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Huckleberry raises $18M to put small business insurance online
The insurance industry, sleepy and ancient, is ripe for disruption. We’ve seen companies like Lemonade, Hippo and Rhino get in on that opportunity. Today, an insurtech company focused on small business insurance has raised $18 million to keep growing.
Meet Huckleberry, whose Series A was led by Tribe Capital, with participation from Amaranthine, Crosslink Capital and Uncork Capital.
Huckleberry launched in 2017 to offer business insurance, including workers’ compensation and general liability, all through an online portal.
Small business insurance coverage is not like car insurance or renters insurance. It’s not as simple as filling out a few forms and getting a quote. Even if a few platforms do have algorithms for providing quotes, you can’t really close the deal unless you get on the phone.
It’s an incredibly tedious and stressful process. In fact, Huckleberry co-founders Bryan O’Connell and Steve Au first came up with the idea for Huckleberry when they were seeking out their own small business coverage for a previous startup idea.
The industry itself is incredibly fragmented, which is caused in part by the fact that small business coverage underwriting varies wildly from business to business. For example, the policy for three or four restaurants might look relatively similar. However, a fast food restaurant might be identified as a higher risk with regards to workers’ compensation than a Michelin-star restaurant, where workers might be more eager to get back to work and take home their tip money. These differences come in the form of location, operations and many other factors, as well as business vertical.
Huckleberry has worked to build out myriad coverage verticals, including food and beverage, fitness, retail, legal, healthcare, hair and beauty and more.
The firm offers worker’s comp, as well as a package policy that includes general liability, property and business interruption insurance. Customers also can purchase add-ons like hired and non-owned auto insurance, employment practices liability insurance (EPLI), liquor liability insurance, employee dishonesty coverage, professional liability insurance, equipment breakdown coverage and spoilage coverage.
Huckleberry isn’t itself an insurance carrier, but does have the authority to underwrite and sell policies on behalf of the carrier. That said, Huckleberry’s expansion both by vertical and geography is more difficult than your average software startup. The regulatory landscape of insurance in the U.S. goes state by state.
“Our biggest challenge is navigating 50 states’ worth of extremely complicated regulations on something that is much more complicated than a software product,” said O’Connell. “We’re trying to protect individual workers and businesses all while staying fully compliant in every market.”
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Rhino looks to replace renters’ security deposits with a small monthly fee
Rhino, the insurtech startup incubated by Kairos and co-founded by Kairos CEO Ankur Jain, has today announced the close of a $21 million Series A round led by Kairos and Lakestar.
Rhino was founded in 2017 with the goal of getting back to renters the billions of dollars that are locked up in cash security deposits, all while protecting landlords and their property. As it stands now, landlords usually take one month’s rent to cover any damage that might be done to the apartment during the lease. This is piled on top of first and sometimes last month’s rent, and even at times a broker’s fee of one month’s rent, which adds up to an incredibly steep cost of moving.
Because of certain regulations, this money is held in an individual escrow account and can’t really generate interest, which results in billions of dollars zapped out of the economy and instead sitting dead in some account.
Rhino is looking to give renters the option to pay a small monthly fee (as low as $3) to cover an insurance policy for the landlord. Rhino is itself a managing general agent, allowing the company to both sell and create policy plans for landlords through partnerships with carriers.
Thus far the startup has saved renters upwards of $60 million in 2019, with users in more than 300,000 rental units across the country.
“The greatest challenge is working against legacy and industry norms,” said Rhino CEO and co-founder Paraag Sarva. “That start has begun, but there is a huge amount of inertia behind the status quo and that is far and away what we are most challenged by day in and day out.”
To help speed up the process, Rhino is working alongside policymakers to enact change on a federal level.
Alongside the funding announcement, the company is announcing its new policy proposal that was created in collaboration with federal, state and local government officials. The policy essentially allows for renters to be given a choice when it comes to cash deposits, including allowing residents to cover security deposits in installments or use insurtech products like Rhino to cover deposits.
