Insurance is a centuries old profession. The problem it solves is as old as time: individual transactions can be risky, but grouped together and used with enough data, a portfolio of transactions offers better risk management capabilities. If you, the insurer, sit in the nexus of all of these transactions, you can charge a fee (premiums) from the majority of transactions that succeed, and use it to compensate the parties in the fraction of transactions that fail. Your car getting stolen can be a tragedy, but if everyone who owns a car pays money into a shared pool, and most cars don’t get stolen, the pool of money can make you whole.

Over the centuries, however, insurance has strayed from its community based beginnings in Babylon and, in modern times, in establishments like Lloyd’s coffee shop. Professor Lisa Servon’s book The Unbanking of America described how banks have evolved to be commoditized fee-extracting machines, protected by regulation and low cost of capital. Insurance, the reasonable consumer will tell you, has a similar problem: insurers became nameless, faceless corporations paid premiums for legally-mandated insurance coverage and at least perceived to have been doing everything in their power to not pay their customers when something bad actually happened. It is a classic situation of misaligned incentives, as insurers have specialized in large scale portfolio management, disconnecting from their sectorial and community based roots.

Much like banks, then, it is insurance companies’ time to be disrupted. Technology stacks have improved, startups understand compliance and regulation to a much larger extent, and the unfortunate reality of life threatening situations like COVID-19 is that they push people to buy more insurance, not less. Founders have been looking at this market for a few years, and while we’re seeing interesting progress in several approaches to changing the core insurance experience, some still require attention.

How startups are making a difference in insurance

One way startups are making a difference is by giving traditional insurers super powers by digitizing their internal and external experience, module by module. Startups like wefox help insurers with distribution (reaching more, and better segmented, target audiences). Others, like Instanda, help with pricing and underwriting (through the addition of new data sources), and Shift, Snapsheet and others help with process automation and UX (revamping the claims management process and other elements). The traditional ecosystem requires a lot of help, and insurers are starting to embrace technology. The progress here has definitely been slow: sales cycles are long, the land-and-expand motion can take years, and the overall impact, once diluted by the insurer’s compliance and marketing teams, can be miniscule.

Another way to disrupt this market is by selling insurance directly to the end user, like Next Insurance, Lemonade, Hedvig, and others do. Several startups, often working as Managing General Agents (MGAs), have gone to market with great brands to attract end users and grown impressively large businesses. Based on their reported growth and customer satisfaction, there’s definitely disruption potential there. The challenge is that MGAs still have to build on top of a traditional insurer’s portfolio, effectively serving as a coat of paint on an existing operation. Alternatively, startups can commit to the long, capital intensive, and slow process required to become an actual full-stack insurer. Both MGAs and pure play insurers will have to grow while managing actuary risk and the financial losses that come from incorrectly modelling it. In addition, customer acquisition costs are typically high for a low engagement product that’s difficult to upsell into. Initial readings from the leading players show that this is, indeed, a monumental challenge.

Connecting insurance back to its roots

I’m most excited about companies that find ways to tie insurance purchases to consumer experience. Companies like Hippo Insurance have demonstrated that by focusing on a specific vertical (in this case, homeowner’s insurance), they can cross sell other services for the home related to safety and security. Customer acquisition at scale is still an issue, especially in more crowded categories or ones with smaller premiums. One interesting way to solve this problem is the B2B2C approach: selling insurance coverage that is closely aligned with a certain brand’s experience. It may be an eCommerce website selling products that require warranty, a car dealership, and so on. As I saw at Klarna, B2B2C is magical when it works, by reducing CAC and increasing brand awareness while providing a valuable service to merchant partners.

Another way to offer better aligned products is Insurance as a Service, similar to the recent wave of Banking as a Service startups. Much like BaaS has unleashed a flurry of neobanks, segmented services, and creative solutions for financial transactions, so will IaaS. Insurance is a big and diverse market, with anything from travel to life insurance bundled in. What if brands themselves could build insurance services that were hyper targeted, in a way that benefited their actuary risk profile and allowed them to be more lenient when paying out claims?

We also have the opportunity to change consumers’ negative perception of insurance products, leading them to get more coverage where it’s needed, creating consumer surplus and increasing our total addressable market by a significant multiple. This is relevant for both day to day and once-in-a-lifetime coverage. In Sweden, for example, 80% of dogs are insured, while in the US only 1–2% of dogs are. Another opportunity is in offering parametric insurance, insuring against an event: FloodFlash is rethinking flood insurance, while Super is reinventing earthquake insurance, two events that are thought of as infrequent — leading many customers to avoid getting coverage. Insurance is about managing risk — and insurers can also deepen their alignment with the insured by launching preventative programs to reduce their risk. Did you get life insurance? Let’s make sure you’re healthy and well. Car insurance? Let’s reduce the chances for accidents. By working with their customers to reduce their chances of actually needing coverage, insurers can improve their results while improving lives.

Insurance is an exciting segment, more so in the age of COVID-19. We have an opportunity to connect it back to its roots: a sector-based, brand-adjacent added service that is aligned with supporting the relationship between companies and their customers in the long term. While doing so, we’ll build incredibly large companies with a long term, positive impact.