Knowledge Center

Knowledge Center Items Podcast Episode 53

How to Create a Perfect Storm to Disrupt Auto Insurance

Published on

Let's be honest, a lot has to go right to take on a trillion-dollar industry that's over a century old.

Because it takes a lot to start a new insurance company and they're never born overnight.

But how does anyone survive that process and what type of innovation has to happen to give it a chance?

Believe it or not, there are quite a few ducks that need to be in a row before significant progress can be made.

John Henry and Carey Anne Nadeau, Co-Founders of Loop Insurance, talk about the fundamental changes they're trying to bring to auto insurance.

For more Change Insurance episodes, click here.

Full Episode Transcript

Joey Giangola: ... Carey Anne Nadeau and John Henry. How are you guys doing today?

Carey Anne Nade...: Doing great.

John Henry: Super well, man. Thanks for having us on.

Joey Giangola: So I got to know this before we really jump into anything too serious. Is there something that you guys have on a day-to-day basis that you try to use as a last resort only? Only if you ever have to in extreme circumstances is there something that you need to resort to, to actually get something done?

John Henry: Yeah. Only if I ever have to do Carey and I take an interview in the same frame.

Carey Anne Nade...: That's the truth.

John Henry: We are sticklers for gear and content around here. Yeah. So there's that. And also only if we ever have to do we, do I pull out the bad cop in negotiations otherwise we're pretty nice.

Carey Anne Nade...: Yeah. That's true. Only if I have to, do I get coffee after 4:00 PM. If I'm going to get that second espresso four o'clock it's a day that's going to go into the night, so I try to keep that to a minimum.

Joey Giangola: Fair enough. I'm not going to complain about the single frame. It's going to make my life easier after the fact. But for me mine's a little more pedestrian. I'm going to go stand mixer on the Kitchen Aid. I feel like everything, if I can be with my hand, I'm going to try. I don't know. I feel like it's cheating, but it does make your life way easier. I don't know. It's just a principle sort of thing.

Carey Anne Nade...: Yeah. Cleaning the blade always feels overwhelming.

Joey Giangola: Yeah. Again, I feel like it's cheating. I don't know. I mean, it's probably more of my issue than it is the actually machine's issue, but it's one of those things.

I guess the thing that I'm kind of curious though, is that kind of continuing with that trend of last resorts, it feels like a lot of insurance, traditional insurance sort of we'll say refuses to use certain information as the last resort only. They're focused on more legacy information. What do you kind of see as the advantage or disadvantage to that approach? And I know you guys are doing different things in terms of how you're viewing the information that is what one might think last resort for other carriers. How do you guys look at that?

John Henry: Yeah, in my view, the advantage is clear. The advantage of using kind of legacy data models is that there's plenty of history and insurance is about pricing the future based on historical performance. But one thing that is changing the assessment in calibration of value is that venture capital and what disruptors have proven in financial services, but really abroad is that it's a lot more about a discount on the future than it is about pricing the past.

So to square your question up directly, what's the advantage? Well, you have decades and centuries of relevant information with which you can deduce your calculations. There is a lot less certainty when it comes to incorporating more novel factors and intersecting them against traditional factors. So the temptation is there to say, "Well, we've got a pretty nice book of business. We're making hefty profits on the investor premiums. Why switch anything up?"

And they're so large and the industry is so regulated that they're almost existing in a propped up environment that where they're not really facing any real competition from players that are more rooted in current market dynamics and reality. That's my assessment. The upside though, is if you're right, and if you're able, there's a lot of ifs and we're going to stack them. If you're right, if you have the team, if you can get capitalized, if you can get approved, if you can dial in your acquisition economics, and if the market from the consumer perspective resonates with your product, you begin to capitalize on that same uncertainty that existing incumbents are not interested in touching.

That same uncertainty has to be where newcomers find their margin. Otherwise you're not going to win if you're going toe-to-toe with Progressive and Geico at retail value. You have to find arbitrage opportunities and in Loop's case, we firmly believe we have found structurally mispriced risk and we are meeting the market dead on by building our own MGA to capitalize on that.

Joey Giangola: Now you held up a lot of fingers, John. Is there one that scares you the most?

