What makes a company a ‘technology’ company?
Answers to this question vary widely - here is how I imagine most people will answer this question:
A business that uses software to reinvent the industry value chain, often making products and services cheaper and/or better
A business that employs a high proportion of workforce with engineering and software skills
A business model that has recurring revenue (SaaS-like) characteristics
A business that raises successive rounds of funding and uses the capital to accelerate growth
A business that owns distribution - often via the use of a web or mobile app
A business where marginal costs of attracting new users decreases over time
A business where costs of scaling to a new geography is quite low
A business that reduces informational asymmetries between buyers and sellers
And so on. I am sure readers of the blog can come up with their own such list. Ben Thompson, who knows a lot more about technology than me, took this question apart in a recent blogpost. Here is Ben’s checklist to see whether a company qualifies as a ‘technology’ company:
He then cites a couple of examples to show how companies like Netflix and Uber fit the moniker. Below are the relevant bits:
Reading through Ben’s list, I couldn’t help but wonder how many insurtechs might not be so much about tech after all. I will pick on the US-based car insurer, Root, here. This is because Root recently announced a $350M Series E at a $3.65B valuation. While I have a lot to say on that valuation, I will resist that temptation and focus exclusively on how Root fares under the ‘Ben Thompson’ tech checklist.
Let’s run through each of the 5 tests:
Software creates ecosystems: ❌
In Root’s case, it should be quite clear that no ecosystem has yet been created. There is no lock-in and no wider distribution play that others are a part of.
So what might an insurance ecosystem look like? At a minimum, it would bundle a host of products and services where car buyers or car owners would use Root’s distribution as the first point of transaction. Other value chain participants (i.e. car manufacturers, dealerships, lending companies etc.) would then plug into the Root distribution (possibly via the use of APIs) and pay Root a small margin for each sale. At best, there would also be some lock-in around this ecosystem.
Software has zero marginal costs: ❌
Root does not and never will have zero marginal costs.
The very nature of the insurance product makes it impossible for underwriters and brokers to benefit from zero marginal costs. Each customer brings a new type of risk and while diversification brings some benefits, on aggregate your risk pool keeps increasing. No amount of software can lead to infinitely decreasing marginal costs. The only insurtechs that can qualify as having zero marginal costs are insurance software companies like Guidewire. In that case, the marginal cost of servicing another user with an uncustomized version of their software is likely zero or close to zero.
Software improves over time: ❓
Root’s claim-to-fame is a telematics app that analyzes your driving behavior upfront and uses that to give you a reduced premium quote. In theory, this might be be an improvement over the existing paradigm (i.e. insurers rating you based on a bunch of demographic and personal info questions) But remember, this bullet isn’t really about whether Root’s current product is better than existing market offerings. It is about whether over time, Root’s product will get better and better over time. And the jury is still out on this one.
In Netflix’s case, an improved product meant greater choice of content. In Uber’s case, an improved product meant more cities, more services (e.g. UberEats) and reduced wait times. In Root’s case, an obvious product improvement might be an improved pricing algorithm over time that priced you solely on your driving behavior. In theory, this is believable given where machine learning is headed. However, Root’s recent decisions around giving a quoted price to everyone - even those who don’t download the app and drive 200 miles - leaves us skeptical. That indicates that Root is geared towards being more of a traditional market insurer as it prepares to IPO.
Software offers infinite leverage: ❌
Root has no leverage due to the industry it participates in. Root is a very, very small fish in a big pond. And even the big fishes (i.e. GEICO, AXA) in the pond have relatively little leverage.
Insurance is a highly regulated industry. Even, underwriting risks in a new state just within the United States requires any company to get a new license. GEICO might be top dog in the United States. But that almost has little to no value if decides to open a venture in Slovakia.
On the other hand, companies like Airbnb and Uber have been able to leverage their brand globally to create ‘infinite’ leverage in the minds of consumers. Often, they are the only game in town and consumers have little other choice.
Software enables zero transaction costs: ❌
Root does not benefit from zero transaction costs. Again, a lot of this is simply down to the nature of the b̶e̶a̶s̶t̶ industry. Sure, you can offer a drive a free 1 to 2 week trial insurance. But these aren’t zero transaction costs. If anything, there are potentially high costs involved. A couple of large claims would make this strategy unsustainable. That is the reason short-term ‘one-week’ drive-away insurances have still not proliferated despite the obvious benefit of being able to capture apathetic customers who might not switch at the end of the trial.
Just as before - an insurance software company - does better on this front. It enjoys zero transaction costs and can ditch traditional sales tactics. A few insurance software startups have now created freemium products in lieu of hiring traditional sales teams.
So on final count, Root ends up with a 0 or 0.5/5 score. Hardly a ‘tech’ company under a Ben Thompson or Marc Andreessen definition of the word. Better companies to qualify for the insurtech title are actually companies that have been around much longer like Guidewire and Ping An.
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