Rhino says it will be sharing the policy proposal with 2020 presidential candidates on both sides of the aisle.
Rhino is one of a handful of companies that has been incubated by Kairos, a startup studio led by Ankur Jain with the goal of solving the biggest problems faced by everyday Americans. The studio focuses on housing and healthcare, with companies such as Rhino, June Homes, Little Spoon, Cera and a couple of startups still in stealth.
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Sweden’s Hedvig raises $10.4M led by Obvious Ventures to build ‘nice insurance’
Hedvig, a Swedish startup, is following in the footsteps of Lemonade, building a new generation of insurance platforms that use AI to help evaluate customers and operate on a policy of using surplus for social good. Today the company announced the next stage of its growth. The startup has closed a SEK100 million ($10.4 million) round of funding to expand from its current offering of property insurance into a wider range of categories, and begin the costly process of expanding its business into more countries beyond its home market.
The funding values the company at SEK342 million ($35.5 million) — a modest figure considering Lemonade’s recent $300 million round, reportedly (per PitchBook) at a $2.1 billion post-money valuation — but helps position the company to set its sights on being a strong regional player (if not an acquisition target for Lemonade if it wants to quickly add new regions: the latter kicked off its first services in Europe earlier this year, so its global aspirations are clear).
It currently has 15,000 customers in its home market of Sweden, who use it for property insurance on rented or owned apartments, and Lucas Carlsen, the co-founder and CEO, said in an emailed interview with TechCrunch that it “definitely” plans to expand that to houses as well as other categories. Home insurance also covers contents, such as gadgets, and travel, and Carlsen said that the former (gadgets) accounts for the majority of claims at the moment.
The round was led by Obvious Ventures, the venture fund co-founded by Twitter/Medium/Blogger co-founder Ev Williams, with D-Ax, the early-stage investment arm of Swedish retail giant Axel Johnson Group, also participating, along with past investor Cherry Ventures.
“We are building a global company. We just started in Sweden since we happened to live here, and it serves as a good test market as we have some of the worlds’ most progressive and demanding consumers. Today, we do not have any news to share about future markets, but stay tuned!,” said Carlsen.
“The new funding will mainly be used to fuel growth in Sweden, but we’ll also be looking at extending into new markets and insurance categories. Insurance is capital intensive and our new partners are committed to supporting our long-term vision,” he continued.
Indeed, getting an investor like Obvious (which published its own short announcement about the investment) involved could open the door to introductions with a number of other investors down the road.
“Hedvig is harnessing its purpose, the power of AI, and its human-centered product to create a modern, full-stack insurance company. Their incredible team is delivering against the mission – to give people the world’s most incredible insurance experience – and we at Obvious are honored to help scale it further,” said Vishal Vasishth, one of Obvious Ventures’ other co-founders, in a statement.
Hedvig — named, Carlsen said, after a legend of “someone who stood up for others and fought for their causes: that’s what we do,” — will sound familiar to you if you know Lemonade.
It follows in a wave of more socially forward businesses that are being created, which are using technology to help disrupt the status quo but also to bridge the gap between building services that consumers need and the principles they would like to adhere to more if possible. (Other examples include the likes of Beyond Meat, which is also backed by Obvious; as well as the plethora of electric and hybrid vehicle makers; and more.)
In the case of Hedvig and the challenge of insurance, the proposition goes like this:
Hedvig uses technology and innovative algorithms to help assess a potential customer, who is then provided with lowest-cost, and often competitively priced, premiums. Then, as a “full-stack” digital company, it also uses its algorithms to help process claims. After Hedvig uses its bigger pot of money to pay out claims, the annual surplus is donated to charities selected by its customers.
“By not pocketing this money ourselves we can focus on providing the best service possible to you and not on making more money from denying claims,” Carlsen said.
