THE REAL “ROOTS” OF THIS BUSINESS

Faltering insurtechs embrace agents

Apps can do many things, but … only humans can be invested with trust. Sustainable growth comes from building on that trust, not from facilitating blind transactions.

By Joseph S. Harrington, CPCU

Apps can do many things, but … only humans can be invested with trust. Sustainable growth comes from building on that trust, not from facilitating blind transactions.

The year did not start out well for insurtechs, the much-hyped and much-heralded technology firms once seen as poised to upend insurance distribution.

On January 20, Root, the Columbus, Ohio-based personal auto carrier, announced it was laying off 330 employees, 20% of its staff. The reasons, according to co-founder and CEO Alex Timm, were “historic levels of loss cost increases” caused by “supply chain and inflationary pressures.”

Problems with supply chains and inflation are certainly well-known to anyone following the news, but Timm’s announcement came after a two-year period in which personal auto insurance saw what has been reported to be its most profitable year in a decade (in 2020) and its lowest first-half loss ratio in four years (January through June 2021).

Launched in 2016, Root went public in August 2020, with its stock initially selling at $24 a share. In less than a year and a half, shares were down to $1.90. A day after the layoffs, The Motley Fool observed: “I wouldn’t say this business is finished, but I wouldn’t recommend buying until tangible progress can be seen.”

As Root’s stock price crashed, so too did those of Lemonade and Metromile, two other highly-touted insurtechs specializing in homeowners and pay-per-mile auto insurance, respectively. (Metromile has agreed to be acquired by Lemonade.) In late January, Lemonade and Metromile shares managed to under-perform a slumping stock market, falling to 86% and 93% below their all-time highs, respectively.

Hold the glee

It would be understandable if agents and brokers took some glee from these companies’ travails, as insurtechs and their boosters have not been shy about proclaiming their intention to disrupt personal lines insurance distribution. At times, this message has come from a moral high horse, with insurtechs proclaiming they will bring fairness and efficiency to a long-suffering public.

While these companies have stumbled, they haven’t fallen, however. Independent agents and brokers would be well-advised to stifle any impulse to vocalize satisfaction over insurtechs’ comeuppance. According to an S&P Global Market Intelligence report released in the last quarter of last year, Root and Metromile have recently shown a new appreciation for traditional distribution by appointing independent agents.

The ongoing saga of “D2C” (direct to consumer) insurance marketing underscores what should have been obvious all along: Compared to other consumer businesses, insurance is not transaction-rich.

How many transactions a month do you have with retailers and your financial institution? Compare that to how many transactions you have a year with your property/casualty insurer. Given the paucity (one hopes) of transactions between an insured, producer, and carriers, how much return can you really expect from investment in a “frictionless customer experience?”

For all the standardization of insurance products, and despite the lack of conscious consideration among many insurance buyers, the marketing of coverage is the first step in a relationship based on trust more than ease of transactions. For sure, clumsy transactions will cost you customers, but transactions alone will not win you loyalty.

Marketing insurance is more like selling legal services than financial services. In the case of Root’s and Metromile’s core product, personal auto insurance, it is literally that, the sale of defense and indemnity coverage for auto liability.

Apps can do many things, but they can never be accountable; only humans can be invested with trust. Sustainable growth comes from building on that trust, not from facilitating blind transactions.

The author

Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations.