Some InsurTechs are following Uber's model. Will the same strategy work in commercial insurance?
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An Overview of Uber's Business Strategy
Uber Technologies, Inc. announced its first quarterly results as a public company with an operating loss of over $5B in the quarter. Their CEO insists that the business can generate profits in the future, and many investors believe the claim. How they accomplish that is not such good news for us as consumers, of course. The plan is to develop a group of consumers who rely on ride-sharing to such an extent that they dump their cars and public transportation. Then Uber can raise prices for their services on the now-captive audience.
Notwithstanding this week's stock movement, many investors appear willing to ride out the losses it takes not just for market share but for mind share. Uber is betting that, even at higher prices, many consumers will still find enough value in their digital experience and the convenience over more conventional forms of transportation.
Many InsurTechs have been described as following a similar approach. Matteo Carbone and other InsurTech watchers have commented at length about the losses at nascent InsurTechs, both MGAs and Full-Stack Insurers. Insurance loss ratios among some of the most followed “first-generation” InsurTechs give no indication of producing profits anytime soon. By that metric, they appear to be following the growth-at-all-costs Uber model.
So the question isn’t if the model is being used among InsurTechs, or if it’s succeeding in creating the conditions for growth in visibility and market share for those that are deploying it. The next question is whether this same strategy will work in commercial insurance.
Will Uber's Strategy Work for the Commercial Insurance Industry?
For very simple insurance contracts like small Workers Compensation or BOP policies, it’s easy to see how the model can work. There, investment in a good digital experience and search engine marketing paired with low prices could make an impact on the small and medium-sized business market. It’s tempting to think that model could transfer up-market too -- the unit economics are much better, with the lifetime value of single customers tens or hundreds of times larger than with a renters insurance or auto insurance policy.
Looking more deeply, though, we quickly see issues with an Uber-like model. Simply beating the competitors on price can work in a low-stakes direct-to-consumer environment but not so well in B2B2B. That’s because the market for mid-sized and larger commercial insurance is very efficient, and also because the cost of commercial insurance is often high, so it earns lots of scrutiny every year by policyholders, or at least their brokers. With lots of discriminating eyes on the purchase, price is hardly the only factor - the inherent risk in trying anything new comes quickly to bear.
Most commercial insurance is intermediated by insurance brokers. Brokers are often derided as being of low value but, in fact, they keep prices low and coverage high for their customers. Price your product too low, however, and brokers will tell their customers that you are unlikely to be a reliable claims-payer - perhaps even likely to go out of business before that commitment is put to the test. Try to jack up your prices after “buying” into a market and brokers will move their business back to one of the dozens of incumbents.
Fast Growth in Commercial Insurance
The key, at least in our minds at Corvus, is for InsurTechs to respect the market and respect the brokers. Sure, being an InsurTech company demands a great digital experience, but we see that as table stakes. The key to victory for everyone in the chain is to use data in a compelling fashion, both to better underwrite - particularly to better avoid the very bottom end of the risk profile curve - and to bring differentiated value through data analytics and services that are facilitated by a great digital experience.
We recently surveyed some of the group of over 1,000 commercial insurance brokers who use the CrowBar, our digital platform. Aside from the very high net promoter score we received from them, which we were thrilled about, we saw numerous comments along the lines of: “I love your digital experience and ease of use, but frequently you don’t have the lowest prices.” That might be cause for concern if we were not growing our business so quickly - as it is, we feel that if brokers love our products, and continue to write business with us while acknowledging it is not the cheapest in the market, then that is the sweet spot we want to be in.
In short, an Uber strategy is obviously compelling to consumers and, so far, extremely compelling to investors. Can it work for InsurTechs? Maybe for some, but not for all.
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