Hedvig itself makes money by taking a cut off users’ monthly premiums (it doesn’t specify how much). To date, Hedvig has not disclosed how much it has been able to “give back” according to its business model. But the philosophy is that by digitising some of the more mundane processes that are relegated to human adjustors and customer agents at traditional agencies — and by not being inherently greedy — the startup is able to provide a more pleasant, more efficient and more conscionable service.
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The rise of the gig economy helps London-based insurtech Zego to raise $42M
A couple of years ago, London-based startup Zego realised gig-economy workers would need insurance, and went on to raise a very healthy £6 million in Series A funding, led by Balderton Capital. Its first products were pay-as-you-go scooter and car insurance for food delivery workers.
It’s now announced a $42 million raise in one of the largest funding rounds for a European insurtech startup, in a Series B investment led by pan-European investment firm Target Global, specialists in the fintech and mobility space, with other backers including TransferWise founder Taavet Hinrikus. The proceeds will be used to for Zego’s expansion across Europe and to increase the workforce from 75 to 150.
The raise takes the firm to a total of $51 million in funding, with new investors Latitude joining existing backers Balderton Capital and Tom Stafford of DST Global. The investment comes as the company claims a whopping 900% growth over the past 12 months.
Zego caters to the new mobility services, such as ride-hailing, ridesharing, car rental and scooter sharing, and offers a range of policies from minute-by-minute insurance to annual cover, providing more flexibility than traditional insurers, with pricing based on usage data from vehicles.
This means it’s become popular with scooter and car delivery drivers, plus van and taxi fleets. The firm currently insures one-third of the U.K.’s food delivery market, largely through partnerships with Deliveroo, Just Eat and Uber Eats.
Sten Saar, CEO and co-founder of Zego, said: “When we built Zego from scratch three years ago, our mission was to transform the insurance sector by creating products which truly reflected the rapidly changing world of transport… The world is becoming more urbanized and because of this, we are moving from traditional ownership of vehicles to shared ‘usership’. This means that the rigid model of insurance that has existed for hundreds of years is no longer fit for purpose.”
Ben Kaminski, partner of lead investors Target Global, said: “With the growth of new mobility services, Zego identified a major gap in the insurance market and created a unique business model to fill it, which the incumbents will find very difficult to replicate. The potential of this company is almost limitless, and I fully expect to see its U.K. success mirrored across Europe and beyond in the coming years.”
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Wefox Group, the Berlin-based insurance tech startup, raises $125M Series B led by Mubadala
Wefox Group, the Berlin-based insurtech startup behind the consumer-facing insurance app and carrier One and the insurance platform Wefox, has raised $125 million in Series B funding. Notably, the round is led by Abu Dhabi government-owned Mubadala Ventures (which is also an LP in SoftBank’s Vision Fund) and is the first investment from Mubadala’s newly created European Investment Fund. Chinese investor Creditease also participated.
The investment, which Wefox Group says is the first tranche in the Series B round, will be used for expansion into the European broker market. The German company will also grow its product and engineering teams, specifically in relation to applying “advanced data analytics” to realise Wefox’s vision for an all-in-one insurance platform that places personalisation at the heart of how various insurance coverage is sold and delivered.
Wefox’s existing investors include Target Global, Salesforce Ventures, Seedcamp, Idinvest and Hollywood actor Ashton Kutcher’s investment vehicle Sound Ventures. The startup raised $28 million in Series A funding in late 2016.
In a call with Wefox Group co-founder and CEO Julian Teicke, he disclosed that Wefox has grown its revenues to around $40 million since being founded in 2014. The company now serves more than 1,500 brokers and more than 400,000 customers, making it “Europe’s number one insurtech platform.”
As it exists today, Wefox Group consists of two main products and subsidiaries: Wefox, and One.
Wefox is a platform that connects insurance providers, brokers and customers in an attempt to drag the insurance industry into the digital age. Rather than bypass human brokers entirely, Wefox lets independent brokers on-board their existing customers onto the platform to help deliver a better experience and more easily manage their clients’ coverage.
