High-tech companies have recently been charging Wall Street with promises that they would reinvent the sedate insurance industry. One such example is Lemonade, a fintech company based in Israel, but their declining share prices tell a different story.
Can The Insurance Industry Be Disrupted?
Technology stocks on Wall Street have generally declined substantially in the last year, but the drop has been particularly severe for Insurtech stocks. Lemonade dropped by a massive 78% over the last year to a market cap of only $2.3 billion. This is less than what it was in July 2020 at the end of its first trading day.
Hippo, based in California, and founded by Israeli entrepreneurs has also dropped 77% since last year listing the New York Stock Exchange via a SPAC merger. Its market cap is currently at $1.5 billion, versus $5 billion when it merged.
The tale of woes continues with Root, an Insurtech company based in the US losing 88% within a year and Metromile’s share price dropping by 87%.
The Insurance Industry Awaits Disruption
At first glance, the insurance industry appears to be ready for disruption. The industry is massive, with premiums in the US standing at $700 billion per year. Even just the US auto insurance sector is big enough to make it attractive, with annual premiums sitting at $260 billion.
The insurance industry is however ruled by very old, outdated companies that have been around for decades. It seems like the ultimate industry to target for disruption due to its hard-to-update, antiquated computer systems, outdated work methods, and superfluous personnel.
Lemonade, Root, and Hippo, all promised to disrupt insurance by using an updated business model and supported by modern technology. Technology was targeted at helping them recruit customers quickly and cheaply while making improved decisions about how to price policies properly and which customers to insure.
Established in 2015, Lemonade was set up as a fully digital insurance company, without any physical distribution channels or agents. Customers interact with a bot called Maya which allows them to purchase insurance policies within minutes. Pricing is calculated by using machine learning and artificial intelligence. More than 33% of customer claims are resolved automatically, without any human contact at all.
Lemonade has created a mechanism that allocates 75% of premium income to payments on claims, and the rest to day-to-day company operations. Money left over that is not paid out in claims, is donated to a nonprofit organization the policyholder selects. In theory, this should reduce the incentive to defraud the company.
Root’s car insurance policy pricing is based on actual behavior of drivers. To achieve this, Root monitors mobile phones of new customers for 2 to 4 weeks before finalizing the policy price. Drivers traveling less will be less likely to be involved in road accidents and are therefore given a cheaper rate.
Hippo provides homeowner policyholders with water leak sensors and smoke detectors. Although this helps the homeowner, it should also reduce the company’s payouts for property damage.
Although this all sounds good in theory, it has not really helped Insurtech companies capture a substantial share of their niche market. Although Lemonade has managed to capture around 5% of the home renters’ insurance market in the US, this market is relatively small and only amounts to $4 billion in annual premiums.
Apart from the disappointing market share achieved so far, insurance tech, aka “insurtech”, companies need to be worried that investors are no longer convinced they are able to disrupt this massive industry. Their declining market caps say it all.
In April 2021, the law firm of Kessler Topaz Meltzer & Check, LLP announced issuing a securities and fraud class action lawsuit against Root Inc.
The lawsuit, filed in the United States District Court of Ohio, alleges that the defendants (i.e. Root) made false and/or misleading statements and failed to disclose that Root would foreseeably fail to generate positive cash flow for at least several years.
The Missing Link
Technology can however also be a disadvantage for insurance companies. Customer acquisition via digital channels is for example by its very nature more attractive to younger new drivers, but those drivers are also more likely to have accidents, and then claim insurance.
This has resulted in Root abandoning its exclusive reliance on digital channels, and it is now focusing on expanding into other customer acquisition channels.
Lemonade, which this year moved into the car insurance market, fervently maintains its adherence to only digital, and therein lies the rub. Online insurance inherently lacks the human touch.
Lemonade emphasizes the use of Maya, an AI bot. The use of digital artificial intelligence means that there is no human touch. In simpler words, this means the absence of a human agent to look out for the customers’ best interest. Moreover, any change to their system would essentially invalidate their business model.
Gefen International AI Technologies Solution
Tel Aviv-based Gefen was founded in 2016 and its stated goal is to disrupt the $400 billion financial and insurance advisors’ market. Rather than trying to replace agents with bots, the company’s platform is used by highly regulated enterprises’ agents to sell intricate products to clients.
Orni Daniel, Gefen’s co-founder and CEO says that in the highly regulated insurance sector, more than 90% of policies are still done with advisors. Regulations require that financial advisors need to explain to customers the complexities and risks around financial products such as pension plans and life insurance. The business for those advisors has however not had any digital transformation.
The Gefen platform named ‘Moments’ was built specifically to disrupt this traditional ecosystem, which includes customers, the agents/advisors, and the carriers (the financial or insurance corporation). It should be noted that the platform doesn’t replace agents in the sales process, as it believes they are essential to the process.
It does however offer a highly compliant platform that can be leveraged by advisors. It includes tools like sales and marketing, and messaging that would otherwise have not been available to them.
Proof In Numbers – Potential to Buy Low and Sell High
Unlike the other failing insurance tech (insurtech) companies mentioned in this article, Gefen International AI Technologies saw strong growth across the major metrics for 2021. End user customers rose by more than 365% from about 65K to 296K while the number of premium agents using the platform increased by 66% from 1,332 to 2,210.
According to leading analysts in the Insurtech sector, Gefen International AI (ASX:GFN) is the company to watch for continued parabolic growth.
