Why Selling Insurance Online Has Yet to Work & May Never Work

by Joseph Totah | Founder | AgencyEquity

Back around 2000, a company called eCoverage launched to sell auto insurance online. The company lasted two years before it shut down for lack of funds probably caused by its failure to achieve expected results. Esurance launched a few years later. While it still exists today, reports to date have shown that its current owner, Allstate, is struggling to make it profitable. Esurance has also incurred high loss ratios over the years, which has hurt its ability to charge the competitive rates that online buyers expect. Uber’s launched in the early part of the decade seems to have spurred a dozen or so well-funded insurance agency or company startups to launch platforms to sell solely online.

Founders Lack Insurance Experience

My research has found that very few of these new online platforms were started by people with insurance experience. Many have had executive positions with other online financial service companies or other technology experience. Hence, a vast majority do not come from the industry, which is a red flag, as there are many variables and moving parts that executives need to understand that were overlooked either because of their lack of knowledge or for the sake of growth. Such aspects as poor loss ratio, underinsurance and E&O claimscan hit these online sellers hard, because users can fool the system, and the system may not be designed with issues like loss ratio in mind. In addition, the lack of a professional to guide the client and to make sure that a submission has integrity can sooner or later lead to the financial decline of these entities.

Adverse Selection

The best clients want an agent. They want professional advice, and they want to make sure that they are properly covered. However, those who get insurance solely because they must have it are likely to buy it online, because all they want is the best deal regardless of coverage. Hence, the higher risk and higher loss ratio type of clients are going online and buying the cheapest insurance. Not surprisingly, their loss ratios tend to be high. Their premiums are essentially subsidized by the investors, and the clients are happy to take advantage of this. In contrast, the more established policyholder is unwilling to risk buying insurance from a startup. In due time, the online platforms increase rates, and, when that happens, they lose the ability to gain more customers.

Poor Loss Ratio Results

Several studies by InsureTech expert Matteo Carbone show that these newer online startups are not turning an underwriting profit or even close to it. Even the longest running player, Esurance, has struggled to turn a profit over the years, though it continues to grow perhaps due to its parent, Allstate continues to fund it’s growth. If Esurance were not owned by an insurance powerhouse, would it still be afloat? The following studies show the underwriting profitability of firms started in the last few years:

Mo Premium, Mo Losses: InsurTech Start-ups Get B.I.G.

Bigger & Redder: the first quarter in InsurTech start-up financials

This trend has been consistent with every online startup, and it has not changed over time or as technology has advanced.

Lack of Professional Consulting

Unless it is a very simple insurance transaction, people buying insurance really need an agent to walk them through the issues, to make sure that they are properly covered, and to build a relationship between agent and policyholder. People also need to talk to someone they can trust when they have issues, not an online chat or a person on the phone who must satisfy a quota on the number of phone taken each day. An online platform cannot come close to satisfying this interest of the policyholder. In contrast, the local insurance agent has a vested interest in making sure that that the policyholder is taken care of.

Lack of Insure to Value

People typically lack the expertise to know how much insurance they need. For example, someone buying renters insurance may think they only need $25,000 of coverage, even though they have $50,000 worth of contents. Providing an inadequate amount of coverage fails the policyholder when a claim occurs, especially if there is a total loss. The more contents an insured has, the greater the amount at risk of a loss. When the amount of coverage is inadequate, the insured is at greater risk of suffering an uninsured loss, which can also eat away at a company’s loss ratio due to underinsurance. Consequently, underinsurance adversely affects both the policyholder and the insurance company.

E&O Issues

Poor coverage selection and amounts have a much greater chance of resulting in an E&O claim than if an agent addressed with the insured all risks that can be covered by insurance. When people make mistakes on their own or they are not property guided, they direct the blame toward those who they feel shortchanged them. Moreover, since those who flock to online insurance platforms are seeking better rates, they are likely cutting corners or perhaps they just don’t know the importance of certain coverages, even if mechanisms are in place. While not all of these policyholders will win a legal battle, it does increase the cost of E&O insurance, and a very expense E&O policy can eat away at an online agency’s profits, especially if the profits are small to begin with.

Client Hesitation to Buy Online

People will do certain things online and have for well over 20 years. Many industries from retail to ride services to stock brokerages have made online transactions very cost effective and viable. If people wanted to buy insurance online, agents would have been out of the picture or dwindled in number long ago. But insurance is just not one of those things that most people want to do online, and I explain why in the section below regarding ride sharing. But it boils down to ease of doing the transaction and knowledge of the product.

Insurance is not a Ride-Share Service

Many of these new online insurance startups were launched after Uber was launched. Perhaps the thought process was that the smart phone with its apps was changing the ballgame. If Uber is a great success, then insurance can be a great success too. Well they missed a number of variables. First of all, a ride service is such a simple transaction; there just are not very many variables to this beyond pushing a button on your smart phone screen. Insurance involves many more factors and requires much more information. In addition, ride-sharing services save its riders 30 to 50% over what a taxi would charge, simply because taxies are partnered with the cities they serve and have generous fixed rate regulations. The marketplace did not exist for taxies, because it was all one big fixed partnership for most jurisdictions. Ride-share companies avoided this arrangement altogether. Furthermore, ride-share companies created an efficient model with amazing technology that made ride services incredibility efficient. In contrast, the insurance agency system has already been lean and mean, and placing insurance is a much more complicated transaction than pushing a button for a ride. Lastly, there is no 30 to 50% margin to save on insurance as there was in the inefficient taxi business.

Policyholder Acquisition Costs

Selling insurance online through advertising and other methods is very expensive. The biggest issue is to convince most people to buy insurance, and when they do, most do not engage with the platform. When they do engage with the platform, most don’t complete the information needed to make it happen. For the few that do complete the processw, the saving has to make sense to convince them to make the move. They know they are giving up their agent, and they will not do it for minimal savings, let alone a similar or a higher rate. The bottom line is that it is not inexpensive to win customers, as every good agency owners knows, but a real person has better persuasive stills than a website and a series of emails. Hence, the idea of eliminating and saving the policyholder an agent’s commission is not valid because of things like acquiring a new policyholder. In addition, the longevity of an online policyholder is not likely to be as long as with an agency, since online platforms lack a relationship that many policyholders want.

Unless something drastically changes, and I mean drastically, these online platforms are not likely to thrive. It is more likely that a shortage of insurance agents in the future may be the only thing that will help these platforms. However, as the President of Strategic Agencies, LLC and the founder of AgencyEquity, I still see a good healthy flow of buyers for insurance agencies that are on the market. We are see a significant amount of those interested in starting an insurance agency with very few signs of slowing. As an entrepreneur, I appreciate entrepreneurship and the drive of those who start these companies. However because of the issues I brought up, most are fighting a losing battle and will struggle to survive.