Efficiencies are achieved through a degree of automation, helping a broker scale the admin side of their business while also ensuring customers get the most appropriate coverage. From a consumer’s perspective, the Wefox app and website also acts as a “digital” wallet, where they can store details of the various insurance coverage to which they have subscribed.
Teicke says that about 80 percent of customers on the Wefox platform come via brokers. The remaining 20 percent sees customers sign-up direct. In this scenario, Wefox effectively acts as a lead generation or matching service for local brokers.
One is a direct-to-consumer fully digital insurance provider, offering various personal insurance coverage — and is only one of multiple insurance providers that reside on the Wefox platform and can be recommended by brokers. Teicke says it is also modular in design, letting customers select areas of coverage and essentially plugging in additional coverage based on their needs and appetite for risk at any given time. This includes pioneering the use of IoT and other data, customer permitting, to make insurance coverage proactive rather than reactive.
“The modular, timestamp and IoT triggered product design will be the role model for all insurance incumbents,” says Teicke. Related to this, Wefox Group plans to make the underlying technology of One available to other insurance providers so they too can plug proactive insurance provision into the Wefox platform, based on specific cohorts, scenarios and specialist coverage.
Ultimately, the grand vision and big bet — and no doubt what attracted such large amounts of capital into this Series B round — is that insurance will transition to a platform play, fueled by responsibly harnessing various types of data. The will see a platform exist to deliver the right coverage at the right time from a multitude of providers rather than the outdated and disparate model that exists today.
“Our hypothesis is that insurance will be massively impacted by the IoT data revolution,” says Teicke. “Insurers will have access to an exponentially grown number of real-time variables in order to price insurance products in real time. This trend will change insurance from a pure financial service to a service that offers proactive advice to reduce risk and consists of a financial service component only as an add-on to the core business model.”
Meanwhile, the new round of funding draws a line under a particularly tough period for Wefox Group after it was threatened with a lawsuit by New York-based insurance platform Lemon. The complaint, filed in the U.S. District Court Southern District of NY, alleged that Wefox reverse-engineered Lemonade to create One, and infringed Lemonade’s intellectual property. Ultimately, however, the dispute panned out to be a “much ado about nothing,” with Lemonade quietly dropping the lawsuit a few months later.
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Alphabet-backed Medicare Advantage startup Clover Health raises $500M
Despite a number of well-publicized hiccups, venture capitalists are betting another $500 million on health insurance provider Clover Health, TechCrunch has learned.
Existing investor Greenoaks Capital led the round, according to the startup, which confirmed it was closing a new round of capital in the coming weeks. Clover Health has raised a total of $925 million to date, garnering a valuation of $1.2 billion with a $130 million Series D funding in 2017. The company, backed by Alphabet’s venture arm GV, Sequoia Capital, Floodgate, Bracket Capital, First Round Capital and more, declined to disclose its latest valuation.
San Francisco-based Clover Health was founded in 2012 by chief executive officer Vivek Garipalli, the former founder of New Jersey healthcare system CarePoint Health; and Kris Gale, who served as the startup’s chief technology officer until transitioning into an adviser role in December 2017. As part of its latest funding round, the company told TechCrunch it’s promoting Andrew Toy, its chief technology officer since early 2018, to the role of president and CTO. He will also join its board of directors.
Varsha Rao, Airbnb’s former chief operating officer, joined the company in September 2017 as COO.
The tech-enabled health insurer differentiates itself from incumbents by collecting and analyzing health and behavioral data to lower costs and improve medical outcomes for its members. It’s part of a new cohort of heavily funded insurtech startups, including Devoted Health and Bright Health, both of which similarly provide Medicare Advantage plans. Devoted Health, backed by Andreessen Horowitz, raised a $300 million Series B funding round three months ago. Bright Health, for its part, brought in a $200 million Series C in late November at a $950 million valuation. It’s backed by Bessemer Venture Partners, Greycroft, NEA and Redpoint Ventures, among others.
