Tech firms selling insurance: 'Do you want fries with that?'

Elon Musk, electric car inventor, space explorer, social media juggernaut and… insurance salesman?

It sounds unlikely, but it’s true.

Tesla has entered the auto insurance market to sell policies directly to vehicle buyers. Musk also announced that Tesla plans to make a few strategic acquisitions of existing insurance companies and build out its own insurance software. While the details are still under wraps, Tesla is already offering insurance in Arizona, California, Illinois, Ohio and Texas with plans to expand to Oregon and Virginia.

Why would a future-obsessed tech manufacturer decide to leap into one of the world’s oldest industries?

For starters, the revenue. In 2020, Musk declared that auto insurance could make up between 30% and 40% of Tesla’s car business. When you think about it, offering an insurance policy at the time of purchase to a Tesla driver is an easy upsell. It’s the equivalent of the fast-food worker at the drive-thru window asking, “Do you want fries with that?”

Secondly, traditional auto insurance carriers have raised premiums for Tesla drivers, reportedly causing Musk great frustration. The industry’s decision to charge Tesla drivers more is based on Highway Loss Data Institute research that indicated Tesla’s Model S and Model X vehicles have high claim frequencies and steep insurance claims costs. Musk may be looking for a way to tamp down those costs. What better way than to set the policy rates himself?

Tesla is only the latest example of a company that’s most definitely not an agency or brokerage getting into the insurance business.

Last year, AirBnB introduced a new risk product, AirCover, for hosts using its platform. It was designed to encourage more hosts to join the platform by guaranteeing coverage for any damage or issues caused by guests, including pet damage.

In May 2022, Airbnb expanded AirCover to include policies for guests. The policy will cover guests against host cancellations and check-in issues, and policyholders have access to a 24/7 Safety Line. The policies can be purchased at the time the guest books the property. This is but another example of upselling policies to a captive audience.

The opportunity for independently-owned agencies and MGAs

This emerging trend may be the source of anxiety for independent agents (IAs) who offer competing products. But it doesn’t have to be. As more companies from outside the industry move into the insurance business, they’ll be looking to make strategic acquisitions of IAs and tech-savvy agencies with already built products.

We already know that the independent insurance space is ripe with M&A activity. It’s not a stretch of the imagination to anticipate that large tech companies will want to get in on the action. Elon Musk and AirBnB CEO Brian Chesky may be some of the first, but they won’t be the last. Other businesses will follow. Instead of fearing the competition, IA owners are wise to consider acquisition as an exit strategy. However, tech companies will have a specific list of criteria when evaluating target agencies.

The question is: When opportunity comes knocking, will your IA be prepared to answer the call?

Five ways for IAs to stand out as M&A targets

As an agency owner, what can you do now to shore up your business and become a future M&A target? Here are five recommendations to consider:

1. Ramp up your digital transformation initiatives. Insurance customer expectations are higher than ever for a seamless, personalized digital experience. IAs must confidently provide a consistent customer experience across all digital and mobile channels, with 82% of customers now expecting multi-channel interactions with insurance providers as the standard. That includes secure, intuitive, self-service digital portals through which customers can manage their accounts, buy products and handle claims.
2. Tap into your agency’s operational and performance data. There’s a reason why McKinsey calls data and analytics capabilities “table stakes” in the insurance industry. Without data, every step of the policy distribution is impacted. IAs can’t make sound business decisions at the most basic level without access to it. Unfortunately, too many agencies struggle with fragmented legacy systems that leave data in silos. Tech companies outside of the insurance industry will consider your agency’s customer data a gold mine for growth and scalability. But first, you need to make sure you have complete visibility.
3. Ensure that your infrastructure is truly cloud-based. Modern insurance agencies are moving away from legacy systems and toward cloud-based insurance platforms. Any company evaluating IAs for acquisition will want to see evidence of full cloud capabilities. Cloud-based platforms allow secure 24/7 access to data from any location to facilitate remote work, self-service platforms, and real-time access to customer data. End-to-end cloud-based platforms help fuel successful mergers and acquisitions, making it simpler to integrate disparate businesses, provide reporting and transparency and reach a positive ROI much faster.
4. Empower your people with work-from-anywhere support. The events of the last two years have tested and proven the effectiveness of remote working. Potential buyers from the tech sector are already well-versed in supporting work-from-anywhere for their employees. However, many IAs are still working on maintaining and supporting WFH permanently. Increasingly, IA owners are looking for SLA tracking and performance analytics to ensure optimum results from their staff. This information is valuable when an agency is positioning itself for acquisition because it can show where its most profitable lines of business are and which employees bring in the most value.
5. Invest in automation. The ability to implement automation should be at the top of your list of technology investments in 2022. At this stage in the game, any agency that opts to solve operational problems by throwing more people at them instead of using technology will be at a disadvantage. Automation adds value to the entire insurance distribution lifecycle by eliminating manual data extraction and data entry and providing the streamlined, fast, and error-free experience customers expect.

Above all, it’s essential to keep your existing customers happy with the right mix of risk products and personalized service. Remember, your agency’s customer data and performance analysis will be paramount when trying to capture a buyer’s attention.

Many IA owners want to scale their business or are near retirement and seeking a succession plan. Regardless of motivation, independent agency owners should understand that technology investments are vital if you want to be a contender in an M&A deal.

Eric Ayala (eric.ayala@novideasoft.com) is the senior vice president, Americas for Novidea, creators of the born-in-the-cloud, data-driven insurance platform that enables brokers, agents, and MGAs to modernize and manage the customer insurance journey. These opinions are the author’s own.

See also:

• Is Lemonade or Tesla the biggest insurance disruptor?
• 8 ways that ‘digital ecosystems’ boost insurance sales
• As M&A activity booms, here’s what agency owners must know