Life Insurance, next play
Recent studies cite the current “underfunded gap” within life insurance to be roughly $15 trillion. That value represents the capital required to insure the subset of Americans whose families would run into “significant financial difficulty” within a matter of months if they died unexpectedly.
A sad statistic, and yet not altogether surprising given the American savings and debt pattern: today 7 out of 10 Americans have less than $1,000 in savings and nearly half would not be able to come up with $400 in an emergency.
While there’s certainly much to critique about how little the product experience of life insurance has evolved over the years, we believe (unlike other financial products whose long-term viability is in question) that it’s here to stay. At its core, the proposition is a sound and highly valuable societal tool that protects families in the event of grave unexpected circumstances.
Net premiums written from insurance in the U.S. totaled more than $1.2 trillion last year, about 6% of GDP, of which more than 60% is represented by life insurance and annuities. That, despite the fact that the product is at its lowest levels in 50 years.
A severely underserved audience in a colossal market — typically a sound starting point for thinking about innovation. But how do we go about solving for it? That’s what we, in partnership with our friends at RRE, set out to answer over the past couple months. Our collective objective is to uncover more insight into the most promising opportunities, and incubate and invest in the most compelling teams and approaches in the space.
We have been convening dozens of conversations with CIOs and CTOs from legacy carriers, large technology companies with verticals within insurance, fellow investors, and of course, scores of emergent insurance startups (“insuretechs”), each pushing different edges within the larger insurance landscape. A space of this historic complexity and level of regulatory scrutiny is challenging to navigate to say the least. We have emerged from our recent discussions with newfound optimism. Below is an initial set of learnings of the catalysts and approaches we believe are well suited to reshape the category —
B2B v B2C
We quickly observed that the direct-to-consumer (D2C) opportunities, like other categories, have attracted the most attention and overshadows the broader set of venture activity. Digging deeper, and with the help of our network of incumbents, we found perhaps a much larger B2B opportunity around sweeping technological modernization across the existing base of carriers.
Exciting advances are coming on that front — everything from machine learning, and in time, artificial intelligence into the underwriting process to blockchain applications around transparency. Even more immediate in need are some of technology’s proverbial low hanging fruit: liberating data siloed across disparate departments, digitizing workflows and processes still being conducted with paper, moving things into the cloud and optimizing for mobile usage— many of the things other sectors absorbed software solutions for 5–10 years ago. We see significant opportunity in this “unsexy” B2B approach of helping legacy companies (some more than a century old!) modernize. Estimates vary, but global IT spending by insurance companies are expected to be >$200b heading into next year.
“It is deeply unsexy, but in my view it is probably the biggest driver by far for what technology can do to improve our process. You can assume it may take out 50 percent of the costs of the insurance industry” — Christian Mumenthaler, CEO of SwissRe
This is easier said than done. Traditional carriers are burdened by legacy mainframe systems with data stretched across varying functional groups in a way that makes them often times too cumbersome to work with, and in some cases representing 18–24 months of technical integration in addition to an extended sales and POC process. We’ve refined our criteria as a result of these findings, seeking out B2B solutions that have little to no technical integration, and particularly where carriers are more excited to direct budgets towards. At least for now, we see those dynamics line up around areas that fuel growth (as opposed to pure cost cutting / efficiency) and seem to mostly settle around solutions within distribution or top of funnel: customer analytics, smarter prospect segmentation/ targeting, engagement and retention, cross-sell / upsell strategies, etc.
Viability and Economics
Particularly on the D2C side, it’s become clear that valuations at seed and Series A well outpace their progress. With over $1.7b invested in insuretech last year, and over $1b in the last quarter alone, some of it certainly stems from valuations getting bid up by a growing interested capital supply.
It’s also due to the gradient along which many of the D2C models have launched that dictates how economics in the sale of an insurance policy can be distributed. On the one extreme is the lead-gen approach of creating a thin, branded marketing layer over existing off-the-shelf products, and on the other is an independent full-stack captive model. To the market they can look and feel quite similar, but their operating and regulatory structure play a significant role in their ability to innovate and retool the product experience, as well as the profits they can extract for each policy they write over time.