Founded in 2012, Clover Health is years older than its aforementioned counterparts. The business, though supported by top-tier investors and plenty of capital, has struggled in the past to shrink its losses. In 2015, Clover Health posted a net loss of $4.9 million only to increase it 7x the following year to $34.6 million, according to financial documents obtained by Axios. At the time, Clover Health had 20,600 Medicare Advantage members, earning it $184 million in taxpayer revenue. According to reporting from CNBC, the company had initially planned to double its membership base each year but was only able to expand from 20,000 in 2016 to 27,000 in September 2017.
Clover Health currently has 40,000 members in Georgia, New Jersey, Arizona, Pennsylvania, South Carolina, Tennessee and Texas. The business earns roughly $10,000 in revenue per member from the Centers for Medicare and Medicaid Services, or currently about $400 million in annual revenue. As a Medicare Advantage plan, Clover Health makes a majority of its cash from the government.
“Clover’s continuously improving economic fundamentals have allowed us to build sustainably, thoughtfully enter new markets and increase our overall membership by 35 percent during the last 12 months, compared with nationwide growth of 8 percent for Medicare Advantage overall,” the company said in a statement provided to TechCrunch. “This has made Clover one of the fastest growing insurers in [Medicare Advantage] over the past three years. That said, there is much more to accomplish, which is why I am so excited about entering this next phase in our company’s history.”
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Insurance startup Bright Health raises $200M at ~$950M valuation
A flurry of digital-first insurers are betting they can surpass industry incumbents with a little help from technology and a lot of help from venture capitalists.
The latest to land a massive check is Bright Health, a Minneapolis-headquartered provider of affordable individual, family and Medicare Advantage healthcare plans in Alabama, Arizona, Colorado, New York City, Ohio and Tennessee. The company, founded by the former chief executive officer of UnitedHealthcare Bob Sheehy; Kyle Rolfing, the former CEO of UnitedHealth-acquired Definity Health; and Tom Valdivia, another former Definity Health executive, has brought in a $200 million Series C.
The funding values Bright Health at $950 million, according to PitchBook — more than double the $400 million valuation it garnered with its $160 million Series B in June 2017. Sheehy, Bright Health’s CEO, declined to comment on the valuation. New investors Declaration Partners and Meritech Capital participated in the round, with backing from Bessemer Venture Partners, Greycroft, NEA, Redpoint Ventures and others. Bright Health has raised a total of $440 million since early 2016.
VCs have deployed significantly more capital to the insurance technology (insurtech) space in recent years. Startups in the industry, long-known for a serious dearth of innovation, have raked in nearly $3 billion in private capital this year. U.S.-based insurtech startups have raised $2 billion in 2018, a record year for the sector and more than double last year’s total.
Deal count, meanwhile, is swelling. In 2016, there were 72 deals conducted in the space, followed by 86 in 2017 and 94 so far this year, again, according to PitchBook’s data.
Oscar Health, the health insurance provider led by Josh Kushner, is responsible for about 25 percent of the capital invested in U.S. insurtech startups this year. The company has raised a total of $540 million across two notable deals in 2018. The first saw Oscar pulling in $165 million at a $3 billion valuation and the second, announced in August, had Alphabet investing a whopping $375 million. Devoted Health, a Waltham, Mass.-based Medicare Advantage startup, followed up with a massive round of its own. The company nabbed $300 million and announced that it would begin enrolling members to its Medicare Advantage plan in eight Florida counties. Devoted is led by Todd Park, the co-founder of Athenahealth and Castlight Health.
Bright Health co-founders Bob Sheehy, CEO; Tom Valdivia, chief medical officer; and Kyle Rolfing, president
VC’s interest in insurtech isn’t limited to healthcare.
