One Dispatch from the InsurTech Survival Island

There is still life on the Island...and the first generation of iconic full-stack InsurTech carriers may survive

Six years ago, my friend Adrian Jones and I published our first deep provocative analysis of the iconic full-stack InsurTech carriers (Lemonade, Root, and Metromile). Our "Five Dispatches from InsurTech Survival Island" rationalized some early findings:

1. Underwriting results have been poor
2. It costs $15 million a year to run a start-up InsurTech carrier
3. Customer acquisition costs and back-office expenses (so far) matter more than efficiencies from digitization and no legacy systems
4. Reinsurers are supporting InsurTech by losing money too
5. In recent history, the start-up insurers that have won were active in markets not targeted by incumbents

Personal note: I really miss that 2018 collaboration with Adrian to review the Insurtech facts and figures. A week of back-and-forth, integrating the different perspectives and challenging each other, allowed us to extract the best from our cumulated knowledge. Moreover, his analytical rigor and exposure elegance made the first chapters the most precious gems of this six-year-long series. However, it is what it is. I'm continuing to report here my perspective on the Insurtech facts and figures. It is an unpolished and instant snapshot of my perspective, written by carving out a few hours on an overnight intercontinental flight. I'm trying to write something interesting each month...but available time and inspiration allows me to do it 8-9 times a year. I do my best, hope you like it 🙏

[if you have subscribed to this newsletter and you are not receiving the notification when it is published: here is the note about troubleshoot notification issues, I'm not too tech savvy ...so had to chat for a few days with the Linkedin assistance to solve my issues with notifications...but now I finally receive all the notifications of the newsletter I subscribed).

In the past months, the current full-stack Insurtech trio (Lemonade, Root, and Hippo) published the 2023 results, and they were not so bad. The dispatch from the Survival Island says: we are alive, and we may survive! [Metromile, one of the original castaways, didn't and was acquired by 🍋 a couple of years ago]

Let's look at some of the main pieces of evidence from this dispatch:

1. It costs 1-2 billion dollars to build a InsurTech carrier that barely enters the top 30 carriers in the personal auto or homeowner insurance business
2. Underwriting results have improved but are still poor
3. Still not efficient insurance carriers

It costs 2 billion dollars to build an InsurTech carrier that barely enters the top 30 carriers in the personal auto or homeowner insurance business

Any of the trio has burned between $1B and $2B since they started their journey to disrupt the insurance sector (😓):

• Root burned $1.7B to build an auto business of almost $0.8B premiums (the US auto market was $316B in 2023 with the 25th player writing $1.3B); the company has grown until 2021, shrunk in 2022, and rebounded last year. A non-immaterial part of its business comes from embedded insurance

• Hippo burned $1.2B to build an insurance business of $1.1B premiums along its journey (it was an MGA back in the days), has acquired a carrier that gives UW capacity to MGAs [IAAS in the figure below], and is acting as also as an agency selling third-party policies [Services in the figure below]. Without the agency premiums, the written premiums are $0,8B. An articulated business that has continued to grow over the years, but where the original homeowner business sold and underwritten [HHIP in the figure below] is pretty stagnant at about $0.3B (the US homeowner multiperil was $152B in 2023 with the 25th player writing almost $1B)

• Lemonade burned about $1.1B to build an insurance business of slightly more than $0.7B premiums and has reached the milestone of 2M clients. The main line of business is homeowner multiperil as for Hippo (but with a predominant presence of renter insurance), with about a quarter of the premiums done by the pet insurance business (inland marine), and with a limited contribution of the auto and international business. Lemonade in renter and pet insurance is probably able to show the most relevant market shares among all the businesses of the trio. Unfortunately, they aren't segments big enought to allow us to talk about any sign of disruption in the market.

Underwriting results have improved but are still poor

All these players have hired seasoned insurance executives over the years and have dedicated a significant focus to improving technical profitability. Since the time when they were used to pay out in claims the same or even more than they’ve collected in premiums, there has been (somehow) evidence of significant improvement:

• Root has brought the loss ratio down to 76%, while the personal auto insurance sector was on average almost at 78%
• Hippo has brought the loss ratio down to 71%. However, the Hippo product [HHIP in the figure above] is still at 103% while the homeowner multiperil line '23 loss ratio was 72%. More than fixing the Hippo original homeowner product, they are writing a good business with Spinnaker as a fronting carrier for other MGAs, and this subsidizes Hippo's loss-making business.
• Lemonade has brought the loss ratio down to 85%, which is high for homeowner insurance and extremely high for a mostly renter portfolio.

Note: All are gross loss ratios and include LAE, the Root's figure below is about loss ratio without the LAE.

Root's loss ratio is an outlier and doesn't deserve the headline "poor", however I've some doubts if it is more due to their underwriting performance or to the peculiar contingency of the US auto insurance market.

Their shareholder letter says "We recorded an exceptional loss ratio as we benefited from our technology platform’s ability to drive pricing and underwriting improvements" and "We are still in the early chapters of disrupting the auto insurance industry".

In 2023 large carriers in many states have struggled to obtain regulatory approval for rate changes and, consequently, have tightened their underwriting guidelines. It isn't unlikely that instead, a small carrier with bloody past technical results has quicker obtained the approval for rate changes and had anyway room for growing (without investing too much in advertising).

Before dropping the magic world "disruption" loved by futurologists and black swan hunters, I suggest waiting a few quarters within a more stable auto insurance market landscape.

Still not efficient insurance carriers

All three players have cut their marketing budgets compared to what they were used to; they aren't anymore the pure and brave online direct-to-consumer players you have met at insurtech conferences with colored t-shits back in the days. All of them are also working with independent agents and embedding insurance policies in other incidental channels. Moreover, Hippo's only profitable business is the fronting business with the policies sold by other MGAs.

They have also controlled the cost base at a decent level, all but Lemonade:

• Root: spent in marketing and sales 6% of the premiums and its administrative costs are 22% of the written premiums;
• Hippo: spent in marketing and sales $56M (9% on the premiums of the Hippo product and the agency), showing that selling third-party policies at least offsets part of the marketing costs. The other costs represent 17% of the premiums written (thanks to the efficiency of the fronting business);
• Lemonade spent in marketing $102M (14% in the written premiums), and the other costs added an additional 38% to the combined ratio.

All these businesses burned a significant amount of cash even in 2023. The cash lost in operating activities was Root $34M, Hippo $92M, and Lemonade $119M. All amounts that are lower than in the previous years. In the next few days, the Q1 '24 financials will be published and we will have an update on their trajectory.

Considering the trend of improvement and that there are still significant buffers of cash in their balance sheet, our castaways may survive.

From the island, still no sign of any disruption.

A few years ago, when the opinions about the newcomers were overoptimistic, one of the most equilibrated questions was: will incumbents innovate their business before insurtechs gain scale?

Well, incumbents are doing it well before the first generation of iconic full-stack insurtechs fully demonstrate their ability to survive.

Let me just give one of the many examples that can be found of this evolution of the insurance incumbents: the results obtained by some of the leading carriers in their telematics and IoT programs go far beyond my expectations when I created the IoT Insurance Observatory to promote a profitable usage of IoT in the insurance sector. #iotinsobs

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