The Case for Default Insurance

Imagine you never had to think about buying insurance—that it was automatically attached to everything you own. Your apartment is broken into? Renters insurance came with your lease. Your dog breaks his leg? Your vet bills are covered. Your business gets hacked? You got cyber when you bought your domain name. 

Unfortunately, we are frustratingly far from this intuitive, risk-reduced life. Insurance purchases are most often decoupled from your purchases. Perplexingly, you acquire the valuable thing (you buy the house or the car, you register your business), then you have to go somewhere else to get the insurance. The purchase and the risk transfer are oddly discrete events. It would make a lot more sense to not only unify the buying experiences, but to make insurance default ON. At minimum, insurance should be a convenient opt-out experience, rather than an inconvenient opt-in.

The problem: Why is insurance decoupled from the purchase?

Buying insurance at the same time as your purchase sounds simple—obvious even. Every merchant should offer insurance for its product or service. So why isn’t this the norm?  

Consider what it currently takes for a merchant to add insurance:

• Insurance is a complex product. As a result, most platforms seek to partner with an insurance company rather than building it themselves. There are many options: One in 10 Fortune 500 companies is an insurance company. But all those insurance companies were started before World War II, and their tech stacks are not much newer.
• As a result, these insurance partnerships are rarely integrated to provide a fast or convenient consumer experience. For example, most home insurance applications span 40 to 60 questions, with separate forms if you apply across multiple carriers. Or for some types of business insurance, it can take several days for an applicant to receive a quote. With such a terrible insurance buying experience, merchants risk maddening their customers in pursuit of a stubbornly low conversion rate. This cycle is self perpetuating: poor conversion rates mean carriers won’t invest in the channel.
• Furthermore, the insurance experience is not just the application. Who will manage the policy on an ongoing basis, the merchant or the insurance company? The full end-to-end process, including claims, is often outsourced. Brands are understandably hesitant to expose their customers to potentially confusing, frustrating, and time consuming experiences that are outside their control.  
• Lastly, the merchant needs to get licensed as an insurance broker in order to get compensated for selling insurance (beyond lead generation).

In short, whether it’s mandatory or optional, if insurance is not your primary business, it’s often difficult to build and painful to partner. 

The potential for merchants, consumers, and insurance companies 

Today, more companies are realizing that by offering financial services, they can better retain their customers and significantly increase their revenue. Insurance is a big untapped opportunity. Specifically, insurance gives customers peace of mind for each purchase, potentially prompting additional or larger sales, or more brand loyalty for future sales.

For insurance companies new and old, distribution is the #1 expense (after losses, of course). While consumers and businesses begrudgingly purchase compulsory insurance—home, auto, workers comp, etc.—the cumbersome process, unclear value, poor user experience, or lack of awareness often prevents them from pursuing non-compulsory (optional) insurance. For insurance companies, integrating their products directly into the sellers’ platforms would be a much cheaper, more efficient way of acquiring them, and could lead to better risk selection.

The solution: opportunities for new companies

It’s time to transition from a disjointed and time-consuming process to an intuitive, one-click, “check box for insurance” experience that happens at the time of purchase. What are the opportunities for new companies? 

1. Pick a category and create a modern, easily integratable product 
2. Build an API layer to make it easier for sellers to partner with existing insurance companies 
3. Develop infrastructure building blocks to enable bespoke integrations 

Pick a category, create a modern insurance product: fast to apply, easy to embed

First, new insurtechs need to continue to build convenient, category-specific offerings that can easily be embedded into a merchant’s existing checkout flow or user experience. A home insurance company like Hippo, for example, asks applicants one question, instead of 40; it could sit on top of most home related platforms. Clearcover’s auto insurance is such a lightweight experience that you could imagine your neobank detecting that you’re paying too much for auto-insurance and offering this alternative. Extend is streamlining warranties for many consumer purchases. For business insurance, Coalition is able to underwrite cyber coverage based on publicly available information on a company’s security posture, rather than sending a team of people to your office. In the future, you could buy cyber insurance when you buy your domain name.    

The bigger opportunity lies in incorporating platform data to not only better underwrite risk, but also inform marketing, quoting, sales, and renewals over the full life cycle of a customer. For instance, imagine a workers’ comp product that understands how much of a contractor’s business is indoor plumbing (low risk) versus outdoor roof work (high risk) based on the payment data from a vertical SaaS platform for home services like ServiceTitan.  

Build an API layer to make it easier for platforms to integrate with existing insurance companies

The existing insurance carriers also want distribution and more direct access to the customer.  But it’s not easy for them to nimbly adapt their tech platforms to build better user flows and integration points. Here, there’s an opportunity for new API layers that make applying for insurance (or switching insurance policies) easier.   

Imagine a company that understood the application processes and data requirements for the 10 best carriers in a category. It could map all those application processes into a single form, potentially even pre-populating some fields with the potential buyer’s info for his or her convenience. These companies would allow you, the consumer, to easily log in to your existing insurance company (a la Plaid), pull data on your existing policy, and then quickly get quotes and compare options.  

For example: your bank detects you are paying $x a month for renters insurance and offers you the ability to quickly compare a curated set of policy options—and potentially switch—without ever leaving the site. Or for commercial insurance, say you buy a new van for your business. The dealer could offer quotes for vehicle insurance upon checkout, provide a comparison to your existing policy, and switch you automatically. You could drive away insured. Critically, this could automate one of the most difficult parts of the insurance process: choosing insurance and feeling confident in your choice.  

This approach of “shopping” rates amongst multiple carriers is appealing since it is near impossible for one carrier to give the best price to every type of customer.  Customers may be willing to “overpay” in year 1 for the convenience of buying on the platform, but it is unlikely they will choose to renew.  

Develop insurance “as a service” building blocks 

Platforms of scale that want to capture even more of the economics, leverage data to better underwrite risk, or need to create a new or unusual type of insurance (e.g. IoT insurance) will be better served by embedding their own insurance product.  

The insurance “stack” is fairly complex.  Here’s a simplified view:

Companies like Hippo and Clearcover are building or partnering to assemble this full stack themselves. It’s not realistic to expect a company whose core business is not insurance to do the same. But what if—similar to what is happening in fintech—each of these layers (or perhaps several layers bundled together) could be offered as a service? With more modern layers, new insurtech companies could spin up more quickly. That advancement could also unlock entirely new distribution channels for larger platforms to embed their own products (e.g. a larger vertical software company, a gig marketplace, or an iBuyer).  

How might this insurance embedding work? New insurance infrastructure companies will provide some of these layers “as a service.” To launch a new insurance product, companies first need to form a reinsurance partnership and partner with an existing carrier (or get licensed as a carrier themselves, which takes much longer). Right now, finding the right partner is difficult and negotiations are opaque. New players such as Boost are pre-negotiating relationships with reinsurers and carriers and providing the licensing and underwriting expertise to launch new products more quickly. Any new insurance type will need a policy management system to track policies and payments—this critical system of record is necessary for any platform launching an insurance product, but it’s often too complex to build if it’s not your core business. Leveraging a policy management partner would be much easier.

One can imagine a fresh take at each layer of the stack, eventually reaching a point where adding insurance will be as modular as adding bank products. 

As a business model, embedded financial services is becoming increasingly mainstream. Embedded insurance is next. With this model, companies can benefit from an improved revenue stream and customer retention. And best of all, consumers and businesses will be able to function much more risk-free.

Thank you to Kyle Nakatsuji (Clearcover) for providing feedback on this post.