Hippo, which sells home insurance plans at lower premiums, officially launched in 2017 and has brought in $109 million to date. Earlier this month the company announced a $70 million Series C funding round led by Felicis Ventures and Lennar Corporation. Lemonade, which is similarly an insurer focused on homeowners, raised $120 million in a SoftBank-led round late last year. And Root Insurance, an app-based car insurance company founded in 2015, itself raised a $100 million Series D led by Tiger Global Management in August. The financing valued the company at $1 billion.
Together, these companies have raised well over $1 billion this year alone. Why? Because building a health insurance platform is incredibly cash-intensive and particularly difficult given the breadth of incumbents like Aetna or UnitedHealth. Sheehy, considering his 20-year tenure at UnitedHealthcare, may be especially well-positioned to disrupt the industry.
The opportunity here for investors and startups alike is huge; the health insurance market alone is forecasted to be worth more than $1 trillion by 2023. Companies that can leverage technology to create consumer-friendly, efficient and, most importantly, reasonably priced insurance options stand to win big.
As for Bright Health, the company plans to use its $200 million infusion to rapidly expand into new markets, planning to triple its geographic footprint in 2019.
“Bright Health has continued to execute at a fast pace towards our goal of disrupting the old health care model that places insurers at odds with providers,” Sheehy said in a statement. “[Its] current high re-enrollment rate shows that consumers are ready for this improved healthcare experience – especially when it is priced competitively.”
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Hong Kong-based OneDegree gets $25.5M Series A to make coverage more accessible, starting with pet insurance
OneDegree, a Hong Kong-based insurance technology startup, announced today that it has closed a Series A totaling HKD $200 million (about $25.5 million). Half of that amount was pledged by investors to OneDegree pending regulatory approval through the Hong Kong Insurance Authority’s new fast-track licensing program for online-only insurers. The company, which participated in Cyberport, the Hong Kong government’s startup incubator, claims this is the largest ever fundraising round for a pre-revenue insurance tech startup in Hong Kong.
OneDegree is currently not disclosing its list of investors because its new shareholders are being vetted by the Insurance Authority, founder and CEO Alvin Kwock tells TechCrunch, but it includes institutional investors and family offices. The South China Morning Post reports that speculation among brokers peg Tencent and Alibaba as probable backers.
OneDegree has developed an online insurance platform that lets consumers purchase personal lines and health insurance products without needing to consult with an agent. Instead, they find and buy policies through an app that is connected to a backend that automates claims processing, policy management and customer service.
The startup will initially sell medical insurance plans for pets. While there are more than 500,000 pet dogs and cats in Hong Kong, only about 2% to 3% are covered by insurance, compared to 42% in the United Kingdom, says OneDegree. The startup blames this on ineffective distribution, since pet insurance has relatively low premiums and is therefore overlooked by insurance agents, even though the number of pet dogs and cats in Hong Kong is increasing at an average annual growth rate of 3.5% and their owners are a relatively affluent demographic.
OneDegree plans to use its Series A to on tech development, launching new products and marketing. The funding will also serve as risk capital once it launches its insurance business.
In a press statement, Cyberport chairman George Lam said “As a key driver of digital technology development in Hong Kong, we are definitely excited to see local fintech start-ups like OneDegree successfully securing recognition from renowned institutional investors and attracting sizable funding that will enable faster growth.”
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Is insurance a rich enough game to disrupt?
Martha Notaras
Contributor
Contributor
Martha Notaras is a partner at XL Innovate.
For the last decade, the largest technology companies have increasingly looked outside of tech to grow their operations. From automotive to retail to groceries, these companies use massive competitive advantages in the form of data, consumer relationships and software engineers to fundamentally change markets.
