Full-stack insurtechs Root, Metromile, and Lemonade have all come a long way in less than a decade since being founded. Spectacular growth has landed Root and Lemonade $1Bn+ valuations in their latest financing rounds, as investors are betting that insurance companies built on a modern technology stack from the ground up pose a real challenge to incumbents.
The theory goes that these companies can use new data sources and modern analytical techniques in underwriting to reduce claims cost. Being a digitally-native business should also allow these companies to automate extensively and reduce overheads.
However, the profitability metrics of these companies paint a different picture. In Q2 2019, Root, Metromile, and Lemonade posted combined ratios of 126%, 103%, and 119% (gross). Loss ratios alone came out at 91%, 72%, and 69%, respectively.
It seems the early promises of high-quality underwriting (i.e. lower loss ratios) and operational efficiencies based on technology are yet to be proven. This might yet be a result of aggressive pricing from challengers who are chasing growth. But for now, it is still too early to claim that these new business models will transform the economics of personal lines insurance. Perhaps, at the very least, these insurtech pioneers will have contributed to accelerating the industry's digital transformation.
We believe the current business models are not yet showing any clear competitive advantages that can make the pricing war sustainable for the three full-stack insurtech carriers. However, they have a lot of cash combined with highly talented teams that can experiment and find new ways to build moats and forts to gain competitive advantages.