrepreneurs, I believe those reports add too much noise.

What I believe is needed is a Human Centered Design approach, using first principles to outline a rudimentary map for the “average consumer’s” initial starting point to Insurance.

Hence, over the past few months, I’ve been work-shopping an Explorer’s Map of Insurance, to help my thinking as an investor and advisor. Like one of those early cartographers, I may be off on a few of the details but have shared this to hear reactions, rebuttals, and refinements.

The main drivers for a prospective consumer

For de novo insurance business models, I believe there are two main drivers to effectively understand the potential are a Consumer’s;

1. Sophistication
2. Urgency

I find the easiest way to segment potential insurance consumers is by their relative sophistication — their prior knowledge, experience, or education, which determines their ability to make quick high-quality judgments about potential insurance purchase opportunities.

The second driver is the relative urgency of a consumer’s need. This is important because most types of insurance are exclusive, elective, ephemeral products. Urgency is heavily influenced by external stakeholders such as governments, lenders, potential employees.

Notable Insurtechs

In December 2018, working with the Fintech team of the world’s leading bank for the innovation economy, and using Coverager, CrunchBase and CB Insights, we mapped the current universe of 115 US-based institutional VC backed startups that are digital-first distributors, either acting as “MGAs” (including BGAs) or digital direct carriers.

In each map quadrant, I have outlined a handful of notable US-based insurtechs with a very high-level overview of how as a group, they differ from traditional incumbents. This listing is not exhaustive and organized by the total amount of venture capital raised.

Origin point

Early mapmakers, lacking precise surveying techniques, used relative origin points to start. For our purposes, I believe that should be Personal Renters Insurance.

Most tenants have a base level of sophistication of personal renters— broadly understanding the outline of the product, as well as an accurate sense for both the severity and frequency for a potential loss. And although approximately 35% of tenants have personal renters insurance on a case-by-case nature of a landlord-tenant agreement forms the basis of the relative urgency at which to compare other insurance products.

Notable Personal Rental Insurtechs

It’s fair that say that most incumbents prior to a few years ago, ignored the category of Personal Renters. With their human advisors, they could not make the unit-economics work. Furthermore, the ticket-size of a typical policy is so small that for many of the large at-scale incumbents winning wouldn’t move either the top or bottom line.

The following insurtechs are focused on attacking an ignored category, with exclusively digital distribution.

• Lemonade, founded in 2015 a NY-based carrier, raised $180M
• Jetty, founded in 2015, a NY-based MGA, raised $40.5M

The Savvy-Shopper Quadrant

On my Explorer’s Map of Insurance, the Savvy-Shopper Quadrant hosts insurance businesses that compete for highly sophisticated consumers. Due to the simplicity of the product, they instantly grasp the relative value of insurance coverage. However, since these products are mandated either by governments, mortgage lenders, or corporate stakeholders (like employees or boards of directors), these categories are urgent purchases.

A recipe for price-shopping:= take a group of sophisticated consumers and force them to purchase your commodity product annually.

Across the universe of insurance businesses, two categories fall squarely into that category. Personal Auto & Homeowners. They are relatively simple to understand, hence the average consumer is highly sophisticated (in comparison to Renter's insurance). And they are mandated either by governments or mortgage lenders, which makes purchasing coverage an urgent need.

The advantage is that new entrants to this quadrant do not need to spend a lot of time educating consumers about the overall value proposition. The challenge is that incumbents’ default response to attract Savvy Shoppers is to outspend rivals’ in advertising. The typical auto & homeowner carrier spends 5–7% of revenue on advertising — Geico alone spent $1.4B on advertising in 2017. They also try to bundle together Auto & Homeowners and get sophisticated around risk selection.

Notable Auto & Homeowners Insurtechs

Not only have the following companies successfully raised a lot of institutional capital, but all of them have tweaked the value proposition to stand out amongst the incumbents’ massive marketing spend.

• Metromile, founded in 2011 a CA-based auto carrier, raised $296M
• Root, founded in 2015, a OH-based auto carrier, raised $154M
• Hippo, founded in 2016, a CA-based homeowners MGA, raised $109M
• The Zebra, founded in 2012, a TX-based auto MGA, raised $63M
• Clearcover, founded in 2016, a IL-based auto MGA, raised $54M
• Cover, founded in 2016, a CA-based auto & homeowners MGA, raised $27M
• Kin, founded in 2016, a IL-based homeowner MGA, raised $18M

Commercial insurance

Stepping away from personal insurance purchases, most commercial and employee benefits consumers qualify as Savvy-Shoppers. Here purchasing is typically made by a professional, unemotional team who are compelled to act due to legal, recruiting or governance mandates. And they are assisted during the journey with data and oftentimes traditional human brokers.