Now, companies like Apple and Google and Amazon are eyeing innovation across the insurance landscape. For example, Amazon is teaming with JPMorgan and Berkshire Hathaway to create a new way to approach health insurance, focusing first on the group’s own employees. On the retail side, Amazon is selling product insurance and extended warranties at the point of sale and investing in insurtech startups. Meanwhile, Tesla is developing an insurance product specific to the Model S. Waymo, Uber and Lyft are certainly having similar conversations internally.
Obviously, these are all preliminary steps. Insurance is a complex, multifaceted and, yes, risky business. In the end, whether or not companies like Amazon become insurers themselves depends on their appetite for risk, their ability to innovate and the potential pay off.
To start, let’s look at the reasons why tech giants are well-suited to upend the space.
They have direct consumer relationships
Like many businesses, a large aspect of a successful insurance business is distribution. Just look at brokers, which are a major means of distribution for insurers today — their cut can be up to 30 percent of the cost of an insurance policy. Brokers also see better margins than insurers themselves, usually around 10 percent net margins. Facebook, Amazon, Apple, Microsoft and Google (FAAMG) possess direct relationship with billions of consumers and could, over time, disrupt the broker business.
They have deep data and analytics
The big secret in insurance is that insurers are actually terrible at using their data. Different departments (marketing, underwriting, claims) rarely work together, and their data tends to be siloed. FAAMG, on the other hand, has put data at the core of their offering; they know how to leverage analytics and AI to create better products.
Tech giants may be tempted to use their troves of data to compete with insurers directly.
They also have access to data that insurers can only dream of having: global geospatial imagery of homes, infrastructure and buildings; location, browsing and advertising data; even real-world behavioral data from smartphones and IoT devices. Combining all these signals can create a very complete picture of human behavior, interests and risk profile.
They have an army of software engineers and a monopoly of AI talent
Tech innovation has long been a challenge for insurance incumbents. Old systems are difficult to displace in any industry, but the complexity of insurance, tradition of relying on the past to predict the future and silos of data can make it a Herculean effort. Tech giants, on the other hand, regularly cannibalize their own revenue with new products and can enlist tens of thousands of engineers to develop fantastic digital customer experiences and bring large-scale efficiencies to back-end insurance systems through better software and AI.
So, yes, FAAMG has a number of major advantages over insurance incumbents. But for tech giants, new verticals and initiatives are also longer-term decisions around margins and market scope. It’s an obvious point, but if FAAMG wants to jump into insurance, they’ll want a decent return. Can they find that in insurance?
There are a number of reasons why it might be a tough sell.
Ultra-low margins
Average insurance net margins are 3-8 percent, and 25-30 percent gross margins, which are meager for tech standards. Software companies average around 80 percent gross margins and around 15 percent net margins. Even consumer hardware like the iPhone — a costly endeavor by software standards — sees 55-60 percent gross margins.
Within insurance, health tends to have the highest margins, followed by property and casualty (i.e. home and auto insurance), followed by life insurance. So if anything, healthcare is probably the closest thing to “low-hanging fruit” — but it’s not exactly attractive to most companies outside insurance.
High risk
Such low margin also means that one major event can destroy a company’s balance sheet for an entire fiscal year (think disasters like hurricanes, fire, flood, etc.). In addition, tech companies don’t have the historical data and actuarial scientists that insurers have spent decades building up, so they might be more prone to misjudging their overall risk exposure.
Complex administration
For insurers, evaluating and underwriting policies is an expensive endeavor. Claims, customer support and back-end are costly and complex. That said, most insurance companies are already outsourcing the development of core administration software to companies like GuideWire and Duck Creek, and then customizing the software to meet their specific needs at the last mile. So it’s not as huge of a leap as it once was to think that the likes of Amazon or Google could develop similar infrastructure in-house to rival incumbent systems. Or, they could easily buy one of the development companies outright and subsume that expertise.