We feel the lead-gen model captures too small a slice of the economics and requires too large a market share to win out. In a subset of cases, we have seen teams adeptly begin on that end, getting to market more efficiently from a capital and regulatory requirement standpoint (but for where economics are dramatically lower), and gradually move upstream to a Managing General Agent (MGA) model or even full stack as they learn and experiment with taking healthy underwriting risks and define new product needs. That naturally means their economics initially follow a shallower growth curve, and accordingly, not necessarily satisfying the progress you might expect to see at the seed or Series A stage. We created this quick sketch to help us organize different approaches we’ve seen across insurance (life, P&C, etc):
The Agency Problem
There are two agency problems within life insurance. The first refers to the actual agencies (captive and non-captive) that sell policies which account for 90% of the industry. The average age of an agent has grown to 59 years old, and more than 85% of these agents churn out of the industry within three years of starting. It’s unclear how these agents can effectively reach a digitally oriented and highly sought after younger audience over time.
The other “agency problem” refers to the conflict carriers face with experimentation with online direct-to-consumer models to better drive acquisition with the younger demographic they desperately seek. While the shift online may seem inevitable, how does a carrier begin to experiment here without threatening their offline agents’ business model that they are currently wholly dependent on (again, 90%)?
We’ve found a fairly binary sentiment from the market here: some incumbents dismiss the online threat and insist that a product as important and complex as insurance, as the old adage suggests, will always be sold, not bought. (and who can cite very recent examples, eg Betterment, who, after long arguing the opposite, has now adopted human advisors). Many insuretechs insist that AI will soon largely supplant human agents and create a seamless, cost-effective distribution engine. We believe there is an inevitable hybrid, with human agents deployed where a high-touch approach is essential, and digital distribution where consumers, knowing what they want, are prioritizing efficiency and speed.
We are keen to hear from companies who are thoughtful about this hybrid and who have run the experiments required to know what geographies, demographics and behaviors are best suited for a digital-first approach, pairing them with the specific relevant products. Not only are we curious how teams articulate how they establish systems online that can easily facilitate a transaction, but with acquisition costs in some cases approaching $1,000 and above, build an organic reputation for the online version of the offline hand-holding, helpfulness, and education that people value in making a decision.
Data Science -> Product Innovation
The popular approach of creating a marketing skin over off-the-shelf insurance products to sell online is likely not a viable long-term combination. While the art of creating a business and brand that consumers can trust is important, it cannot be the sole differentiating innovation for a team building a venture scale business. Have they hired their first data scientist? How are they articulating what new data models will be used to unlock a compressed and higher conversion acquisition funnel and smarter “good risk” targeting? Do they have a proprietary way to access and manipulate new data sets that derive insights other actuarial teams can’t? How will they use that to inform how they will introduce new-to-the-world products that reflect current needs more effectively? At times the use of data can remain vague and assumed, but we are asking some of these questions in detail, even if they only serve as thought exercises to start, to distinguish which teams are committed to true transformative changes over the long-term.
“Once data becomes ubiquitous and information asymmetry collapses, you are purely in the service and investment management business — what’s your edge?” — CIO at top 5 global life carrier
Good product vs Good business
Many of the direct to consumer strategies we’ve seen make a lot of the unique efficiencies of being a digitally native company. And to be sure, the extent to which manual processes encumber traditional carriers is far worse than you might suspect, and stripping these costs out make for a far more efficient model. But it doesn’t solve for how to re-engage the American population of the merits of the core product, arguably the industry’s biggest challenge. In truth there is as much outside the insurance category — Millennials’ distrust of financial institutions coming out of our most recent recession, their bloated student debt loads, etc — that are factors in need of fixing along with the industry’s own issues.
“Life carriers are fighting this belief that what they sell is a utility. Most people don’t care or don’t know enough to care.” — Life Insuretech CEO
So simply selling online doesn’t get people to care. Creating an approachable brand doesn’t get people to care. Even the ability to underwrite and bind a policy in minutes, to be sure a meaningful advancement in the space, doesn’t necessarily get people to care. The hard work and time necessary to effuse a product experience with real meaning and trust around how financial services can guarantee a sound future for families is where things will start to shift.
It may come from a fresh team and approach, but it may very well emerge from an incumbent reinvention. Regardless, the elegant coupling of best-in-class technology with a human-centered product strategy is what we believe are the necessary elements to build the eventual category shaping leader the industry is so starved for.
We are actively incubating and investing (seed through Series B) alongside teams that are orienting their approaches and resources around thoughtful behavioral understanding, true actuarial and regulatory expertise, and world-class engineering and data science architecture. We would love to chat if you are building something new or transitioning into the space.
