As news continues to get worse for incumbent insuretechs, it made me wonder if there is an alternative universe where startup insurers behaved more thoughtfully and rationally and achieved great success.
Luckily, with a little help from some failed startup CTOs from our Earth, I’ve been able to open a portal to another universe and now report back to you with my findings.
Earth 99: The UnderwritingVerse
On Earth 99, there is no venture capital. All startup insurers are funded by industry experts with long term horizons.
Founders have relevant industry experience but an innate frustration with the shortcomings of the industry. They hire the tech expertise they need to implement their vision.
As a result, most insuretechs have created businesses where they can write at a a combined ratio of 99 or below. However, many of them still have strange names as you’ll see below.
Because new insurers prioritize underwriting profits on Earth 99, they have much slower growth than on our Earth.
This means they need much less outside capital and much less reinsurance. While some are structured as MGAs, this isn’t because of a perceived capital arbitrage, but because their underwriting success has made them attractive to a diversified group of reinsurers, so they are confident in their long term access to markets.
Where they do use reinsurance, it is from highly rated, established reinsurers who are willing to provide quota share support given the profitability. No fronts, no transformers, no three guys and a Front Street mailbox.
They don’t compete for customers by offering prices that don’t make sense. Instead, they offer some sustainable advantage such as better service or more convenience or a structural expense advantage that they can pass along.
Their business model is not centered around their distribution strategy. They have a distribution strategy, but it is not what they are about.
Their reserves are set conservatively, even if it makes it harder to produce that 99 combined, because they know establishing a pattern of conservative picks with future releases will quicken their path to a better S&P rating and result in a higher valuation after they go public.
I took copious notes on the most successful new competitors who you can read more about below.
Fruit Punch quickly became the dominant insurer for renters on Earth 99. They did it by realizing renter’s insurance was a niche market, not served well by the large insurers.
By making it easier for renters to document their possessions through their leading inventory app, they are able to offer more accurate limits, customizable coverage terms, and faster payouts when there is a claim.
They also have a very clean buying experience which was easy to understand, especially for younger people who are insurance naive. The combo of the better buying portal and enhanced service means Fruit Punch is able to charge a price premium to the established insurers.
“We envision ourselves as the Chubb of renters,” said CEO Stan Dryber. “We aim to provide a premium experience that consumers will pay a little extra for.”
Parabola is the leading provider of telematics to rideshare drivers. After initially planning to offer a broader telematics product to all drivers, CEO Tim Albert realized it was going to be too difficult to outexecute Progressive and altered his plans.
He realized that Uber and Lyft drivers get the same amount of company insurance regardless of their driving record or skill. He developed a telematics app that measured drivers’ behavior specifically while they were driving for Uber or Lyft.
He was able to sell this data to the rideshare companies and offered to help them segment the quality of their drivers beyond user ratings.
Now, Uber is able to provide more insurance to its safer drivers as well as let passengers know which drivers have better safety records.
This has led to greater earnings for safer drivers and changed the behavior of more aggressive drivers to improve their safety scores.
Uber and Lyft have been so pleased with these results they have signed long term contracts with Parabola to provide the data. Also, individual drivers have asked if they can buy their personal insurance through Parabola too creating an unexpected growth market.
Crocodile is the most successful new home insurer on Earth 99 due to their focus on improving antiquated homeowner’s forms and bringing better risk data to homeowners to help identify problems before they become a claim.
While growth has been slow, as many homeowners still default to the lowest priced offering, Crocodile has been steadily winning kudos from consumer advocates for the extra value they provide. This word of mouth has provided favorable buzz and kept acquisition costs low.
Crocodile realized early on they were better off learning the ropes in the middle of the country where there is less severity. This fortunately kept them away from the elevated cats of recent years in Florida, Texas, and California.
With more stable results in recent years, Crocodile is well positioned to expand into more states.
Not all startups need to aim for giant markets. On Earth 99, TAM stands for total available margin. Mastering a highly profitable niche can be a great business.
Ken is a new homeowner’s insurer which focuses on coastal risks. Rather than take on the difficult Florida market, Ken specializes in Malibu dream houses where there are never claims because nothing ever goes wrong. It’s proving to be a great business model.
Brownie has made great strides breaking into the worker’s comp market. Their software to help automate many of the manual back office procedures that keep expense ratios so high has proven a winner.
By partnering with well known TPAs, Brownie was able to avoid building large fixed cost infrastructure. The TPAs require less staff per account than for their legacy clients so are thrilled with the margins they earn.
Meanwhile, Brownie can pass along some of the cost savings to the market to gain share and still make an attractive return. With a heavily competitive market like comp, a 5 point expense ratio advantage can go a long way to winning clients…and Brownie thinks they can get that to 10 as they scale and add more states.
Rather than focus on smaller clients like many startups, the expense advantage allows them to go straight to large accounts and even fee only captives.
The larger markets like Unravelers and Hardfort have noticed Brownie’s success and are scrambling to emulate them but likely aren’t nimble enough. Could one of them pay up to buy Brownie to protect their market position? Many industry observers consider it inevitable.
Well Positioned For Future Growth
Not only have these start ups done well so far, they are poised for a much better future. See, Earth 99, like our Earth, is experiencing elevated claims in home and auto insurance causing many established insurers to retreat.
This presents a once in a generation opening for new markets to step up and establish a bigger presence. Of course, this is only achievable if one is on sound footing and has the ability to raise growth capital due to their strong results.
Meanwhile, workers comp has had a run of terrific results that appears to be coming to an end. As loss costs inevitably pick up, having an expense advantage will become more important as it will allow one to maintain their CR below the sacrosanct 99.
Renters insurance is poised to be a growth area as new houses are unaffordable for many due to high mortgage rates.
Similarly, the high cost of car ownership is pushing many to reconsider owning a car and instead use more rideshare services.
It looks like insuretech is primed to capitalize on industry turmoil and become the future leaders of the insurance industry. It’s a great time to be a thoughtful, pragmatic insurance startup on Earth 99!
Is it too late for our Earth to learn these lessons?