Amazon makes a big move
Still, the creation and underwriting of policies is something tech giants have avoided to date. Amazon has been working on warranties for certain products as an add-on to their margins — but these were backed and administered by The Warranty Group rather than Amazon itself. Before that, Amazon acted as a sales channel for SquareTrade and built up an understanding of the warranty business before diving in deeper. Tesla, as another example, announced it was selling Tesla-branded tailor-made policies for its vehicle owners, but those policies were backed by Liberty Mutual.
What role will tech giants in the U.S. play in the insurance landscape?
Then, in January, Amazon made a well-publicized announcement, in tandem with Berkshire Hathaway and JPMorgan, around its intention to create a private healthcare option for their workers. We don’t know much about the initiative, but Amazon has been working on a healthcare technology project codenamed 1492 for some time. Rumors point to a “platform for electronic medical record data, telemedicine, and health apps.” Amazon’s technology paired with Berkshire Hathaway’s insurance knowledge and JPMorgan’s financial expertise makes the creation of a new health insurance entity more likely. If so, this would be a significant shot across the bow of U.S. healthcare insurers.
Of all the tech giants, it would not be a surprise if Amazon were the first to jump into insurance. Amazon has mastered the art of building massive businesses off of razor-thin margins. They’re also targeting health insurance, which presents the best margin opportunity. They can test their offering within the company first and then scale across their massive consumer base. Finally, they have a history of building out complex back-end services for their own purposes before offering it to their customers — just look at AWS.
Will other tech companies follow Amazon’s lead?
Signs point to yes. Recently, Google’s sister company, Verily, “has been in talks with insurers about jointly bidding for contracts that would involve taking on risk for hundreds of thousands of patients.” In addition, Apple will be opening a network of medical clinics for its employees.
It may not stop at health insurance. There’s no question technology is changing human behavior and society, and as the developers of much of this new tech, FAAMG will inevitably be pushed closer to other sectors of insurance, as well, including home and auto.
Autonomous vehicle fleets will make companies like Tesla, Google and Uber the owners of tens of thousands of cars, subjecting them to the risk that comes with that. Meanwhile, IoT hardware and accompanying services are bringing tech giants into the living room. That’s a literal statement when it comes to Amazon Key. Nest, Google Home and Amazon Echo are more innocuous, but provide all sorts of data about what’s going on inside the home and could, someday, help inform the creation of real-time home insurance policies.
East Asia as a leading indicator?
It also can be instructive to look at markets outside the U.S. In East Asia, businesses are taking a more aggressive posture vis-à-vis insurance. Baidu, Alibaba, Rakuten, Tencent and LINE have all shown some level of appetite for offering their own insurance products. These companies can verify identities, enforce trust and access the behavioral and financial data necessary to provide better policies than many insurance incumbents in those countries.
They also are exploring new ways of looking at risk and changing user behavior: Tencent’s WeSure is paying users to stay healthy by walking more, while Yongqianbao, a lending company, tracks unconventional digital data to determine credit risk, such as phone brand (iPhone users are less likely to default) and whether they let their phone batteries run down.
Still, the question remains: What role will tech giants in the U.S. play in the insurance landscape? Will they act as a channel for existing insurers, as a provider of data and analytics to those insurers or even as a provider of direct insurance themselves?
Insurance may not be lucrative-enough for tech giants in the short-term, but as real-time data and analytics are used to create insurance policies, tech giants may be tempted to use their troves of data to compete with insurers directly. Until then, we can expect insurers and tech giants to form alliances, as they have in East Asia, with tech companies using insurance and warranties as a value-add for their customers, and insurers using tech companies as a sales channel. Regardless, the story of FAAMG (and others) in insurance is undoubtedly just getting started, and we’ll have to check back in as the landscape develops.
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The insurance tech equation
Insurance policies can be complex, and some policyholders may not understand all the fees and coverages included in a policy. Indeed, people typically buy policies on unfavorable terms. In 2014, two major insurers, Blue Shield and Cigna of California, were sued for misrepresentation of the coverage network, which caused delays for their consumers in accessing needed health care. Yet,… Read More
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