Tech Startups Are Prodding the Dinosaur That Is the Insurance Industry
Here’s a sentence you don’t read every day: Insurance is so hot right now.
Entrepreneurs and investors have finally woken up to the opportunity in the insurance industry. At $831.5 million, investment in insurance tech this year is already up nearly 10 times what it was in 2010.
The opportunity has been staring entrepreneurs and investors in the face for years. The first insurance companies in the U.S. were started in the 1700s, and that cottage industry has grown into one of the biggest markets and sources of capital in the world. Premiums in the U.S. insurance industry total around $1 trillion, or approximately 7 percent of gross domestic product. On top of that, insurance companies invest nearly $7 trillion in assets.
And here’s the kicker about all that insurance money -- it’s generated by millions of agents, with lots of paper, in processes that look much the same way they did 30 years ago.
In my previous life as a McKinsey consultant, I advised the top insurance companies on projects that were, at their core, incremental. They were always about increasing the productivity of the agent-based sales force, or improving the efficiency of paper-based claims operations. In other words, what I was doing was putting the dinosaur on a diet and prodding it with a stick. What needed to be done was bring a whole new breed of animal into the insurance game.
So I left McKinsey in 2013 to do just that and started a digital consumer insurance company, PolicyGenius. At PolicyGenius, we want to do for consumer insurance what TurboTax did for taxes: Make a complex and intimidating financial task easy enough to do it yourself online.
While raising seed capital for my insurance tech company last year, the most common question I got from prospective investors was, “Why is now the right time for tech to disrupt insurance?” The obvious answer for those unfamiliar with the insurance industry is the Affordable Care Act, which was signed into law in 2010. The law created exactly the kind of macro shakeup that attracts entrepreneurs. Indeed, since 2010, 56 percent of all insurance tech startups are focused on health insurance, either delivering new employer brokerage models (Liazon, Zenefits, Benefitter), new consumer brokerage models (Gravie, Stride Health) or even new health insurance (Oscar). These startups are pushing the brick-and-mortar incumbents to deliver better services and providing much-needed options to consumers.
Beyond the Affordable Care Act, there are other forces at work that have opened the floodgates, allowing creative entrepreneurs to reshape the insurance industry more broadly. These are the market disruptions I see:
1. The end of an era
Americans used to rely on their employers for retirement security. After 20 years of service, you’d get a gold watch and a pension to fund your sunset years. Then, in the 1980s, growing pension costs and a legislative change replaced the corporate pension with the 401(k) and gave rise to the modern retail investment and retirement industry.
That shift -- from employer to consumer responsibility -- is exactly what’s about to happen to insurance. Employer-sponsored insurance is the legacy of an IRS ruling after World War II that allowed employers to deduct employee health insurance as a business expense and employees to receive that benefit as nontaxable income. Sixty years later, we have a sprawling and bloated system, where the extra employer layer adds billions of dollars of cost and empowers employers to make intrusive decisions about their employees’ healthcare. Add to that, the cost of health insurance premiums growing at four times inflation and workers changing employers far more often than they did 60 years ago, and you have a system that’s going to break.
The cracks are already showing. The number of workers at small and medium-sized companies who get employer-sponsored health insurance has steadily declined since 2000. The CEO of Aetna has called for the creative destruction of healthcare and taking the employer out of the health insurance equation. Startups that can effectively step into that employer insurance void, the same way companies like Fidelity and Schwab stepped into the employer pension void, will enjoy a massive opportunity.
2. A changing workforce
It’s no secret that the workforce is rapidly changing. The average worker changes employers every 4.6 years. And, more disruptively for insurance, more workers are finding themselves outside the typical employer relationship. Spurred by on-demand services like Uber and countless “Uber for X” startups, freelancers and independent contractors are projected to grow from 42 million people to 65 million in the next 5 years.
These workers need individual insurance (like health, disability and life) and business insurance (liability and property). Insurance companies, and the traditional insurance agent model, are ill-suited to serve the self-employed and provide them with the advice and products they need to financially protect themselves and their families.
Ask 100 freelancers how they navigate the insurance maze and they’ll all say same thing -- with tremendous difficulty. Easing that difficulty for them represents a tremendous opportunity.
3. An aging sales force
Most insurance in the U.S. is still sold by human agents, same as it’s always been. But it won’t be for long. The average age of an insurance agent in the U.S. is 59, and one-fourth of the industry’s workforce is expected to retire by 2018. In other words, insurance companies are standing on a burning platform. And they’re already starting to feel the heat.
For example, life insurance ownership is at a 50-year low, not because the need has changed -- in fact there’s a $20 trillion life insurance gap, but because the agent sales channel can’t reach the modern financial consumer. To their credit, insurance companies realize this reality, but the fact of the matter is that they can’t move as fast as startups can. So they’re investing in startups.
Insurance companies have dramatically increased their direct investments in tech startups to the tune of $1.8 billion since 2010. Much of this investment has gone to the first waves of financial technology: lending (Prosper) and wealth management (Learnvest, Betterment). But talk to any insurance company directly investing in startups, and you’ll learn that they’re hammers in search of nails, that is, smart entrepreneurs tackling the fundamental problems in insurance.
4. Unmet need
Finally, and most importantly for a mission-driven company, there is a tremendous unmet need for insurance in the U.S. According to a recent survey by the Federal Reserve, 47 percent of households couldn’t cover an emergency expense of $400. Insurance is intended to fill in this savings void for unpredictable emergencies. However, too many Americans have low savings and inadequate insurance, which leads to financial disaster. For example, health problems and disability contributed to half of all home foreclosure filings and over 60 percent of all personal bankruptcy filings. It’s not easy or sexy to sell insurance to middle America, but it’s an important problem to solve -- and the first company to do it will be huge.
These are the tailwinds that made me excited about insurance tech two years ago and which continue to drive my company forward. We recently closed a $5.3 million Series A round, which included the participation of insurance companies’ venture arms, including AXA Strategic Ventures and Transamerica Ventures. We, and our insurance partners, are excited to make insurance the next big thing in tech.