Listen: Next in Tech | Episode 73: Interesting times in insurance technology

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Eric Hanselman

Welcome to Next in Tech, S&P Global Market Intelligence podcast with the world of Emerging Tech lids. I'm your host, Eric Hanselman, Chief Analyst for the 451 Research arm of S&P Global Market Intelligence. And today, we'll be discussing insurance technology with Thomas Mason, senior analyst for our team. Tom, welcome to the podcast.

Thomas Mason

Well, thanks for having me.

Eric Hanselman

Well, thanks for being on. And especially in an area we've touched on in the past, [indiscernible] was on last fall, talking about some of the tech aspects of this. And I wanted to get back into this because there's a lot that's been going on, the market's really advanced a bit, but there's also been a lot of upheaval that's taking place in the market itself. I'm sort of curious in terms of where InsurTech is in the market. U.S. InsurTech start-ups that have gone public in the recent past have been hit with a lot of this turbulence that exists in the market and some are way off their original offering prices. So what are your thoughts about what's driving that?

Thomas Mason

Yes. So it's a pretty interesting time right now. I'd say that InsurTech for years tried to emphasize how tech forward they were, which is kind of ironic now, and that it seems like tech stocks are selling off because I would say the main culprit is really rising interest rates, causing investors all across the board to reevaluate their portfolios and try derisk them. So I think tech stocks are, given that they're not profitable and that they have had high PE ratios, I think that a lot of investors are selling off not only growth stocks but particularly tech stocks.

Eric Hanselman

So they're being colored by those same sort of concerns about tech stocks in general.

Thomas Mason

Yes, exactly. And I think that we might start to see InsurTech sort of change their branding a bit and say, actually, maybe we're not as techy as we thought or maybe a little bit more insurance.

Eric Hanselman

Really, really, we're focused on insurance, not tech. Well, so how are they responding? This is you talk about sort of rebranding, maybe refocus. What's -- how do they step through this?

Thomas Mason

Yes. So I think it's really interesting to watch because it seems like a real sort of paradigm shift from the Silicon Valley playbook typically, which would be what's known as rapid scaling. So you try to come in really strong and grow the company as quickly as possible, and you could tolerate years of losses. I mean, like an Amazon was unprofitable for years at Uber. And that would even -- so venture capitalists, VC firms would definitely tolerate losses for years. And then I think the idea was that even the public market will be willing to exchange a lack of profitability for very strong growth. But I think that a lot of companies now, given that they're just getting their stocks pummeled in the public market are going to try really hard to become profitable, which is -- yes, it's been a real change.

Eric Hanselman

Well, you're actually echoing the kind of things that we've been talking about actually in the last few episodes, which is this real significant change in sentiment. As you're saying, there's a lot less appetite for the grow fast at all costs, not worrying about any of the profitability issues, free cash flow, any of those sort of traditional metrics. And now when things have backed off a little bit in the macroeconomic sense, now there's a refocusing in terms of ensuring that you actually do have something that's actually going to help out and something that's really going to pan out well.

I guess, I'm curious when [indiscernible], we were talking about some of the pieces about the technology aspects, not to get back into the tech, which seems to fall on a market favor, but to think about some of the technology pieces. I mean, one of the things we talked about was how analytics and ML were helping insurance companies to move beyond just the limitations of actuarial data, particularly in areas where there isn't a lot of actuarial data just simply because there isn't a lot of history in some of those subject areas and presenting challenges and moving beyond those challenges for insurance businesses?

Thomas Mason

Yes. So I actually think that even though InsurTech particularly tried to become profitable, I don't think they'll really pull back on their tech spend too much. I think their advertising budgets might get significantly. But tech really isn't -- I wouldn't say like it's not an overwhelming expense item for a lot of these InsurTech stocks. And I think that a lot of the technologies they've come up with can actually lower expenses for them. So like Lemonade is a classic example where they created chatbots, Maya and I'm trying to remember [indiscernible], I think, may -- but these chatbots that can actually handle claims for you, so you could just text this chatbot and tell them that you're in an accident, then they would actually handle claims.

I think InsurTech also are very good about using alternative data, so like telematics sort of those devices that monitor how you're driving like Snapshot. And they pull in all sorts of data, which is not a very expensive thing to do, but actually yields a lot of additional savings in terms of those actual models you can build, just like you were saying. And particularly because regulators seem to be more open to insurers using machine learning methods. So that's what something I found pretty interesting as well. It seems like regulators are getting more comfortable with the idea that maybe you can't always explain what the model is doing.

