Companies today operate in an entirely different world than the one just a few months ago. Now, cash is more king than ever and, top of mind for so many businesses, is how to increase runways and build sustainable positions. Companies no longer have unlimited access to VC capital to pursue growth-only strategies, disregarding profitability until late in their lifecycle.
In this post, I cover why insurance should be a critical component for many companies, particularly marketplaces, in getting to and building upon profitability. These thoughts were recently shared at a virtual webinar as part of the Marketplace Risk Master Program. Free access to the webinar is available here. This post summarizes my remarks.
Insurance has a dual impact on gross margins. First, it can increase the revenue when sold as part of the company’s offering. Second, it can decrease the costs of goods sold (COGS) when premiums paid to insurers are reduced. This characteristic makes it a powerful lever.
Online companies have data and access to risks that can be monetized with insurance products. They collect unique data about their users, their assets, and the transactional context. For example, an RV sharing company like Outdoorsy knows (1) who is the driver, (2) what vehicle is being rented, and (3) what the context is (e.g., the location, the time of the day, the weather, the duration, how the RV is driven, etc). This information is very useful for underwriting, and is something most insurers only dream of having access to.
Some players in the ecosystem are already waking up to this opportunity. We’ve seen 3 main approaches to insurance:
Designing, launching, and optimizing insurance products that are profitable and that improve the user experience is not easy. At Tint, we use the following framework when helping our clients:
First, the company needs to decide what it wants to offer to its users. Examples of questions to ask include:
Let’s take a look at how Turo did it (detailed description of how Turo designed its protection plan). It decided to organize its protection plan in 3 categories to address different risk-taking preferences of its users: Minimum, Standard, and Premier. These plans all cover physical damage losses but have different limits, deductibles, and premiums. Turo also decided to have different parameters for these plans in different countries in order to incorporate local specificities.
The protection options are offered to the users during the check-out process and the cost is shown separately. Turo also lets users decline this protection.
What are the risks that the company accepts? In the insurance world, this is called underwriting criteria.
There are two ways of approaching this problem:
Both are useful and have different pros and cons:
The most powerful risk selection processes will use a combination of both.
Now that the company has defined the criteria to filter out the risks that it doesn’t want to ensure, it’s time to set the price that the user will pay for the insurance policy. The best pricing schemes are risk-based and as granular as possible to ensure fairness for the users and sustainability for the company.
There are 3 basic ways to define the pricing:
There are pros and cons for each of them:
Companies typically start with basic pricing when they don’t have a good understanding of their risk and don’t have enough data to segment it. Over time, they deploy sophisticated techniques to personalize the insurance offer and achieve higher profitability.
The last step is to figure out if the company wants to retain all or part of the risks or transfer it to an insurance company. Here are a few questions that can help the company decide:
Here are the pros and cons of both options:
From our experience, companies transfer most or all of the risks in the early days when they don’t have enough capital to risk and data. As they scale, businesses start to internalize the risk functions and use tools like captives to reduce the overall cost.
Insurance is a critical lever to boost your company's margins while improving customer experience. It can help companies increase revenue through the sales of insurance products and reduce the costs of goods sold when premiums are reduced. A well-executed insurance strategy improves the quality of the service and provides valuable financial resources.
Achieving this is not easy, as the companies must execute each step in the framework described in this article well, which requires software and operational resources. Here at Tint, we focus on providing a seamless experience powered by our AI-first insurance infrastructure that helps companies design, launch, and optimize world-class protection programs. You come with your unique data and insights, we coordinate everything else.