I was watching a conference session recently where a group of InsurTech startups were being interviewed about their perspective on the industry and the role that InsureTech is playing. A memorable question was asked of the panelists: How many InsurTech startups are going to fail? Almost before the question left the moderator's mouth, one of the panelists blurted out, "Almost all of them." Despite the massive amount of money being poured into InsurTechs, there are some clear signs of potential failure. Here are six of them:
- Lack of knowledge of the insurance business. While there is tremendous advantage to coming in with a fresh eye and seeing the gaps that insiders have become blind to, there is danger in not understanding some of the structural nuances of the business — especially from a regulatory aspect. I've had startups call me to get my thoughts about their idea and have had to say "Great idea. You know that's illegal right?" And then after explaining little things like Departments of Insurance and regulatory requirements, had the start-up say "That is sooo unfair!" If you're going to focus on the insurance industry, you really need to have SOMEBODY on the team who knows something about it.
- Lack of understanding of the economics of insurance. Here's the reality. You just can't charge as much for your product as you might think. There isn't enough margin. Here's an example. Let's say you're addressing the homeowners' market. Average premium per policy nationwide is less than $1000. With a combined ratio of around 95, that leaves $50 of profit. Now the startups want to come in and charge $20 for their device? They're taking 40% of the insurers profit. And the cost to the vendor isn't the only cost. The carrier will have to implement the product, which may involve technology expenses, marketing expenses or training expense on top of the $20. Unless they can truly demonstrate that they can generate reduced losses or expenses on the overall book of business, not just a few accounts that have losses, in order to make up that huge dip into the profit, there is just no way to justify that kind of investment. And of course, startups just don't have the data or the history. So coming in and saying we promise we'll reduce your losses, and our product is worth it… is a bit of a pipedream.
- Failure to recognize that the cost-benefit analysis (CBA) is a long-term return for a carrier. So suppose you have the most amazing product that will reduce losses. The carrier has to spend money day one to get the product, has to spend money to get the product ready for implementation and then will have a roll out plan that probably starts with a pilot and then a staged roll out. Once that roll out happens, they have to sit and wait for the losses to occur that your product will reduce. It takes time for there to be a critical mass of benefit to overcome the day one costs. Not every carrier has an appetite for long term CBAs on unproven solutions. By the way, if you're interested in learning more about how the industry thinks about this, check out Jamie MacGregor's report, "Finding Value in Insurtech, Part 1: Predicting Time-to-Value."
- Running out of cash. All startups face the worry of running out of runway. My last startup did (although it was a brilliant idea). The insurance industry doesn't buy quickly. Sales cycles even on established products can run 18 months or longer.
- The product isn't actually any better than what is out there already. You hope that all these InsureTech startups are actually going to be cool and disruptive… or even just better. But we see a lot that just aren't, especially in the area of distribution. If you're rolling out an online direct sales site that works just like the ones I did back in the late 90's but with a cooler UI, you haven't really changed the game. If you're placing your bets on buying traffic or Search Engine Optimization, that will run out.
- Investors don't understand the industry. When I was raising funds for some of the four startups I have been involved in, my team and I would talk about smart money v. dumb money. Of course, if you're running out of runway, all money looks smart. But smart money comes with investors who understand the business and can help you with connections, advice, and insights to help you cross the hurdles. Dumb money is just money — and often is worse than dumb if they don't understand the sales cycle in the insurance industry. Dumb money may push you down a path that isn't the best for your business because they're looking for the short term returns and don't understand that this is a longer term game than straight consumer plays.
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