InsurTech is booming. Or at least a lot of investors think it will boom soon as demonstrated by how much money they are investing – hitting US$1bn across 47 deals in H12016 according to the latest quarterly fintech venture capital report from KPMG and CB Insights. How can your average person profit from this boom in a simple way? If you are an InsurTech entrepreneur or investor you can profit from this boom; but this is complex and the option is only open to a few investors on the inside track and to entrepreneurs willing to do whatever it takes to grab the brass ring.
JoeQPublic could invest in public traded InsurTech ventures – if there were any.
There are publicly traded Fintech stocks. For example, you can buy into Lending Club (disclosure, I invested after the CEO was fired) or Square. However, there are no publicly traded stocks that are pure play InsurTech (AFAIK, please tell me if there is one). However I think I may have found an Incumbent Insurance Company that can profit from the InsurTech boom. Before telling, I should say that this is NOT investing advice, I have no credentials to do that and I have not yet decided to invest in this company. I am just sharing my notes as I dig into this possible opportunity.
The Agent channel problem
Having to keep an Agent channel happy can be a big drag on innovation and an innovator’s dilemma.
Amy Radin does a good job explaining why in this post. Digital ventures can sell direct and change the user experience. Incumbent Insurance companies are constrained by the legacy of their agent network. As Amy Radin points out, the traditional agent model is riddled with issues:
- A continuous decline in the agent workforce,
- A mismatch between agent demographics and overall population trends,
- A prospecting model out-of-touch with the times, and
- A compensation model that encourages churn and does not align interests between the agent and either the carrier or the client.
So I went looking for an Insurance Company that sells direct and immediately thought of Geico. Unfortunately Warren Buffet got there a long time ago. You cannot buy Geico stock. You can buy Berkshire Hathaway stock and that may be a good bet, but you cannot call that an Insurance pure play.
I ended up with Progressive Corp (stock symbol = PGR, key stats are here, valuation looks reasonable, not cheap but not expensive either).
Convergence theory in Insurance
Our thesis at Daily Fintech is that 2016 sees the start of the Great Convergence between Banks and Fintech. At the end of this Convergence, we won’t be able to tell the difference between:
- A Fintech upstart that matured, became regulated and added some people into the service delivery process (because that is what customers wanted).
- An incumbent Financial Institution that automated enough of the service delivery process to be cost competitive with Fintech upstarts and learned to deliver digital first.
This is as it should be. All the sturm und drang around disruption and conflict is great for getting media attention and selling conference tickets, but the reality is a more nuanced cooptition – some competition and some cooperation. Customers don’t care about disruption. They only care about better, faster, cheaper services and they don’t mind who delivers that to them. And the competition is on a surprisingly level playing field. Banks have access to the same technology as the Fintechs and the Fintechs have to keep the same regulators happy with the same rules as the banks. May the best entity win – the customer benefits either way.
The same theory can apply to Insurance. You can build a “full stack”, fully regulated InsurTech venture that can sell Insurance to the general public. That is what is happening in Health Insurance (see this post). Or an already fully regulated Insurance Company can transform their operations to the extent that they have the same efficiency metrics as a digital first InsurTech venture.
The end result – for both customers and investors is the same thing.
Coming from the Insurance Company end, Progressive could get there first. That is why they are an interesting company to look at for investors.
Like GEICO, Progressive focus on Auto Insurance.
Yes, but Auto Insurance will be killed by driverless cars?
That theory is being put about. Warren Buffet has expressed an opinion along those lines. The theory goes that we will have much fewer accidents in driverless cars, so we will buy less insurance. It is pretty likely that driverless cars will become mainstream at some point and that will make driving safer, but whether that reduces Insurance and in what timeframe is unclear:
- It is likely to be a gradual process via increasing automation from cruise control to ABS to automated parking and we may always want to sit “in the driver’s seat” and have insurance “just in case”.
- Perception lags reality. So we may be safer, but we will still want Insurance. A few headlines about crashes in driverless cars will be like plane crashes – statistically insignificant, but enough to scare us into buying Insurance.
- In many jurisdictions, at least some form of Insurance is mandatory.
Progressive is an unusual company. You can read the history on Wikipedia.
Progressive was founded in 1937 by Joseph Lewis and Jack Green as Progressive Insurance Company. Starting in 1956, the company found its niche insuring more risky drivers. In 1987, the sum of the company’s written premiums breached $1 billion. In 2016, that number crossed the $20 billion mark. It has generally attempted to live up to its name by being innovative in the industry. It boasts being the first auto insurance company to have a website, allow customers to purchase policies via that site, and later to pioneer allowing the use of mobile browsers and smartphone apps for rating and managing policies. It was also the first to offer 24/7 claims reporting. As it has grown, Progressive has sought to be a one-stop insurance provider for families in order to more competently compete with other top-insurers. It’s leadership has been marked by consistency, having only 2 CEOs in its history.
Actually, make that 3 CEOs as Tricia Griffiths took over as CEO in July. Some headlines talked of uncertainty. I see a new CEO for a new era and a woman (a benefit in a market that has been too much of an old boy’s club). The company promoted somebody who knows all the operations of the company. This is not a turnaround executive because that is not needed – they need more of what they are already doing. See her LinkedIn profile.
Continuing a tradition of innovation
Progressive are the first auto insurance company to:
- have a website
- allow customers to purchase policies online
- allow customers to use mobile browsers apps for rating and managing policies
- offer 24/7 claims reporting.
That is quite a track record of firsts and they clearly don’t intend to rest on their laurels. They launched their Business Innovation Garage in April of this year. Quoting from their site:
BIG, as it’s known to employees, exists in a virtual testing environment, and works with partners across the company to collect and cultivate business solutions, with the end goal of exploring and testing new ideas. The garage has a physical location at company headquarters and is staffed by a team of analysts and IT developers working for a garage manager who prioritizes the work and oversees the innovation process.
“Over the last five years, we’ve had countless discussions about the need for an internal ‘lab’ to test and learn,” said Ray Voelker, CIO of Progressive Insurance. “Innovation requires some degree of speed, so BIG allows us to fail fast, innovate faster and get best-in-class products to market in such a highly-regulated environment like the insurance industry.”
There is plenty of room to grow. They are # 4 in Auto Insurance in America with 8.74% market share and could move into other Insurance lines with a direct model and/or could expand internationally.