Carey Anne Nade...: That's a good... I'll let you answer that question. It was your fingers.

John Henry: Wait, what was it? What was that? Is there any what?

Joey Giangola: I said which one of the fingers that you held up scares you the most? Which one has the most volatility to it?

John Henry: You know what scares me the most is that you have to do all of them well in order to win. If you underwrite successfully, but don't become capitalized you don't necessarily go out of business, but you remain a small player. If you become wildly capitalizing and grow really fast like Root but don't underwrite well, you're a ticking time bomb anyway.

And so I think what we've deduced here internally at Loop is that right now, telematics is synonymous with really shitty performance, if we were to keep it a buck, like they say in hip hop culture. If we were to keep it a buck, telematics, the moment you say it, they say, "Oh, you're going to get the worst terms. It doesn't matter what your rate filing structure looks like and your analysis. You're getting the worst."

But what we're looking to prove is that if you can assemble all five fingers, I think I might've even used six. Then you have a chance at building a long-term sustainable company. We're not saying that's going to be easy, but what we are saying is that the underpinning of all of that has to be that we believe we're right about something new. Otherwise it's not worth taking the bet.

Carey Anne Nade...: I might jump in there as well and say, I think that there's a lot of MGAs that have sort of raised the land before us in the definition, meaning to burn and scorch and leave it ungrowable. But a lot of those MGAs have focused on discipline and underwriting or introducing new underwriting methodologies that increase or optimize the efficiencies of existing rating models without really rethinking them structurally.

 And so in auto insurance, this sort of sector we play in, I believe that those companies are also really constrained by their market opportunity simply because there's not a lot of juice left that hasn't been optimized by Progressive already. And so that's sort of the disbelief in going out to the market that there's somehow a phenomenal, magical formula that could improve the loss ratios just by taking the existing formulas and finding more money somewhere buried in there.

So it really does take a transformational approach to the underwriting model to say it's not about using the same old criteria and finding efficiencies. It's about actually structurally re-engineering the rate filing from the ground up so that you can find not just a slight improvement on the loss ratio, but potentially a transformative moment for all of auto insurance to reconsider how profitable the line can become and how sort of good a service, how high quality the service can be provided back to consumers.

Joey Giangola: Yeah. And I think you guys hit on something interesting in terms of changing the rules, right? I mean, writing your own rules, right, in terms of not playing by what has kind of come before. And that's always sort of stuck out to me as an advantage that kind of helped people that are looking to kind of shake the space up.

I think the other thing that's interesting too is, is even if, I guess let's say you have all your fingers accounted for, right. There's still the market acceptance to sort of changing the way that they've traditionally engaged with insurance. It's always a sort of a tumultuous relationship, no matter what, but kind of re-approaching that at a different way to, what do you think, I guess people are willing to accept when it comes to looking at their insurance differently?

John Henry: I think that is the part that I feel best about. What I've seen in looking at the insurance landscape is a lot of insurance people trying to market. Right? And so what do you get as a result? Well, you get a lot of emphasis on numbers. 20%, 15 minutes save 15% and safe drivers save 40% and seven and ten and seven and three and four and five. And it's like, all right, but what about the people?

So I think that by shifting the order of priority for us right from the very beginning, from the very beginning, we knew that pricing was not going to be our value proposition. If you today, right now, go to the Facebook ads library for any competitor out there, Progressive, Geico, Root, Clear Cover, Branch, any one of them, we have great respect for all of them, except for Root. Any one of them, all of their ads are pure pricing play.

We in our hierarchy shifted pricing to the bottom. Pricing is cost of entry. You got to have good pricing in a price sensitive market. Stop ringing the damn bell about how much a customer can save on the fray in a regulated market where you can't price how you want anyway. Instead, what we wanted to do was to raise another element up that was not being considered by any other insurer from as far as we could see.

And that was, we believe that having an emotional more mission driven value proposition and bringing that up to the top of our hierarchy, that mission guides Loop. It guides how we think about our product, it guides how we build our team, it guides our messaging, it guides our value proposition, it guides the investors that we bring on. And just to put some quantitative reinforcement behind that we've been converting paid soft, paid leads to Loop at a 10th of the industry average today for customer acquisition costs.