And then, yes, I'd say other like really hot topics for InsurTech's right now are fast quoting. So some companies advertise they can give you a quote in 10 seconds, whereas GEICO is always like 15 minutes. So -- and that's going to be key.

Eric Hanselman

Moving down, orders of magnitude.

Thomas Mason

Yes, exactly.

Eric Hanselman

You don't actually have to have reptiles onboard in order to help you move faster. So...

Thomas Mason

Yes. Maybe at some point, they'll just know you want insurance before you even contact though.

Eric Hanselman

Yes. Hopefully, we're not getting into sort of minority report territory. Just like, "Oh, yes, you really -- you should have insurance."

Thomas Mason

Yes. And then that I think was a really hot topic, embedded insurance, where you would be able to say you wanted to use Airbnb and you wanted to get travel insurance. You could embed the actual insurance in part of the checkout process for whatever it is you're buying.

Eric Hanselman

So something like -- and we've gotten used to seeing that for travel insurance for airline tickets, for example...

Thomas Mason

Yes, exactly.

Eric Hanselman

But to expand that into a whole range of other offerings.

Thomas Mason

Yes, it really is like Sky's limit, anything you could purchase online. So I think you've seen InsurTech called Root try to -- so they lined up this partnership with Carvana where if buying used cars online really takes off, that could be potentially lucrative.

Eric Hanselman

Oh, wow. So that winds up being yet another new avenue. We've talked -- it's actually just the last couple of episodes, we're talking about the payments industry and how the merchants are looking to integrate and embed and, in many cases, actually own some of the financing pieces. And yet now here's another option with insurance capabilities that they could wrap into that purchase process as well.

Thomas Mason

Yes, exactly. And I think that a lot of people have had this idea for years, but it was a bit [indiscernible] by how long it took to get quotes. So I think a lot of the tech companies that, the ones that were selling actual items like the Carvanas, they were a little hesitant because they were like, well, we want this checkout process to be really quick. And if your insurance quote takes like a few days to arrive, then that's just not going to...

Eric Hanselman

Yes, they don't want to put the car sale on hold if the insurance is going to be an issue. So...

Thomas Mason

But then one of the things I think like really long term is sort of like crazy ideas of like, for instance, like if Tesla's car could just buy insurance for itself, like really automation way out there.

Eric Hanselman

You want to get off SkyNet here. But -- well, it raises interesting questions about the fact that we've seen insurance as a discrete product. It's been something that's really been separate. You go out, you buy whatever the thing is, you get insurance for it separately, but that integration now starts to offer some potential opportunities to have tighter connections, better binding. Again, one of these things that we love in tech is that integration capability to bring this all together?

Thomas Mason

Yes, exactly. And I think as any tech company, it's really about removing the friction in any kind of process. And I think it really would benefit insurance because it's not a product that people typically love buying. So if you could make it -- if you could somehow attach it to something fun like an iPhone, then it might make it easier for customers to swallow.

Eric Hanselman

Easier to get together. It's one of those things that -- I guess there are other aspects that we talked about, various large merchants bringing in payment capabilities and actually taking on that risk themselves. So for example, Apple getting into buy now, pay later. But that's going to be a much larger issue or a much more complicated thing to do, I guess. When you think about that disintermediation that a large tech could -- company could do, I mean it seems like that's the kind of thing that the insurance market is just -- is hard to disrupt because of regulatory pieces. And I guess there are other aspects as well that really would be difficult for even large merchants to take on their own.

Thomas Mason

Yes. I -- so a lot of people ask that question, like what's stopping the big tech firms from just taking over this market? And I personally think that, like you said, the regulatory aspect is a huge differentiator for any insurance company or InsurTech start-up. I mean you could even sell that to companies that want to start selling their own sort of white-labeled insurance. You could say like we'll handle going to all 50 states and filing documents for you because there's no federal regulator for the industry. So it really is -- I think it would be difficult to add probably just not worth the time of Google, which actually started a price comparison site years ago, but shut down.

Eric Hanselman

Again, something where I guess you can be the front end of the market, but actually taking on the business itself is going to be a little more complicated.

Thomas Mason

Yes, exactly. And it's a very capital-intensive business since you have to pay out claims. So I don't know if the big tech companies would be okay with basically setting aside all of that cash just to -- just in the event that something bad happens.

