“Insurance is the next FinTech,” is a buzz phrase that has spread through VC circles over the last 12 months. And indeed, insurance technology startups raised over $2.6 billion in 2015. Among the notable recipients were Oscar, Zenefits, Clover, PolicyGenius (portfolio company of ours) and Lemonade.
Certainly the insurance space feels a lot like financial services did five to 10 years ago, when startups — including LendingClub (founded 2006), Betterment (2008), Square (2009) and many others — began changing the day-to-day business of finance. The FinTech comparison isn’t completely accurate, but there are some key parallels in terms of the opportunity:
- Sheer size. The U.S. insurance industry in 2014 wrote new policies worth $1.1 trillion in net premiums and employed 2.5 million.
- Opaque fees. Almost every area of insurance has complex fee structures that are difficult for consumer to understand.
- Lack of loyalty. Clients don’t love their existing insurance options; even the top insurance companies have low Net Promoter Score (NPS) ratings compared to other industries.
Many VCs believe Insurance Tech has, like FinTech, the potential to shape the future of a huge industry and they are investing seriously and developing their portfolio companies. But despite a dramatic upswing in funding, Insurance startup investing is dwarfed by current FinTech investment (see chart) but growing quickly.
Why has Insurance Tech been slower out of the gate?
Creating a new insurance company is really, really hard. Getting licenses in all 50 states (or even just for New York, Texas and California) is a slow and costly process. Purchasing a shell company with existing licenses is faster but even more expensive — about $2 million, plus $5 million to $10 million in required regulatory capital. Though some have done it (Oscar, Clover and Lemonade) this level of capital is prohibitive for most entrepreneurs.
The industry also still generally believes that insurance is “sold and not bought.” As a result, insurance agents still dominate new policy sales.
Carriers want to take more control of sales for several reasons: The commission structure Agents require make the process expensive an misalign incentives between the carrier and the end client. Agents tend to own their clients. And this aging workforce isn’t replacing itself. Carriers know they have to find better ways of selling policies directly to consumers. Until very recently it’s been clunky to buy insurance online. At the carriers, paper forms remain the norm and it’s hard to find a consumer who uses their insurer’s online portal routinely, let alone enjoys the experience.
Insurances’ inherent leverage makes carriers and regulators skittish of product innovation or changes to underwriting. Leverage is typically associated with banking and debt but insurance is
via seedingtech.com