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Insurance brokerage is broken

TechCrunch TechCrunch 2/05/2016 Whitney Arthofer

I’ve worked on a number of projects over the past year as an MBA Associate with the General Catalyst team. One of my principal areas of focus has been a deep dive into the emerging field of insurance technology startups, piggybacking GC’s early work in the space with investments like Oscar Health, TrueMotion, Gusto, Super, Livongo and Freebird.

As we outlined in our last post, working closely with the GC team across both coasts, we developed a framework for thinking about the state of the sector today and the most exciting opportunities going forward: online aggregators and brokers, new direct-to-consumer brands and new models.

In even just the last few weeks, it seems the excitement and momentum around the insurance tech sector has continued to accelerate. Coming off huge growth in 2015, early-stage insurance tech deal activity is expected to set new records in 2016, with 24 seed or Series A deals just two months into the year.

There’s now an insurance technology industry conference, OnRamp, bringing together relevant stakeholders. We are seeing the most innovation and activity in online aggregators and brokers, and thought it timely to share some thoughts on the space.

A declining channel

Given that insurance is fundamentally about the trading of information (consumer data for a policy product), if you think about it, the most logical and near-term place for technology disruption should be found in distribution. Looking at any industry where we make big purchase decisions that involve the trade of information — buying a home, car, plane ticket — the Internet has become the key facilitator.

Yet, across product verticals, in-person agents have remained the primary distribution channel with dominant penetration: commercial (~99 percent), life (99 percent), homeowner’s (94 percent) and auto (73 percent).

Direct versus agent penetration across verticals

On many levels, it makes sense that agents have remained so entrenched in the market — they can be an incredible source of value creation. Insurance policies are complex financial instruments. Consumers want to purchase products through a trusted channel and be coached through complicated decisions.

One thing that is often overlooked is just how much money these agents make.

Insurance carriers want to validate the customers to whom they are selling, and so have limited the degree to which customers can complete transactions online. And as time has passed, agents have become more and more ingrained as the key sales channel, making it easier for carriers to “kick the can” down the road, delaying the transition online rather than disrupting their entire distribution model.

One thing that is often overlooked is just how much money these agents make. In 2014, insurance agents made $325 billion in commission revenue ($300 billion in commission spend by insurance carriers plus $25 billion in fee spend by consumers). And because of their critical role as an intermediary in closing policy sales, agents make significant operating profit margins (~12 percent), which increase with the complexity of the product.

Insurance agent relative profit margins by category

Source: “Agents of the Future — Evolution of P&C Insurance Distribution.” McKinsey, 2015.

Out with the old, in with the new

But as with every other industry, we are beginning to see the Internet enable a new world of comparison shopping, online transactions and streamlined customer service for the insurance consumer. A handful of factors are driving this evolution:

Growth of e-commerce and changing consumer demographics. Online comparison shopping is the new norm for everything from diapers to plane tickets to real estate. And with the rise of the millennial buyer, the insurance industry needs to find new ways to sell to audiences that are used to being reached and interacted with very differently.

Improvements to front and back-end tech. Improvements in UI create a better shopping experience, more sophisticated analytics enable carriers to price and fulfill policies online and smartphones set expectations for mobile native solutions that remain with the customer everywhere they go.

Ageing agent workforce (average age: 59). The agent workforce is on the brink of retirement, and less in touch with consumer demands in a digital world.

Increasing consumer responsibility. With greater employee churn and pressure to cut costs, companies are increasingly shifting the purchase burden to employees. As consumers become more responsible, and individual plans win share over group plans, online aggregators should become more compelling.

Proof points in other markets. Businesses like Alibaba in China and Check24 in Germany ($100 million + EBITDA with expansion into insurance, consumer financial, credit products) are evidence that consumer brands can be built to compare and buy these types of utility products.

We saw this transition from in-person agents to online distribution in travel — with Kayak, Orbitz, Expedia and many more — and are seeing the beginning of this evolution in insurance.

Agent decline: travel as an example

As we think about what it will take to succeed as an online insurance broker, we see a few table stakes requirements for success:

Direct marketing and consumer education: Best-in-class customer acquisition and engagement (content + advice) to build the brand and consumer trust as an intermediary.

