Uber Technologies Inc. announced its first quarterly results as a public company with an operating loss of over $5 billion in the quarter. The company is emblematic of the growth-at-all-costs model that has been behind the strategies of a number of tech firms in the last decade. The CEO, Dara Khosrowshahi, assures investors the company will become profitable. 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 ridesharing to such an extent that they dump their cars and public transportation. Then Uber can raise prices for its services on the now-captive audience.
Executive SummaryInsurTechs will face some obstacles if they try to follow Uber’s strategy—one that hinges on the ridesharing company gaining both market share and mind share with customers, according to Phil Edmundson, the CEO of Corvus. Here, Edmundson outlines three points of friction that companies may face when pursuing similar strategies in the world of insurance.
Notwithstanding the market negative reaction this month, along Uber’s journey many investors have appeared willing to ride out the losses it takes to gain not just market share but also 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.
So, the question isn’t whether that model is being used among InsurTechs or if it’s succeeding in creating the conditions for growth in visibility and market share for those deploying it. The questions now are whether the model will work long term; if it can, or should, be replicated by others; or if it will be revealed to be a mistaken reading of the market dynamics of insurance.
Only time will truly tell, but there are a few points of friction companies may encounter when pursuing such a strategy in insurance. Here are three.
- Reinsurance participation
First, there’s reinsurance. Will the reinsurers of these InsurTechs play along with the growth model? Surely they aren’t going to turn down a piece of the action—at least at first. But their participation is likely conditional on a plan of future increased pricing and the implementation of long-term, one-way commitments on their reinsurance arrangements with these cedents. How long will they wait for profitability, and what will be the price of their patience?
Just like with Uber, the bet is that policyholders will find their new experience to be superior and will not notice, or will tolerate, progressively higher prices after having made the switch from incumbents. With one-way agreements, though, the reinsurers could have an “out” if the promised profits do not develop fast enough. If InsurTechs find that their customers will not tolerate price increases and prolong their loss-making price model, reinsurers may pull their agreements and the entire model could break down.
Next is whether the model can expand into the $1 trillion-plus commercial insurance market. For very simple insurance contracts like small workers compensation or BOP policies, it’s easy to see how the model can work. But the market for midsize and larger commercial insurance is very efficient, leaving less room for playing games with pricing.
Part of that is due to the role of 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, 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 lowball and then jack up your prices, and brokers will move their business back to one of the dozens of incumbents.
In a market with this much competition, it’s unlikely that a single company will be able to attain the level of market domination required for the Uber model to pay off.
- Low switching costs
Third, in personal lines, where many of the “first generation” InsurTech companies have focused their development, there remains a potential conflict between the Uber model and the nature of the insurance purchasing cycle. Uber seeks to become part of the fabric of the everyday lives of its customers, with customers ideally interacting with Uber products one, two, three or more times every day. If achieved, Uber would be so embedded in its customers’ lives that price increases—however unwelcome they are—would be tolerated. Like rising gas prices, they’d be something to gripe about. But what’s the alternative?
On the other hand, personal lines insurance like auto and home, despite the best efforts of insurers to provide value-added services throughout the policy year, will struggle to become so central to the lives of their customers. It’s hard to imagine a customer seeing a large rise in premium and shrugging it off because they love the application or claims process—things they hope not to use frequently or ever. There is still a rich market of options from incumbent companies, who are doing their best to keep up with digital experiences like those produced by InsurTechs. If price is no longer a differentiator, InsurTechs may find it difficult to retain their early customers.
Will It Work Anyway?
The Uber model may yet work out for some of these new entrants. There could be new types of products, or new sources of value for policyholders, that the industry has not yet considered. This could vault companies over the pitfalls mentioned here. That’s what makes InsurTech exciting.
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 we are not the cheapest in the market, then that is the sweet spot we want to be in.