Neo Insurance refers to the provision of fully digitized insurance products and services entirely through digital channels. These products take advantage of new technologies to provide novel insurance models that feature personalization and convenience.
These new insurance models in the personal lines insurance segment focus greatly on customer experience by providing personalized products that better reflect individual circumstances, allow for instant coverage, feature faster claim processing, and are delivered digitally. They seek to address the growing needs for newer policies while overcoming the pain points of traditional insurance where policies are offered based on a one-size-fits-all approach, with customer relationships generally delegated to brokers and agents.
Restrictions on physical gatherings have pushed consumers toward digital alternatives with insurance being no exception.
During 2020, Lemonade’s gross earned premiums more than doubled from the previous year.
Root Insurance’s direct written premiums grew by 36.7% YoY during 2020.
Bestow, saw sales grow by 450% YoY from January to October 2020, driven by pandemic-induced demand.
While the first half of 2020 witnessed a significant decline in venture capital funding, the second half marked a public market debut for key disruptors and a major funding round.
Investments in the sector amounted to USD 2.3 billion during the first half of 2020, representing only 17.2% of the full year investment amount (USD 13.4 billion) in this space during 2019.
The second half of 2020, however, saw notable developments on the capital front, as Lemonade and Root Insurance went public, and Metromile followed suit via a merger with a listed special purpose acquisition company (SPAC). Hippo Insurance raised USD 350 million in funding, closing the year with one of the largest funding rounds in the industry.
Startups such as Slice Labs and Jetty have laid off a significant number of staff due to the pandemic recession. Premium write offs driven by US government-imposed measures have added further stress to digital insurance startup balance sheets.
Neo-insurance products for the automobile, homeowners, and renters markets account for more than one-third of the companies in the Industry Hub, with more than half of the startups under analysis established after 2016, and a majority in their early or growth stages.
Solution-provider startups have attracted more than USD 2.6 billion of investment as of November 2020. These companies' profiles range from turnkey solution providers offering end-to-end infrastructure for launching digital products to companies targeting specific processes within the value chain.
Incumbents have been quick to react to changing market dynamics, especially in the automobile space where most companies have either developed solutions in house or partnered with turnkey solution providers and vehicle manufacturers to provide usage-based insurance offerings. Vehicle manufacturers such as Tesla have also ventured into this space leveraging data from their own connected vehicles.
Neo-insurance startups operate either under a carrier model, where they control all aspects of the process and underwrite their own policies, or under an agency model, where the startups act as a Managing General Agent (MGA)—selling insurance to customers and providing the underlying technology, while larger insurers underwrite the policies. Most of these startups are in early or growth stages.
While most neo-insurance startups are solution providers that enable neo-insurance products for larger underwriters, full-service insurance startups have absorbed most of the funding. The most highly funded of these solution provider startups has been Cambridge Mobile Telematics with a USD 500 million funding round from the Softbank Vision Fund in 2018.
Automobile insurer Root Insurance and renters insurance provider Lemonade filed for an Initial Public Offering (IPO) during the second half of 2020, raising USD 724.4 million and USD 319 million, respectively. The industry has also seen several startups merging with special purpose acquisition companies (SPAC) to go public. Metromile was the first neo-insurer to go public via this route, merging with INSU Acquisition Corp in February 2021. Hippo Insurance followed suit six months later by merging with Reinvent Technology Partners in August 2021. In July 2021, Kin Insurance also announced plans to go public via this route by merging with Omnichannel Acquisition Corp.
wefox has raised the most money of any still-private neo-insurer with a total of USD 919 million following a USD 650 million round led by Target Global in June 2021. Collectively, neo-insurance startups in both the automobile and property markets have exceeded USD 1.5 billion each as of August 2021.
2020 has also presented setbacks to the neo-insurance industry. A provider of on-demand insurance for the gig economy, Slice Labs, suspended its homeshare insurance offering due to the Covid-19 pandemic and had not yet launched its rideshare platform as of August 2021.
Root Insurance is a full-stack insurance provider focusing on usage-based automobile insurance. The company offers a mobile app that collects data on driving speeds, braking patterns, and driving times using smartphone sensors, and applies artificial intelligence (AI) and predictive models to offer a personalized premium to the customer. The app incentivizes safe driving by providing greater insight into one’s driving patterns and issuing additional discounts for improved driving behavior. Root allows customers to file claims directly through the mobile app.
As of June 2021, Root held a carrier license in 48 states and offered automobile insurance in 31 states—most recently in Wisconsin. The company acquired a shell company in November 2020 in a bid to fast-track its nationwide expansion and will continue to launch its service in additional states throughout 2021.
In July 2019, Root launched its renters’ insurance product and expanded to homeowners insurance in May 2020. The homeowners’ insurance is provided through a partnership with Homesite Insurance, a Boston-based property and casualty insurer that will underwrite any homeowners insurance policies issued by Root. As of June 2021, the company’s renters’ insurance product was available in eight states. As of June 2021, the company had 373,721 auto policies and 9,103 renters policies in force.
In October 2020, Root sold 26.8 million shares in its initial public offering (IPO), raising USD 724.4 million in the process at a valuation of USD 6.8 billion.
For FY2020, the company recorded Direct Written Premiums (DWP) of USD 616.8 million (up 36.7% year-over-year). During the year direct loss ratios improved to 82.0%, compared to 99.9% during the previous year. During H1 2021, the company recorded DWP of USD 379.6 million, which grew 23.8% YoY. As of 1H 2021, the company’s direct loss ratio amounted to 81.0%, a minor decline of 30 basis points from 1H 2020.
Homeowners & Renters:
Incumbents in this space mostly include traditional insurers who are increasingly moving towards developing their own digital, neo-insurance products. Partnerships with digital insurance technology (insurtech) startups are common in instances where incumbents want to leverage the former’s technologies to offer new insurance products or bolster their own offerings. Cross-industry partnerships are also ubiquitous, providing a venue for these traditional insurers to market their product, with common examples including partnerships with auto manufacturers and ridesharing companies.
Most incumbents also have their own venture capital arms and accelerator programmes which provide guidance and capital for promising insurtech startups.
Tesla is an example of a vehicle manufacturer developing its own insurance product which leverages the data from the vehicle's systems. This also provides Tesla with a feedback loop which can then be used to alter its vehicle designs to mitigate common repairs in the long term.
Reinsurance incumbents complement their reinsurance offerings by providing digital solutions to insurers, these include turnkey solutions to implement a new digital insurance product (such as usage-based insurance) or platforms for data analytics and risk management.