Deep customer interactions: Ability to facilitate the full transaction online; sophisticated CRM for personalization, retention and cross-sell; and expansion to mobile native.

Customer service: For lines that are more complex with large insured sets — deep product expertise, dedicated support and claims management (mimicking the best of what offline agents offered).

It’s worth noting that Google recently announced it is eliminating its comparison tool for insurance and financial products. As a search product, Google never really veered away from its standard GoogleCompare UX or invested as a curator of content. Their experience seems to highlight the importance of consumer engagement and interactions discussed above, as well as the operational complexity of integrating with carriers.

Thinking more deeply about the specific categories of players, we see three types of online brokers beginning to emerge, each with its own set of success factors.

Consumer players

The greatest barrier to online distribution has been the carrier’s ability to automate a complex underwriting process online (without paper documentation or in-person interaction to validate customer information). However, new technology adoption and data sets are changing this dynamic. We now have sophisticated telematics and driving data for auto insurance. And in the not-so-distant future, you can imagine a Homeowner’s policy with underwriting supported by satellite or drone imagery to view the property, as well as risk data by cross street.

It makes sense that the simplest products (where tech has already enabled automation of underwriting) have been the first to shift distribution online. We’ve seen a lot of early activity in auto insurance aggregators (ZebraCoverHoundGoji), where sophisticated predictive modeling enables seamless comparison shopping.

While these players are gaining an early foothold, in the long term, we believe the winning hand in online aggregation will be a multi-product player. One way of thinking about this that came out of internal conversations with GC Managing Director, Phil Libin, relates to the difference in purchasing behavior for aspirational versus compulsory products.

Consumers derive little intrinsic joy from shopping for insurance.

When you think about opportunities to create a search platform online — the Zillows, Airbnbs, Indeeds — the brands that have succeeded are typically focused on single categories where the item you’re shopping for is something you talk about and are really excited about. As consumers, we spend time researching and comparing purchase decisions when they are emotional and say something about our identity.

However, given the painful buying process and commoditized nature of the insurance product, consumers derive little intrinsic joy from shopping for insurance. Instead, the real value proposition will come from creating a single, aggregate destination — to complete the entire buying process and deliver a service experience as quickly and painlessly as possible.

The brand value will come from the efficiency of “getting it done” rather than the aspiration of acquiring the product. An online aggregator in insurance that can holistically make the experience better across multiple categories has huge potential.

Because some verticals (like auto) are more prepared for the online transition, it makes sense that many players have come out of the gates to nail a single product, with plans to cross-sell over time. We have also seen companies like PolicyGenius tack on other personal lines with low direct penetration (renter’s, pet insurance) where customer acquisition cost and cross-sell opportunities are relatively cheaper. Others, like Cover, are using mobile native to leverage camera and location functionality for better lead capture and less work for the consumer.

Key challenges consumer-focused online brokers may face:

  • Degree to which they are able to integrate into tech stacks of carriers, who still remain the bottleneck to online transactions for most insurance products.
  • Unit economics of a business model that requires scale by selling multiple products, particularly in a world with increasing competition for customer acquisition and the “one-and-done” nature of some products (e.g. life insurance).
  • Financial services entrants, with competition from players like NerdWallet and Credit Karma, who sit at the top of the funnel for personal financial products and already have a relationship with consumers.

Commercial players

There has been a lot of excitement and buzz around commercial insurance brokerage, largely catalyzed by the stratospheric rise of Zenefits. As a company, Zenefits focuses on facilitating benefits and personal lines (health, disability products) and sells into HR. We see another tremendously exciting opportunity in the commercial space, with products like general liability, directors/officers and cybersecurity insurance that are more focused on corporate risk and have a different buyer in the COO, chief compliance officer or CTO function.

Any business generally needs to purchase upwards of 5-7 different types of insurance to get started. These policies are typically sold over the phone, through PDFed documents with a similarly clunky claims management process. Compounding the problem, carriers of commercial lines are more regional and fragmented, so corporations often have to herd cats to purchase adequate coverage.

A significant part of the opportunity here is to digitize and curate that experience into a streamlined workflow. As with personal lines in the consumer space, a player that can serve as a single throat to choke and trusted source can be incredibly helpful. We’ve seen a handful of players emerge in this space to provide price comparison and various policy management tools — notably InsureonemBrokerCoverWallet and Next (which will serve as a Managing General Agent, a model we will discuss in later posts).

