P&C Specialist reports that “Hippo announced that about 120 employees, or 20% of its workforce, would be laid off. The move follows the company’s decision to stop writing new home policies across the U.S.”
In this Hippo follows a host of other insurance startups like Lemonade and Root into financial trouble. And the reason why is hidden in the announcement: “The move follows the company’s decision to stop writing new home policies across the U.S.” – they are losing money because of poor underwriting results – if they were making an underwriting profit but just had too much overhead, they’d still be selling policies. But they are clearly experiencing such large underwriting losses that it does not make sense to sell any more policies until they figure out what has gone wrong.
So, what has gone wrong? Like all its Insuretech peers, Hippo made the critical error of assuming that because consumers consider car and home insurance commodities that they in fact are. Yet the risks that these carriers underwrite are anything but.
Insurance is unique in that it is the only business where consumers pay such a small percentage relative to the potential policy payout. A thousand-dollar premium can cost a carrier a million dollars. No other consumer financial product has such an extreme risk profile. As a result, carriers are very vulnerable to risk selection errors – signing up customers without truly understanding the risk is a recipe for disaster. And there is a wide variation in customers and their propensity to manipulate/cheat at both POS and during the policy lifecycle.
The Insuretech ‘disruptors’ thought that all they had to do was apply the proven Amazon technology model to undercut the industry’s high-cost distribution model dominated by expensive commissions paid to agents. But little did they know that the agents represent the last vestige of a risk selection process that had developed organically over decades to meet the evolving risk market. Sadly, that infrastructure, built around agents that know their customers, has largely fallen apart due to changes in technology and consumer preferences. As a result, most agents have become primarily salespeople taking orders over the phone from customers they will never meet. Customers who have already gone to comparison sites and learned not only what their insurance should cost but also how withholding different ‘facts’ can radically change the price.
Hippo should have invested in better Risk Selection technology.
The simple fact is that the vast majority of losses that carriers incur come from 20% of their customers and that roughly half of those customers incur losses that are in part or in whole not justified based upon the risk assessment done at POS. It is these customers and these levels of losses that caused Hippo to stop (albeit temporarily) selling any insurance at all.
What Hippo and other Insuretechs should have been focusing their technology innovation on is in building tools to detect and correct excessive risks automatically at POS and throughout the policy lifecycle. Building a toolkit that lets them read the many digital indicators that signal excessive risk. Which is what we have spent the last 8 years developing. We believe that “Carriers getting the risks they want and avoiding the ones they don’t” is the key to insurance success.
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