It took a long time for Fintech startups to become full stack regulated banks. This is happening much faster in Insurance because Insurance is a stack with three layers and tech centric players understand stack dynamics in their bones and know how to build a sustainable position within a stack.
Root Insurance – going after the auto insurance market – is an example of a full stack InsurTech player. They have been in the news recently with a public launch and new funding. What is significant is the third layer of the stack – reinsurance. That is why the disruption is happening faster in Insurance than it did in Banking.
Although it took a long time for Fintech startups to become full stack regulated banks, it is happening now. In most markets we see banks variously described as Challenger Bank or NeoBank or Digital Bank. Some are VC funded and some are Bank funded. This is 7 years after the Cambrian explosion phase of Bank centric Fintech c 2009 after the Global Financial Crisis. Insurtech Cambrian explosion phase came much later around 2014, yet we already see a lot of full stack Insurtech startups. This post explains why.
Root is leveraging external tech disruption that is fairly new
Bank centric Fintech Cambrian explosion c 2009 leveraged the distrust of Banks after the Global Financial Crisis and the fact that the Internet was now mainstream. There was no fundamentally new technology.
Root Insurance is able to leverage sensor data from devices both in-car and on-person. This tech is more recent. What appears to be clever about Root Insurance is how they can differentiate the trips that done by the customer as a driver as vs trips done as a passenger.
Auto Insurance and the 3 layer Insurance stack
Insurance has a 3 layer stack, whereas Banking has a single stack; this is just starting to change thanks to MarketPlace Lending.
Brokers are a legacy constraint for Insurance companies. They are like physical branches for Banks. That is why we see a lot of opportunity in traditional insurance companies that already sell direct (and why we profiled Progressive Insurance here).
A full stack Digital Insurance startup like Root Insurance sells direct using online tools, collects premiums and then manages the claims process. They are able to do this because of the 3rd layer which is Reinsurance.
Unbundling the stack thanks to L3 = Reinsurance
Root Insurance reports that their policies are reinsured by Munich Re, Maiden Re, and Odyssey Re.
This what gives Root the financial stability to make regulators comfortable. Root can do Layer 1 and 2 (customer acquisition and claims processing). These processes are fundamentally digital/tech and can be capital efficient . Reinsurers are the ones who have to be very well capitalized. Reinsurance can be extremely lucrative for those who know how to invest (just ask Warren Buffet) which is why Hedge Funds and other capital sources are moving into the business. So we expect L3 to become increasingly efficient and competitive (which will enable more players to jump in at L1 and L2).
Stacks Communicate via Open APIs
How does L1 work with L2? Or L2 with L3? In ye olden days, this worked via long complex Systems Integration projects that made a lot of money for outsourcing companies and middleware vendors. Today the Stack below you creates an Open API and invites the layer above to innovate on top of their platform services.
Personalized Auto Insurance is a highly competitive market
As well as Root Insurance, Metromile recently did a big raise and there are some agile Incumbents such as Geico and Progressive that are not burdened with legacy agent networks. Given how fast InsurTech is moving we expect to see acquisitions happening soon – this market is moving from Cambrian Explosion to Consolidation much faster than usual.