Even robot rebellions can fail. Investors riding the artificial intelligence wave should sound the alarm in the insurance industry.
Even robot rebellions can fail. Investors riding the artificial intelligence wave should sound the alarm in the insurance industry.
Shares of “InsurTech” start-ups looking to transform traditional insurance through the use of automation, data and AI have seen a slight uptick recently thanks to the frenzy unleashed by OpenAI’s ChatGPT. However, it is still well below the level of a few years ago. When many people go public.
Shares of “InsurTech” start-ups looking to transform traditional insurance through the use of automation, data and AI have seen a slight uptick recently thanks to the frenzy unleashed by OpenAI’s ChatGPT. However, it is still well below the level of a few years ago. When many people go public.
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Is this a good time for investors to jump ship, or is it the beginning of a rebound in which trust in AI will pay off?
A takeover offer for the auto insurance start-up route highlights a dilemma. The $280 million offer from Embedded Insurance, run by serial insurtech entrepreneur James Hall, is far better than the $85 million valuation of the route prior to the bid, but the company plans to grow in 2020. That’s an order of magnitude below the roughly $7 billion it went public. I’ve kept my silence until now.
Other startups that went public around the same time as Root include Lemonade, Hippo, Oscar Health, Clover Health and Bright Health. They all trade for a fraction of their value at the time.
Few industries, in theory, would be easier to transform than insurance, run by big, do-it-yourself boring companies with very low customer satisfaction. Data and statistics have been at the heart of it ever since British mathematician James Dodson founded the Equitable Life Insurance Society in the 18th century.
Venture capitalists love it as a result. They poured $49 billion into insurtech between 2014 and 2022, according to reinsurer Gallagher Lee. Funding was down last year, mostly because 2021 was turbulent.
Unlike Moonshot, which promises air taxis and space travel, these startups have a clever blurb. Root, which is backed by online used-car retailer Carvana, says that driver risk tends to be assessed through coarse variables such as age and occupation, and assesses individual behavior including factors such as calm driving. Therefore, I thought there was still a gap in using telematics. Turning while driving or not responding to text messages.
Similarly, Hippo employs a “smart home” kit to constantly monitor the risk of fire, water and other damage. Lemonade uses AI and behavioral economics technology to expedite all types of insurance.
However, the rebels failed to storm the gate.
Root’s performance has slowed recently, a red flag for investors looking for fast-growing companies with potential economies of scale. Even more worrying is that the new technology has yet to prove superior in pricing risk. Traditional insurers still have lower claims on premiums than insurtechs, but the latter group is performing better.
There are few signs to date that the digital age threatens insurance giants. They didn’t see their market share eroded or have to adapt their business significantly. Price comparison websites may have sparked more competition, but people are still using online apps to pick up rides, have food delivered, and take trips. We haven’t fundamentally changed the way we buy insurance. This suggests that even insurtech stock acquisition prices may be low.
After all, the incumbent had good reason to be conservative. “Twenty years ago, we thought the internet would make distribution cheaper, but that’s not the case,” said Frédéric de Courtois, group deputy chief executive of French insurer Axa. It’s more expensive than what you pay to the store,” he said.
New AI players face additional problems. Growing aggressively means attracting riskier customers, so they struggle to achieve scale. Without sufficient data, you cannot gain the edge you need to compete in a highly price sensitive market.
These lessons have broader applicability. As has happened with personal computers and the Internet, AI could pay big dividends for its suppliers, the software and chip giants whose stocks have risen the most in the recent stock rally. It also opens up some new markets and, indeed, could change the way existing players perform certain tasks. For insurance companies, new avenues are opening up to identify fraud, for example.
But investors who see revolutions everywhere may end up putting their portfolios on the dock.
