Insurance is a central concern for millions of Americans in 2020 — from those with homes threatened by the fires in California to those at risk of complications related to the pandemic. However, the industry is operating on 50-to-60-year-old backend office systems that limit its efficiencies. Customers across many different types of insurance are realizing that they aren’t getting the coverage they really need, and they are looking for more flexible solutions. Digital insurance is jumping in to fill this gap.
To explore the impact that COVID-19 has had on digital insurance, my colleague Phil Rist and I spoke with Jim Ferry, Vice President of Volition Capital, a growth equity firm that invests in software, Internet, and consumer companies, most notably in leading online pet food retailer, Chewy.com (Nasdaq: CHWY) before its acquisition by PetSmart and subsequent IPO. More recently, Jim and the team at Volition Capital led an investment round in ButterflyMX, a provider of smart home technology, primarily for multifamily residential, and building owners and managers.
Taking into account Jim’s investment experience and expertise in transactional Internet applications, and specifically digital insurance trends, we analyzed data from Prosper Insights & Analytics annual Media Behaviors & Influence study of 16,000+ adults. We also explored data from Prosper’s October Survey of 7,600+ adults to get a sense for how American consumers were handling the pandemic.
Gary Drenik: We’ve seen a lot of innovation across industries during the pandemic. For context, could you give us an overview of where digital insurance stands next to, say, digital banking, for instance?
Jim Ferry: The pandemic certainly has spurred much digital innovation. We’ve seen roughly 10 years of digital acceleration in only a few short months. When it comes to digital banking, the industry had a bit of a head start. For instance, in the Prosper October Survey, 56% of millennials were already using their smartphones to conduct online banking. Even in less digitally native generations such as baby boomers, over 37% were using mobile banking. Another survey cited by eMarketer indicates that a remarkable 73% of Americans were more likely to leverage digital banking during the pandemic, but this number has certainly increased.
Digital insurance, by contrast, has traditionally lagged behind. According to a report by The Economist Intelligence Unit, only 35% of insurers could process a transaction digitally before the pandemic. Before they can begin to process online transactions, many are still in the process of updating archaic backend systems. One driving factor behind this historical lack of innovation is that legacy carriers in the insurance industry are generally risk averse. This has led to them avoiding adopting new technologies and choosing instead to cling to less flexible processes. Additionally, a lack of competition has led to complacency. Ultimately, however, the pandemic has forced the industry to rapidly adapt, and we’re starting to see widespread digital adoption.
Drenik: Can you talk more about this complacency? How has it impacted consumers?
Ferry: It really comes down to customer experience. According to the DXC Insurance Consumer Survey Report, 57% of consumers ages 18-44 believe their carrier needs to improve the user experience online. That same report found that regardless of the insurance category, 60%+ found the claims process to be at least somewhat complex.
This has resulted in a high degree of churn in some insurance categories. For instance, according to Prosper’s annual Media Behaviors & Influence study, over 28% of Americans planned to switch auto insurance in the next 12 months. Only renter’s insurance was in the single digits at just under 6% churn.
This is fairly interesting data because of the recent IPO from digital insurance company, Lemonade (NYSE: LMND), which saw its target price more than double on the first day of trading and a market cap of $3.8 billion. Despite this validation, Lemonade’s main category of renter’s insurance is a smaller overall category, so it sees fewer Americans switching. Even so, it’s a simple type of insurance to sell online. Unlike health insurance it does not require a medical exam, and unlike auto insurance it does not require evaluation of driving records and other data points. Despite the digital advantages of renter’s insurance, Lemonade’s net written premiums only equate to .2% of State Farm’s, and much of its hype comes from the fact that many people predict it will be able to move into other categories of insurance and bundle coverage in the future.
Drenik: Despite this incumbent advantage, certainly younger demographics are more likely to adopt digital insurance solutions. What role does age demographic play in an individual’s likelihood to switch insurance providers?
Ferry: It’s certainly a large factor. Younger demographics still tend to be more comfortable with digital technologies, making them more likely to embrace newer solutions. According to Prosper’s annual Media Behaviors & Influence study, there are particularly large demographic differences in the auto, health, and life insurance categories.
It should be noted that it’s easier to build customer trust in digital solutions for annual insurance policies such as auto as opposed to life insurance where a customer needs to feel confident that a startup will succeed and be operating many years down the line.
Early startups that might appeal to younger demographics are also not mature enough to truly understand what their long-term retention and unit economics will look like. Because these digital insurance companies allow for fast purchases, there will undoubtedly be some customers that purchase online for proof of insurance and churn quickly depending on the type of insurance.
Drenik: So how can digital insurance startups differentiate themselves from legacy players?
Ferry: They really have two options: price or branding. When it comes to branding, the legacy players have a huge advantage. For P&C, Geico and Progressive each have marketing budgets of $1B+ annually according to AdAge’s 2020 Fact Pack, with a focus on both customer acquisition and retention.
Price remains the largest factor influencing loyalty. The DXC Insurance Consumer Survey Report highlights that 54% of Americans think that insurance companies charge too much, and 67% said lower premiums would make them more loyal to their provider. Almost every carrier has some marketing indicating that customers who switched saved a certain percentage off their previous premiums, so digital startups must be able to explain how and why their savings add more value.
Emphasizing how technology can reduce premiums is one way to stand out. A large portion of costs during claims processing is due to human intervention. The use of technology to quickly settle claims such as Snapsheet can remove the cost barriers to enable cheaper premiums. Another option is a model such as parametric payouts where certain events trigger a claims payout, removing the cost and time of claims processing.
Instant digital processes and customer satisfaction are closely related, and satisfied customers are significantly more likely to refer others to the company. As a result, many digitally native insurances startups have remarkably higher net promoter scores (NPS) than traditional insurance providers, indicating the quality of their services. For instance, Lemonade’s NPS is double that of traditional homeowner’s carriers. This has huge consequences, as McKinsey found that word of mouth referrals account for 20-50% of all purchasing decisions, making digital claims processing key to organic customer acquisition.
Another way to stand out is through advanced targeting. When competing against less technologically nimble competitors, direct mail can be an effective tool to segment the market while abiding by the regulatory laws across all 50 states. This is something that Volition Capital saw with Chewy.com, which was able to personalize its communication with customers to great effect. Its customer service once went viral after sending a customer a painting of his dog with an encouraging note after he had been forced to put it down.
What we love about the insurance industry is that it has this service aspect to it. It’s not purely a transaction business. If you can create value through lower costs with higher intensive service experiences, that marriage can create defensibility in the market. Legacy insurance providers must adapt, or they will face continued disruption as consumers grow accustomed to the reduced prices and drastically better service from digitally native startups.
Drenik: That’s a touching story, and digital insurance really does seem to have the opportunity to make a difference in customers’ lives if they focus on that personalized service. Thank you for your expertise, and I’m looking forward to when my premiums go down as a result of digital innovation!
To stay ahead of the post-pandemic consumer, Prosper’s US Signals series of datasets include leading indicators and advanced predictive analytics covering forward looking consumer spending plans, behaviors and economic outlook:
To read my previous Forbes articles on changing consumer behavior, predictive analytics, machine learning, data privacy and more, please click here.