Eric Hanselman

Well, okay. So if it is that level of capital intensive, I mean, for startups, I mean the publicly traded InsurTech stocks are hitting significant losses or earnings losses. But if it's -- what about underwriting? I mean, is that the issue that they're running into? I mean, again, you've got to have large set of sides to be able to handle claims. But how are they doing on that front?

Thomas Mason

Yes. So there's -- we split the InsurTech space up into a couple of categories. So those are definitely the -- what we would consider underwriters or carriers, and we call those full stack companies in the InsurTech space because they basically do everything. And those are the ones that are very capital intensive. They have to pay out claims.

There are also digital agencies, which might be -- they might just write policies or essentially sell policies for an underwriter or they might be the price comparison sites like a Policygenius or insurance Zebra. And then we also have what we call B2B solutions, which is essentially just any kind of company -- any kind of tech company that provides software to the insurance industry or some kind of service like, for instance, like satellite imagery or something for insurers to use.

Anyway, so getting back, but the full stack companies, I think, are probably really in focus right now because, as you said, are they at risk of running up too much losses and will that be sort of a solvency risk for the industry, which I don't think is really a problem right now. But all across the industry, we've seen, I think, expense reduction in terms of headcount. So we've been seeing lots of layoffs. And then I think going forward, we'll probably see them pull back on their advertising budgets a lot, which tends to be a really big expense item for tech companies.

Eric Hanselman

Yes. Well, and headcount reduction, as you're identifying, if they're putting a lot of automation in place, if they're starting to shift to chatbots, if they're doing more automated claims processing, quote origination or quote policy origination, those sorts of things, automation is going to help with that. And unfortunately, the downside is going to be headcount reduction.

Thomas Mason

Yes. Plus we've seen -- we saw just a huge increase in headcount at a lot of these companies in the past few years. So I think this might be sort of a natural rightsizing for the industry. And perhaps, yes, as you said, if automation continues, then this might be -- yes, it might just be getting ahead of the issue earlier.

Eric Hanselman

The market shaking itself out. Although, I guess, are there parallels that -- I mean, is this something that's gotten so frothy that -- are we looking sort of back into the google.com kinds of days for any of these in terms of sort of what we see in the market today?

Thomas Mason

Yes. I mean it's -- I think that's probably the best parallel to draw. You could look at 2008 in terms of just a really bad economic time if we head into a recession that bad. But I think, yes, the dot-com era was probably the best example we have where these -- it's sort of the same dynamics that happened back then, too. So I'd say, really, one of the best case studies was Esurance where after the bubble burst, they had to go out. They were writing with Argonaut and insure at the time, and they had to go out and immediately finds an emergency buyer company called White Mountains. And they -- White Mountains paid only $9 million for a majority stake in 2000. And fast forward 11 years and White Mountain sells Esurance to Allstate for $1 billion.

Eric Hanselman

So not bad in terms of their ability to both identify the opportunity and then turn it around. But I guess a lot of that is really -- they were early enough in the business that they really established a lot of that early InsurTech operating ideas and especially when you look at an exit to a large insurer like that really sort of speaks to that market maturing pretty significantly.

Thomas Mason

Yes. And I think that you'll see more of that. So I think if this cycle continues, you probably will see incumbents like White Mountains come in and swoop in and buy up all these, whether it's the tech or the whole company itself, for pretty cheap. And I think it's important for the startups to make sure that they have enough capital to survive and then also to preserve any relationships that they have with incumbents like that.

So back in the dot-com era too, there is a company called InsWeb, and they were more of a policy comparison type site. But once they lost State Farm on their site, their stocks just basically collapsed.

Eric Hanselman

So you've got to be able to manage those relationships, ensure that, in fact, that you're going to be able to play in the market more broadly. And I guess that really is a matter of balancing what your competitive positioning is, making sure that you're also able to play well with others in the process.

Thomas Mason

Exactly.

Eric Hanselman

So -- well, you're saying that basically underwriting seems to be in reasonably good shape. You're not seeing heavy losses. Are there other things that InsurTech companies should be looking at and how they should be managing it? And I guess, actually, we're going to extend that to what other organizations should be thinking about how they interact with InsurTech.

Thomas Mason

Yes. So I should clarify that there are some companies that have pretty bad underwriting losses.

Eric Hanselman

Not all those...