75% plus of our conversions have been pure organic. That is mission yields distribution. It yields coverage on Time Magazine, it yields coverage on all the industry blogs and so on because you're doing something different and worth doing. And so from the consumer perspective, we're going to have a lot of challenges specifically in the educational component. People don't know that there is bias in the pricing so we're going to have to educate the consumer at the same time that we're priming them to then buy.

I'm aware that that's going to be a big leak in our funnel. However, mission seems to be, those things seem to be subservient to the mission. People seem to care so much about the mission of what we're doing, that they're willing to stick around for the journey of being educated so that they can buy it.

Joey Giangola: Yeah. I mean, you guys did pick the most commoditized, I guess, of the insurance products, right? So there's a lot to go against. And what's interesting, right, because in my experience, anytime you did just have a simple, honest conversation with somebody about their insurance, they were generally like, "Oh wow. I didn't realize that." Right?

John Henry: Right.

Carey Anne Nade...: Mm-hmm (affirmative).

Joey Giangola: And there's a lot of that I think that you kind of were talking about. Is there something that stands out to you in those interactions in that conversation to where you've heard back from them about just their overall again, just that communication and that refreshing sort of, we'll say truth, to the whole thing. What do you think stands out there?

John Henry: For me the biggest one, and we've been speaking to a lot of customers, the big one is, "Oh, no wonder why they ask those questions." So when we say, "Hey, did you know that your credit score is a part of your pricing?" "Oh, no wonder..." "Did you know that if you work a blue collar job, you get penalized? Did you know that if you didn't go to a four-year school, you get penalized?"

So it's all of these demographic factors have this same response where it's like, "Oh, that's why they asked me that. Wait, that's so interesting. Wait. Why?" And once we get you to ask, "Wait, what? I didn't know that. Why?" You're hooked. We bring you into our funnel that's not some nefarious lab. We bring you into our wonderful funnel of fuzzy love and magic and content, where we teach you about all the things that are going on. We prime you. We lead with love first, and you end up leaving with this feeling, just like Warby Parker.

When Warby Parker said, "Hey, did you know that glasses don't have to cost $500?" I grew up below the poverty line. So whenever I lost my glasses, which is often, my mom would be like, "Dude, you're done with glasses for the year. You're done." And so when I came across a player notice one of Warby's value props was cheaper pricing, $95 for the frames. However, they didn't lead with the what, they led with the why.

I became in love with Warby's why and I've been a customer ever since. My lifetime value is insane for them. So similarly, people fall in love with our why, they come along for the journey and we are anticipating that their lifetime value with Loop is going to be insane.

Carey Anne Nade...: I'll add to that. I think a lot of people are pissed off when after six months with their carrier, their rates go through the roof and they only see it when they get a bill that comes and is different than it used to be. And a lot of people maybe don't monitor their bills as actively as the mill checking the mail every day and opening up all the envelopes, because they're automatically withdrawn from a lot of our checking accounts.

So it strikes me that actually our content producer here just recently went through, this, was on the phone with his insurance carrier for like two hours. We had to listen to the whole ordeal of him trying to fight back $48 in fees. Our neighbor just left Root because he was like, "My rates tripled. What the hell happened to me?"

So I think like, even if you make it through the first order of business of getting a relatively decent rate, like getting set up with your car insurer, there's also a lot of questions about, what happens to my rate after six months and why did it change without me substantively becoming a much worse driver? And that is an education, not just for consumers, but it is also an education for state regulators. It's also an education for reinsurers-

John Henry: And agents.

Carey Anne Nade...: ... and agents, because a lot of that was baked into the rate filing. A lot of the way that we price folks is this sort of discounted upfront price and then we'll hit you with fees or we'll hit you with a rate increase after six months because we believe that you're already in our funnel and you're not going to leave because buying insurance is such a painful process.

But what a horrible thing to just have that expectation of your customer, that the quality of service you can provide them is so poor because they can't go elsewhere or it's even more cumbersome to find somebody else who's going to treat them just as poorly.

