Thesis Investing and the Future of Life Insurance
When we set out to raise our first fund, we did so with the conviction that opportunity is plentiful between the coasts, and that hugely successful companies can be — and are — built here. Since then, we’ve discovered promising startups in every corner of the large region we cover – from Minneapolis to Austin, from Boulder to Atlanta – that have only strengthened our conviction.
In the course of those discoveries, we became accustomed to using high-potential companies as entry points to promising markets and learning as we went. At times, however, we’ve found ourselves playing catch-up in order to fully understand the opportunity in industries that we hadn’t previously explored. Sometimes we even felt like we were missing key insights that could’ve helped us make more informed decisions, especially when we were facing external time constraints.
Over the past few months, we’ve decided to deepen our roots in thesis-driven investing to develop a better understanding of a few key markets. So far, we’ve applied this approach to real estate, wealth management, and insurance; we’re planning to continually refine our theses in these areas so that we can better track emerging trends and the new opportunities that will arise as a result. But we’re just getting started with this new approach, and we plan to continue adding new theses as we grow.
Insurance is unique among the three markets we started with in that we previously spent significant time in the space when doing the diligence for our portfolio company Beam Dental. But for a number of reasons, we felt that the space deserved redoubled efforts. For one, insurance is a breathtakingly large industry. Nearly $5 trillion in premiums were written globally in 2017. In the United States alone, $1.1 trillion in premiums were written last year, amounting to 7% of the US GDP. 1 Further, many – if not most – of the top insurers are located in the middle of the country: State Farm, Allstate, Blue Cross Blue Shield, Nationwide, Northwestern Mutual, and American Family, just to name a few. The region is thus an attractive location for insurtechs looking for customers or partners. Finally, and perhaps most importantly, the industry is ripe for disruption. Concentration within the industry has historically disincentivized incumbents from focusing on customer experience and support, and too much of what insurers do today is manual and paper based. With an integrated tech stack and a relentless focus on customer satisfaction, we think startups can capture significant market share in a number of insurance verticals.
When we began our latest round of research into the insurance market, we were immediately drawn to life insurance. Within the massive global insurance market, life insurance is the biggest segment, accounting for nearly 50% of all premiums written. In the US, sales of life insurance and annuities amount to a whopping $952B in annual revenues, despite declines in recent years, with penetration dropping to 60% in 2013, from 77% in 1989. 2
As we dug deeper into the causes of this decline, we looked at research conducted by the Federal Reserve Bank of Chicago and we learned that the declines have been largest in low income households. Although it is not entirely clear why this is the case, we hypothesize that there are likely two drivers. First, healthcare costs have grown significantly over this period (while wages have stagnated) crowding out the disposable income that folks used to allocate for products like life insurance. 3 Rising healthcare costs – particularly the costs paid directly by employees – have also led to care avoidance, which very likely leads some to avoid life insurance since it often requires a health screening.
Startups and VCs alike have been attracted to this space for some time, with insurtechs like HealthIQ focusing on special rate life insurance for healthy individuals. New companies like Bestow and Ladder have seen the same opportunity, touting the absence of a medical exam requirement for their life insurance policies. Using algorithmic underwriting to price policies, these startups hope to attract new customers without incurring significant incremental risk. Customers still may need to take a medical exam, though, if they disclose certain health issues in the course of going through the signup process – leaving many potential customers – especially low income folks experiencing most acutely the effects of higher healthcare costs – in the same place they were in before.
We expect to see the next wave of innovation in life insurance products that unlock affordable options for people whose budgets have increasingly been squeezed by the aforementioned (and other) factors. One means by which innovators might achieve this is by developing deeper relationships between life insurers and their customers.
We’ve already started to see this in other insurance categories, and new data is driving the way. In auto insurance, customers used to interact with their insurer (or agent) in just three instances: purchase, renewal, and the rare cases when they need to make claims. But now auto insurers like MetroMile and Root are constantly collecting data on their drivers’ usage and behavior and feeding back some of this information to make safer, better drivers. Beam is doing something very similar in the dental space by collecting brushing data on their customers and nudging them to become better brushers. They’re also providing periodic refills of paste, floss, and brush heads to ensure that their customers have everything they need to keep up stellar dental hygiene.
It’s not a stretch to envision a similarly deep relationship between life insurers and customers. Today the data captured by life insurers is relatively minimal and a reflection of an individual’s health at one point in time (with a few rare exceptions). Potential customers provide their demographic data and the results of their health screen and then carriers quote them a price. Obvious opportunities exist to supplement this information with data from wearables or other connected devices, such as activity levels, quality of sleep, weight, or blood sugar readings. All of these variables could plausibly affect actuarial tables in meaningful ways. Some insurers may look to go even deeper and collect certain information from their customers’ mobile devices.
We already know that patterns of usage can be highly revealing about people’s mental and physical wellness. Chicago-based TriggrHealth, for example, has made great strides using device data to forecast substance abuse relapse. Other insurers may look to nudge their customers to engage with their devices in new ways. For instance, Lapetus Solutions is pioneering algorithms that use selfies to predict longevity and measure the visible impact of behaviors, such as smoking, on an individual’s health. How comfortable consumers will be sharing these types of data with insurers and how valuable this data will ultimately be to actuarial calculations are open questions, but engaging with these ideas seems, to us, necessary.
All of these new data sources will likely lead life insurers to be better underwriters, and this is no doubt good news for the insurers and for healthy individuals who probably pay more than their share for life insurance today. But it is not clear, given existing business models, how new data can drive costs down and expand the mass appeal for life insurance. This is where we see a significant opportunity for life insurers to innovate how life insurance is sold and become a more active partner in promoting healthy lifestyles for their customers. One way might be to offer a standard probationary rate for a limited period, say six months, with the ability for that rate to be adjusted upward or downward at the end of the period dependent on customer behavior.
Another could be a recurring revenue model that allows insurers to adjust prices periodically as their customers embrace healthier choices. Although it is unclear ex ante what the best structure should be, the underlying premise is that by working alongside their customers to improve health and longevity life insurers can reduce risk, increase affordability, and open back up a large swathe of the market that they’ve lost over the past few decades.
If we’re right that the next wave of innovation in life insurance will bring deeper relationships between insurers and their customers, we welcome it. Americans need more affordable insurance options, and it probably wouldn’t hurt to have yet another set of products nudging us to live healthier lifestyles. In the meantime, we’ll be carefully looking for the companies making this wave of innovation. If you’re a part of one, or know someone who is, we’d love to get to know you.
1. https://www.ey.com/Publication/vwLUAssets/ey-global-insurance-trends-analysis-2018/$File/ey-global-insurance-trends-analysis-2018.pdf
2. https://www.bloomberg.com/view/articles/2018-02-27/the-decline-of-life-insurance-is-a-mystery
3. https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.html
