Insurance Industry Is Shifting Due to Millennial Homeowners
By Ryan Jesenik, Senior Vice President of Orion180, a technology-enabled homeowners insurance provider serving most of the Southeast region.
The insurance industry, which is typically antithetical to modern advancements, is at the beginning of a technological renaissance driven by a massive generational shift led by millennials, who value simplified user experiences and an extraordinary increase in investment dollars.
This movement, commonly referred to as InsurTech, the combination of insurance and technology, has become a force to be reckoned with, with more than 1,500 new companies entering the market in the last five years.
Further, the institutional investor community is recognizing the impact that technology is having on the massive sector, with a total of $2.55 billion raised just in the first quarter of 2021. Some of the most well-known venture capitalists including Andreesen Horowitz, Sequoia Ventures and First Round Capital, as well as hedge funds such as Tiger Global and Softbank, are participating in almost every stage of fundraising.
What makes InsurTech so appealing to investors in 2021?
The U.S. insurance industry wrote $1.32 trillion worth of net insurance premiums in 2019, with property and casualty providers (this includes home, auto and liability insurance) making up more than $637 billion of that total. On top of this, the insurance ecosystem employs more than 2.9 million people in the U.S. alone. Consumer-facing agencies, reinsurance providers, new and old carriers, data aggregators and managed general agencies all contribute different value propositions. The industry’s sheer market size, its variation in participants and the vast number of employees creates an extraordinary amount of opportunities for innovation and tech-enabled solutions.
Public market evaluations are another contributor to the attractiveness of the industry for investors. Lemonade, ROOT, Metromile and OscarHealth are all examples of recent public market participants either via the IPO or SPAC process. These companies have raised several billion dollars for further expansion at mouth-watering valuations. For example, at this moment in time, Lemonade and ROOT are trading at around 20 times and around 10 times, respectively. MetroMile is trading at around 15 times with 90,000 policies in-force at a $1.7 billion valuation. In fact, each company is trading at a substantial premium compared to private market valuations.
In addition to new entrants like Lemonade and others, there are still many traditional insurance carriers in the market, representing one of the oldest groups of companies in the U.S. While many legacy carriers are still using outdated systems to transact millions of complex business processes, these incumbents are increasingly embracing technology, recognizing the need to leverage third-party software services to deliver streamlined experiences on par with tech-first competitors. This creates a massive market opportunity for entrepreneurs. As legacy carriers slowly restructure their infrastructure, investors believe newer technology trends like predictive analysis, artificial intelligence, Internet of Things (IoT), and machine learning can be incorporated to further optimize overall underwriting performance.
Where do millennials come in?
The millennial generation is the steady undercurrent inciting rocket ship-like growth in InsurTech. More than 72.1 million people born between 1981 and 1996 are transitioning into first- and even second-home ownership. As the first generation with access to smartphones during most of their adulthood, millennials are almost entirely digitally capable. According to a survey conducted by eMarketer, more than 85.9% of millennials were digital buyers in 2020. In light of their digital aptitude across various consumer-focused mobile applications, millennials have come to value simple and streamlined purchase processes across the board.
Plus, while millennials value price and convenience like their predecessors, they also seek authenticity and transparency from companies. Their openness to industry newcomers, particularly if those newcomers align with their core values, poses a significant threat to incumbents that did not exist years ago.
Market participants can address and adhere to these preferences head-on by effectively incorporating technology into their product and communication strategies.
Why is this better for the insurance sector?
Both new entrants and traditional participants embracing technological solutions are good news for investors and for consumers. In order to survive, legacy insurance providers will continue to invest in new technologies to improve their business workflows. Customer service standards will continue to improve as providers increasingly offer automated live chat, texting and other methods to resolve matters faster than ever before. The investment community will also continue to fund innovative twists on existing products, from incorporating AI to evaluate claims to offering adjustable premiums based on real-time data factors.
While it could take years for InsurTech to fully permeate the insurance sector, what matters most is that the movement will ultimately result in an optimized insurance experience for all.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.