I mean, really, I think it leaves a very low bar and a very big opportunity for us to walk through that door and say, "We're going to try to price you correctly at the point of sale. The only reasons your rates should go up or down is if you get in a car crash, significant car crash and, or you're a horrible driver driving on the worst possible roads." Right? If your crash risk exposure increases, maybe your rate increases. If your crash risk exposure you can manage and actually improve your driving behaviors or avoid unsafe places, your rates will go down. I think there's still a mysticism there for a lot of people. And frankly, a lot of insurance carriers who have kept that a really opaque process at renewal as well.

Joey Giangola: Yeah. You mentioned there at one point the group of people in the room that have a very interesting place in this process, and that is the agents, right? Now what do you think, because we've seen a lot of Insurtechs come into the market and want to sort of go it alone. Right? And I guess I don't really know entirely too sure what your model is on that, but where do you see that sort of traditional agency relationship fitting in? Is that something that has a place in this space or is this one of the spaces that agents need to just really figure out, "Eh, listen, it's not that profitable for you anyways. Let's look for something else"?

John Henry: Yeah. That's a great question. I'm glad you asked it. And I quite like the agents in, I like the agent's role in this space. We are launching as a direct to consumer MGA because we believe that we have a novel product and we are best equipped to in this phase one, I'm not going to leave my success up to anyone else other than our team, but that's understandable of course. However, I think it is a mistake for tech enabled MGAs and VC backed companies to say, "We're going to replace the agent."

I think that not only is that naive, but it's misguided and also it's a bad business decision. You're leaving a lot of business on the table that agents produce. I would much rather actually find out, developed some mechanics and assist them to enable the large army of digitally native agents that are out there to partner with Loop.

So we are most definitely putting that on the table Loop will be an agent friendly MGA business, just not for phase one. We feel like we still need, since we're selling something unique and novel, we still need to become intimately familiar with the conversations, the rebuttals, all of our funnel, our economics, so that we can understand, our loss ratio performance and after we dial these things in for the first year and change, two years, then we'll be in a better position to create an informed agency model that we feel will work for us.

I'm glad you mentioned it. We are quite excited at the prospect of working with agents and yeah, I think we can... I want to grow a $10 billion business and I just don't see how you do that in insurance without agents.

Joey Giangola: Yeah. And I think that's the other thing too, is that's it's that relationship where, like you said, in the early goings, it seemed like people kind of came after like, "Oh, this is going to be an obsolete sort of way of doing business," but at the point it's like, they weren't necessarily enabled to their fullest ability, right, to have the companies and the carriers and the tools that we're providing them with resources to handle the business, the way that they want it to be handled. It's just something that it's refreshing that, again, we've kind of come around to this now in the sort of Insurtech space to where everybody kind of want to play in that same sandbox.

Carey Anne Nade...: Yeah. I totally agree with that. And tech and AI in particular has been pitched as this operational efficiency savior and it can be in certain parts of the business. I've seen some AI technologies really dramatically transform claims handling for example, and all of the technologies that have emerged around natural language processing and image capture if there's an actual crash.

But what Loop is playing is not an operational efficiency, dial it in so that there's no fat on the bones here kind of operation and I think actually racing to the bottom there really cuts corners and cuts costs in ways that really affect the customer experience.

Joey Giangola: All right, guys, I got three more questions for ya. And really simply, what is one thing that you guys hope you never forget?

Carey Anne Nade...: One thing we hope we never what?

Joey Giangola: One thing that you hope you never forget?

John Henry: I hope I never forget that business is a people first game. And we are playing in a very quantitative field where insurers and reinsurers deal with these enormous books of business and look at their customers as but another number and premiums and claims as but a rounding error on their balance sheet.

And I hear how people refer to nonstandard business. We're a standard carrier, but for example, everyone likes to talk down. Everyone loves non-standard business because it's fee-driven and you can bank on those fees, but they look down on the same customers that they insure. And so I think what I really hope to never forget is to always meaningfully support the same communities that we insure and remember that there's people on the other side of these experiences, of these quotes, of these leads, of these click-through rates, of these claims. And I think that, so as long as we keep people first, I don't think that there's a way that we can lose, personally.

Carey Anne Nade...: In developing this answer, I think that's such a beautiful way to say it. I would add, I hope I never forget that my mom always, her car was always breaking down. I was the kid that was left at school for too long because her car was always breaking down. She didn't have reliable transportation to get to work, come pick me up to school on time, do all of the things that actually today we take for granted because getting a car and having a car feels like very much part of our day-to-day life.