Notable Commercial & Benefits Insurtechs

Most commercial insurtechs broadly follow two paths to growth in this quadrant:

1. Focusing on a niche set of consumers that large commercial incumbents are poorly suited to serve — Small-Medium Businesses is one example and coincidentally the least sophisticated consumer of the commercial cohort
2. Simplify; build superior decision support tools from quoting to coverage recommendation.
3. New product lines — particularly Cyber insurance, with only 15% of businesses purchasing coverage, with a lower adoption from SMBs. This is another area that Insurtechs can exploit

• Gusto, founded in 2011, a CA-based benefits MGA, raised $316M
• Namely, founded in 2012, a NY-based benefits MGA, raised $221M
• Next Insurance, founded in 2016, a SF-based commercial carrier, raised $131M
• CoverHound, founded in 2010, a SF-based commercial MGA, raised $111M
• Beam Dental, founded in 2012, a OH-based benefits MGA , raised $33M
• Insureon, founded in 1997, a IL-based commercial MGA, raised $31M
• CoverWallet, founded in 2015, a NY-based commercial MGA, raised $29M
• HixMe, founded in 2013, a CA-based benefits MGA, raised $25M
• At-Bay, founded in 2016, a CA-based commercial cyber MGA, raised $19M
• Pie, founded in 2017, a DC-based commercial MGA, raised $16M
• Embroker, founded in 2015, a CA-based commercial MGA, raised $14M

The Unloved Quadrant

If Consumer Urgency is maintained — due to government or mortgage lenders requirements — but the sophistication of the typical consumer decreases — due to the inherent complexity of the products — we end up in what I call the Unloved Quadrant.

So why are the products so complex?

With certain types of nonproportional risks, both consumers and carriers are not able to accurately predict the potential severity or frequency of loss that the insurance product is designed to protect against.

When there is a combination of nonproportional risks and a high likelihood of asymmetric information — as is the case with Personal Health — carriers often create increasingly byzantine enrollment processes, benefit maximums, or policy exclusions. In the US, this is further exacerbated by the prohibition of individual underwriting.

A recipe for an unloved insurance product:= force consumers to purchase protection they don’t fully understand. Guaranteeing that any amount of money spent is viewed as wasted.

Personal Health consumers don’t fully appreciate all the benefits and features, and can’t understand any of the exclusions, yet are forced to purchase the products annually (if they aren’t already covered by employers).

Title, is a bit of an outlier. This is a bundled requirement for closing a home mortgage, which for most consumers is an infrequent event that they want to complete as quickly as possible. Compared to the other transaction costs with homeownership, title insurance is relatively minor, but if consumers stopped to assess the price of the protection with their perceived risk of loss they would definitely hate the category.

Notable Personal Health & (one) Title insurtechs

Notable insurtechs in the Unloved Quadrant have focused on radical simplification. By simplifying the entire journey they empower the consumer to higher levels of confidence and ultimately, sophistication.

For Personal Health Insurtechs, it’s important to call out the group that focuses on the Medicare Advantage (MA) space. With MA enrollments doubling in the past ten years, and a personal cap on out-of-pocket expenses, and often bundled additional benefits (such as Vision, and Dental) which are not often found in traditional Medicare plans — these factors help make MA (and by association the new Insurtech providers) the most lovable within a generally unloved product category.

Personal Health companies have raised an order of magnitude more capital than other insurtechs. This is because;

1. The complexity of complying with the various state and federal health regulations
2. The need to own the entire stack of risk to ultimately drive their vision of simplicity
3. The willingness of VCs to fund — given the overall expenditure, and rapid inflation trends that are endemic to the entire healthcare industry.

• Oscar, founded in 2012, a NY-based health carrier, raised $1.3B
• Clover Health, founded in 2013, a CA-based MA health carrier, raised $925M
• Bright Health, founded in 2015, a MN-based MA health carrier, raised $440M
• Devoted, founded in 2017, a MA-based MA health carrier, raised $362M
• GoHealth, founded in 2001, a IL-based health MGA, raised $75M
• Stride Health, founded in 2013, a CA-based health MGA, raised $39M
• Spruce Holdings, founded in 2016, a NY-based title MGA, raised $21M
• Joany, founded in 2015, a CA-based health MGA, raised $19M
• Renew, founded in 2016, a CA-based MA health MGA, raised $12M

Next Up

In the next article, I’ll explore the southern hemisphere of the Explorer’s Map of Insurance. The category of insurance in which consumers can easily procrastinate throughout the purchase funnel.

Thanks to Matt Wong for great notes and suggestions. I’m keen to hear any reactions, rebuttals, or refinements. Please reach out on LinkedIn.

Farron Blanc was named by Digital Insurance as one of the 20 Insurance Innovators to know, as well as one of the top 35 young executives by Intelligent Insurer in 2017. He is a former global reinsurer, corporate VC, life insurance carrier President, BCG Strategy Consultant, and insurance Chief Marketing Officer. With deep Asian and North American startup and corporate experience. He is currently angel investing, and advising operators in Insurtech & Eldertech.