Insurance companies cannot expect to sell the same way to a cohort with fundamentally different purchasing habits and expectations.

One particularly attractive feature of commercial insurance is the maintenance revenue. Today, one agent makes the initial sale, capturing the upfront commission. However, after the transaction, the actual policy management is still highly competitive. Other agents actively try to steal this business to become the “agent of record” to earn a fat maintenance margin over the life of the policy. If companies can use technology to build a better way to capture those customers, and the associated maintenance revenue, there is an opportunity to access an annuity revenue stream with a relatively small amount of work.

So what we’re looking for in SMB is someone who can build a system to:

  1. Acquire SMBs scalably, profitably and uniquely — either selling new policies or taking control of existing offline policies.
  2. Once acquired, transfer any existing policies to its online system, as the “agent of record.”
  3. Make that mousetrap and policy management offering sticky enough so that other online agents managing new and existing policies don’t steal the acquired book of business.

We’ve seen a handful of interesting companies in this space, each with creative and slightly different approaches. Some are acquiring SMBs through SEO, recognizing certain milestones that trigger businesses to purchase insurance. Others are giving away software and solutions like claims management as a way to acquire customers and make the relationship sticky. Players with deep hooks in SMB (e.g. Zenefits, Intuit, Gusto) through payroll or benefits management as a base for expansion may also be well positioned.

Technology to empower existing infrastructure (in-person agents)

While strong secular trends suggest the disintermediation of the in-person agent over time, new software solutions may help some maintain staying power. Considering other industries that have made the transition online, many tech-enabled solutions have helped optimize (rather than displace) existing infrastructure (think Compass for real estate brokers). In the more commoditized insurance products, technology may enable brokers to achieve the scale and efficiency necessary to operate profitably.

In complex lines that require more sophisticated underwriting and consumer education, we see tech delivering creative ways to differentiate on service. We’ve yet to see specific solutions in this space, but believe there is real potential, and welcome submissions for companies that are considering how technology might empower the in-person broker of the future.

One idea we’ve discussed is whether there is a way to build a marketplace for agents, enabling each to promote her/his own business and scalably acquire customers. Historically, independent brokers have struggled with customer acquisition in a fragmented market. With flat commissions and pressure on margins, the need to grow scale and increase to a more regional or even national focus is growing.

Building a marketplace model that enables agents to get licensed and reach customers across state lines, with ratings and reviews to differentiate, might prove valuable. Because insurance products are relatively commoditized, the challenge would be in developing a model that has more durable network effects where brokers differentiate outside of price.

While geography might be the premise for lead sharing in a marketplace model, another potential lead-sharing opportunity in this space could evolve through virtual teams that own the full stack of insurance products. We can imagine a model where teams of specialized agents across different product lines participate in referral sharing, and also leverage shared back office services for operational efficiency. In this way, agents can achieve scale and amortize the customer acquisition cost while still maintaining specialization in more complex lines.

Finally, the emergence of more bespoke, niche insurance products is creating opportunities to enable agents with analytics to more effectively consult clients and support the
underwriting process. Given the complexity of cyber insurance, today, large carriers like AIG ultimately do the underwriting while companies like Accenture perform assessment and prep.

There is a category of software that’s become general cyber risk assessment, understanding the shared vulnerabilities of companies and creating a risk score. We can see agents armed with software solutions from cybersecurity companies that deliver highly customized assessment and underwriting. A similar example of this model is a company called Syndeste, which provides analytics tools for brokers to assess and price flood insurance risk.

Closing

While many factors are driving the tipping point in the online distribution of insurance, the thread that ties it all together is actually a simple one: changing demographics. The millennial generation has tremendous buying power, and will soon become the industry’s primary customer, whether in consumer or commercial lines.

Insurance companies cannot expect to sell the same way to a cohort with fundamentally different purchasing habits and expectations. Players that can find new ways to sell insurance products — to new audiences that are used to buying products differently — are poised to capitalize on a huge opportunity.

Thanks to Spencer Lazar and Prateek Alsi at GC for their help exploring this space and drafting this post.

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