But the importance of having mobility, being able to access schools, being able to access good, healthy foods, being able to access reliable childcare are largely tied to people's mobility. I was just reading Andre Iguodala's book, The Sixth Man, and he tells a story about his mom walking to work in Illinois in the winter, through a snow storm without a jacket and that keeps him humble in the same way. It's this memory of what it really means when you're faced with a situation where you don't have mobility and how hard your life becomes and how difficult just practically getting places becomes.

And so I think it's a great gift and an opportunity to sell a car insurance because it's also a great gift to the people that are receiving mobility and being enabled to go farther in their lives and in their journey, wherever they're headed.

Joey Giangola: Now, on the other side of that what's one thing that you guys still have yet to learn?

Carey Anne Nade...: How to drive well. We're horrible drivers. I'm just kidding. But we were testing our telematics apps and we were all pretty, our head of data science were like, "You need to slow down because we're going to have to, I don't know if we're going to insure you."

John Henry:  Yeah. I have yet to... I'm learning the intricacies of the... The reinsurer stakeholder really fascinates me. They hold a lot of the leverage, a lot of the power in negotiations. There's not really a negotiation. It's really just like, "Can you please underwrite me?" And then it's like, "All right, here's the terms maybe if you dance through all these hoops."

I want to learn how to successfully and meaningfully bridge these worlds between Insurtech That's kind of seen as a novel play that you kind of have to have in your portfolio so you can check that box. I was a venture capitalist before and we successfully were able to court the institutional stakeholder. And this week we announced $134 million fund two, which is unprecedented. It's the largest diversity-focused fund in the country.

I think that there's a really big opportunity for Insurtechs to nail it with the institutional side of this, the institutional stakeholder here, which is the reinsurer. So my mind went to a more tactical place, but I'm fascinated by the stakeholder and I want to learn how to deal with them more and more fluently.

Joey Giangola: All right, Carey Anne and John, last question to you guys, and we might've spent the last 30 minutes answering it, but let's find out. If I were to hand you a magic wand of sorts to basically reshape, change, alter really anything in insurance, what is that thing, where is it going, and what is it doing?

Carey Anne Nade...: Boy, a magic wand to change anything about insurance today. Yeah, I mean, just John's comment about re-insurance really struck me because they are, in many ways, the capital infusion that drives innovation in our industry. It really does come from the top down because they have the executive authority to deploy capital at scale and so enables some new technologies to enter the market.

And so I guess one of the things I would be excited to see is a more sophisticated understanding of the potential of AI in the underwriting side of the house. Certainly every reinsurer that's met with us has had a lesson in geospatial statistics that we have been really excited to share with them about the power of really understanding where people are and where they go and understanding their risk profile.

But I think there's still a lot of fear, a lot of reticence, a lot of insecurity from the way that AI has been used over the last decade, both within insurance and outside of insurance that has left people with a skepticism and a fear that needs to change if we want to... We're not headed in any other direction. So my magic wand would maybe just speed that up so that we can get to market faster and grow our business faster and get more folks excited about what we're doing.

John Henry: Nice. Good answer. My magic wand would be...

Carey Anne Nade...: It's a hard question.

John Henry: Yeah, my magic wand would be, I mean I... So what I'm actually wrestling with is I had a few answers that come to mind, but I don't want to cheat. However, one of them is, I wonder how the industry would change if the majority of profits didn't come from the invested premium side of the house, and it came from the underwriting side of the business. I think that that would prompt a lot more innovation, a lot more quickly, but there's a natural disconnection and misalignment with the consumer because the industry can make so much money from invested premiums.

Hypocritically, I'm not complaining because I want to be able to invest my premiums and in carriers and MGA's, and everyone else should be able to, but the fact that that is a reality, I think misaligns interests between the risk-bearing entity and the consumer.

So I thought about a number of things. I was going to say people first or some stuff on the regulator side, but ultimately that's one thing that... I don't know. Be careful what you wish for, because I don't want to wish that profit center away for the insurance business. Because it's a big one, but I wonder what it would do is moreso where I'm coming at it from.

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