Thomas Mason

No. But yes, I think so. So I think several of the startups could turn things around, particularly if their underwriting is in good shape. But I think as we enter just for the insurance industry more broadly, I think what they'll probably have to do is preserve capital, which all ensures a lot to do in a recession, all companies will have to do in a recession. And that might be, as we were saying find larger incumbents that can either bail you out or acquire you or maybe give you some -- like a credit facility. And then I think, yes, preserving those relationships, as we said.

I think for insurance companies, the full stack ones, they'll have to tighten their underwriting, get claims under control and push for rate increases. So I guess yes, like sort of the analog to the broader industry would like get expenses under control and try to pull back on just things that really don't drive profitability for the company.

But then for insurance, what's also kind of interesting is that a lot of them make money from their investment portfolios. So Buffet being a classic example. But -- so I think one of the bright sides or silver linings for them is that higher interest rates should help with their portfolio yields. So they should be making a little bit more on that side.

Eric Hanselman

So an interesting countertrend. We've talked about a lot of the pressures that higher interest rates are putting on a lot of the core aspects of technology markets, but this is something where those higher interest rates are actually going to help yield. So you're going to wind up with portfolios that are more valuable and build your back end, so that you actually are a bit more robust from the financial side.

Thomas Mason

Yes. And inflation, while generally not really a good thing for anyone, it could force more customers to shop around for a better price on their insurance policy. But I think, generally speaking, inflation is pretty bad.

Eric Hanselman

I think we can agree on that broadly.

Thomas Mason

I'm going to go out in whim and say...

Eric Hanselman

Well, but you raised an interesting point there, which is that it is going to mean that there's going to be more price comparisons. You are going to be looking at consumers who are going to be looking at potentially shifting carriers. So that's something that might be an option or might open the door for InsurTech to be able to garner more business, or at least if we've got people who are looking around, maybe that kind of churn would at least present opportunities for them.

Thomas Mason

Yes. And then one of the things we saw from the 2008 crisis was that people tend to keep paying their auto policies, their private auto policies. So even when people lost their houses, they would keep paying their auto insurance, which I found pretty interesting.

Eric Hanselman

Yes. Well, it's -- again, you got to get to work if you don't have options or other transportation options. So that's -- it is one of those basic needs, and you may be able to replace housing or you may be able to shift in housing in ways that you might not in terms of what your transportation requirements are?

Well, it'd be interesting to see how the tech aspects of insurance are beginning to help them weather this market and see what happens because kind of it seems like if you've got the ability to get policies or get quotes in customers' hands more rapidly, if you've got the ability to be able to understand the market better, maybe a little machine learning to help you figure that out, hopefully, that makes you a little more profitable as well.

So it's interesting to see where this market is headed for organizations that are looking at the insurance market more broadly, enterprises that maybe want to integrate insurance capabilities. What should they be looking out for? And what should they be doing to size up the insurance market and look at potential integration. So you're talking about potentially bringing them into the purchase process in greater detail. But what should organizations be looking for?

Thomas Mason

Yes. That's one of the things I find pretty interesting too is that we've seen companies outside of insurance, starting up their own insurance operations. So a company called Outdoors, a new insurance of recreational vehicles, started an insurance brokerage. And then a company called Porch, which focuses on all sorts of like homeowners type services, they actually started their own carrier and their own insurance brokerage.

So I think for them, it's really trying to get a -- trying to learn how the business really works. So whether it's pushing for rate increases, which is the amount that you have to charge customers for policies, that could be really important because if you underprice policies, it's going to create huge problems in the long run. And some insurance companies even pull out of states entirely because they just don't think they can get enough money back from what they're charging customers because the regulators, as we were talking about, might crack down on you and say -- if you say we need to raise prices by 50%, the regulator might say no, and you can only raise them by 10%.

Eric Hanselman

But that's something that we've seen in our information security team and conversations we've had on earlier episodes, which is a pullback in cyber insurance because it looked like insurers got out over their skis, but something hopefully that won't be something that will affect the InsurTech that we're looking at today.

Well, this has been really interesting. I appreciate all the perspectives, but we are coming up on time. So thank you for being here.

Thomas Mason

Yes. Thanks for having me.

Eric Hanselman

And that is it for this episode of Next in Tech. Thanks to our audience for staying with us. And thanks to our production team, including Caroline Wright, Caterina Iacoviello, Ethan Zimman on the Marketing & Events team and our studio lead, Kyle Cangialosi.

I hope you'll join us for our next episode where we're going to be talking about digital decision-making and some recent data that's come out from the voice of the enterprise studies talking about what organizations are looking at with James Curtis. So I hope you'll join us then because there is always something Next in Tech.