Insight From the Front Lines: Homeowners Insurance Innovations That Will Save You Money

by Sean Harper

We’re seeing unprecedented change in channels and distribution for property insurance, thanks to advances in technology and available data. Whereas underwriting control used to determine an insurance company’s profitability, distribution and customer control are now the strongest indicators of high margins.

Fueled by the commoditization of underwriting and evolving consumer behaviors, power dynamics are changing. Traditional carriers were once the most profitable, but today, the companies that own the distribution and customer relationships come out on top.

The Commoditization of Underwriting

One major contributor in insurance carriers’ lower margins is that underwriting has been commoditized. In other words, the product is so widely available, the only real factor that matters to consumers is price.

Online aggregators allow shoppers to see prices from a range of insurers, forcing carriers to compete on price and unify rates. Online packages, default coverages, and click-to-buy experiences further help commodify insurance to the point where customers can no longer tell the difference between products, despite the company or brand behind them. Plus, insurance has to contend with industry regulations that force similar coverage offerings and definitions.

Even when carriers leverage their consumer ratings and services, differentiation is still an uphill battle.

While there’s still some room for differentiation based on location (like specializing in home insurance for Florida, which is prone to catastrophic loss) and unique offerings, safer homes could further homogenize risks.

Changing Consumer Behaviors

Insurance has long lagged behind innovation, and that makes sense – it’s a risk averse industry. But that lag has led to a decades’ long gap between customer expectations and innovation that matches it. Complicating things further, other industries’ customer-centric approaches have been changing consumers’ buying patterns, building up expectations that the insurance industry’s traditional players are not prepared to meet.

While traditional carriers have primarily focused on product, insurtech distributors have focused on customer experience – market demand, not actuaries, guide product development.

Beyond product, insurtechs are building solutions that address ongoing customer pain points. Most customers want an easy online quoting and buying experience, immediate expert and personal guidance, quick and transparent claims processes, fair claims settlements, and instant communication. By using technology, insurtechs are streamlining what were once cumbersome processes into intuitive, user-friendly experiences.

For traditional insurers, customer satisfaction continues to be one of the biggest challenges – only 40 percent of property insurance customers had a positive claims experience with their insurance company. That’s a failing grade by any standard.

Power Dynamics Are Shifting from Carriers to Distributors

Given that carriers are struggling to differentiate their products and continue to fall short of customer expectations, it’s little surprise that power is shifting toward distributors and intermediaries. Because of their innovation, reliance on technology, and direct contact with customers, they’re best poised to meet consumer needs.

It used to be very expensive to become a carrier and data was difficult to get, and those conditions allowed carriers to control the transaction and therefore two-thirds of the profits four decades ago. But now that capital is easy to get and information is readily available, distributors and service providers control the transaction and get the lion’s share (about 60 percent) of the profits.

Although carriers can see the writing on the wall, most are not equipped to implement the technology they need to sell directly to consumers; struggle to reduce costs and be more efficient; and can’t compete with insurtechs who excel at technology, direct distribution, and cost reduction.

Insurance Distributors’ Stock Prices Continue to Climb

For proof of who controls the market, look no further than the financial environment surrounding insurance distributors and marketplace innovators. Once Lemonade, a property and casualty insurtech, went public, it closed at $69.41 on its first trading day – 139.3 percent above its offering price. It was the second best-performing IPO trading debut in 2020, and that activity will only further attract investor interest in the sector.

So far in 2020, share prices rose 80.7 percent for Lemonade (a direct-to-consumer insurer), 133 percent for Goosehead (a personal lines distribution platform), and 16.5 percent for EverQuote (an online auto insurance marketplace). Compare that to traditional property-casualty insurance carriers – like Allstate, Assurant, Federated National, Horace Mann, Mercury General, Progressive, State Auto Financial, United Fire Group, and  United Insurance Holdings – whose share prices dropped 24 percent this year.

By 2022, Lemonade’s revenue is expected to grow by nearly 61 percent, Goosehead’s revenue is projected to grow by almost 45 percent, and Everquote is expected to climb by 22 percent.

Whoever Controls Distribution Wins

All signs point toward a growing market interest in efficient and effective digital interactions and transactions, which is why more insurtech MGAs and startups will continue to gravitate toward full-stack operating models. There’s more regulation to contend with, but the ability to sell directly to consumers offers more flexibility and scalability. And the trade off is worth it: the more a company controls consumer interactions, the higher its margins will be.

To combat sinking profit margins, traditional carriers will likely try to regain control over distribution, but that will have its challenges. They’ll need to create the infrastructure to support direct sales, which may require reconfiguring their channels and implementing modern technology to support it.

About the Author

Sean Harper is the CEO and co-founder of Kin Insurance, an insurance technology company and home insurance carrier built to make insurance easy, efficient, and affordable. Previously, Sean founded FeeFighters, a payments company bought by Groupon, and TSS-Radio, an ecommerce company that became an Inc. 500 fastest-growing company. Before becoming an entrepreneur, Sean was a consultant at the Boston Consulting Group and an investor at Longworth Venture Partners. He holds an AB from the University of Chicago, where he studied economics and computer science, and an MBA from the University of Chicago Booth School of Business.