Digitizing Distribution in Local Markets

We’re seeing more mega-funding rounds, such as the $650 million Series C that wefox announced in June. What does this say about the state of the insurtech sector?

From my perspective, it’s just the beginning. We’re looking at a $5.2 trillion industry that still works in the pre-internet era. It is one of largest industries in the world that hasn’t been digitized fully. The reason for that is it’s a very slow-moving industry with few customer interactions. These funding rounds show that insurance is the next large industry to be digitized, and investors understand that there is a huge opportunity. If you start a new insurance company, you have a lot of advantages compared to managing a legacy insurance company into the future. Investors understand that newly founded and built insurance companies will soon take over the incumbents. I think it’s early in the journey but the impact will be immense, and that’s what investors see.

Given the growth in funding, is there a danger of overheating for insurtechs industrywide?

There is a life cycle. We’ve seen the insurtech startups launched around the world in 2014-2015, and they received smaller funding rounds at that point. They went through the Series A, Series B, and Series C. The insurtechs that are receiving the mega-rounds are the ones that have proven over the last couple of years that they are able to deliver. There are not many companies that receive a lot of money. The money really concentrates with the few—let’s call them winners of the last few years. Since insurance is such a huge opportunity, I see no danger whatsoever of the insurtech scene overheating at all. Most of the insurtech startups that have launched in 2014-2015 are already gone or are very small. There are just a few where the money concentrates. These insurtechs pose the real competition to the incumbents.

Many insurtechs began with a direct-to-consumer approach. Why did wefox choose to work through intermediaries?

My dad was an insurance broker, which was actually the reason I never wanted to have anything to do with insurance. But when I realized that it’s an industry that has yet to be properly disrupted, I sought my father’s advice. He explained to me how insurance works, and I realized that insurance worked very differently from other industries that have already been disrupted by technology. Nine out of 10 insurance policies are sold via intermediaries around the world. One out of 10 are sold via direct channels. The direct share is not increasing over the last couple of years as much as experts have said. We call direct insurance the worst of all worlds, which means you have high customer acquisition costs. This also creates higher loss ratios than the other distribution channels if you compare it to brokers or agents or affinity channels, and you have a lower loyalty of customers acquired directly. It is very difficult to turn direct business profitable.

We decided that, instead of focusing on nailing the challenge of turning direct acquisition profitable, we are going to focus on digitizing the nine out of 10 policies sold via intermediaries. What we’re thinking about is the human. We want to power the human with technology and to be able to sell more insurance policies in a more customer-centric manner.

What is the value in partnering with brokerages?

It offers huge value. Essentially, insurance is an abstract product that is based on considering the possibility of negative outcomes and trying to mitigate the risk by taking out an insurance product. In these moments, you don’t want to talk to a chatbot; you want to talk to a human who is empathetic. We believe that, with insurance, people play an extremely important role in building trust and providing transparency and clarity. There is a small customer cohort that has the ambition to understand everything, research everything and understand it, but that is a very small group. The majority of people don’t want to have anything to do with insurance. That is why dealing with a real person plays such an important role.

How does the technology streamline the insurance process?

We work on a single tech platform to build all of our insurance products. This is very important because, for the different countries, we don’t have different tech platforms. It’s a central product team that builds insurance products for all of our insurance markets, so we can speed up the process, as a lot of it is replicable and the only difference is catering to the local market requirements. …We’re very fast, and we build these products based on the demands of the advisors and customers.

Why is understanding differences in distribution crucial?

We started off in Switzerland and Germany, and we are now also in Austria; we are in Poland and recently launched in Italy. There are a few more European markets that we will be launching in very soon. The model that we have built truly understands the differences in distribution, market by market. Distribution in Italy works very differently from distribution in Switzerland. While in Italy, affinity partnership is very strong—you buy a car, and you get insurance with the car—this doesn’t happen in Switzerland. The broker channel is very, very strong in Switzerland. In Germany, the tied-agent channel is very strong. If I come to the U.S. with the same distribution channel that has worked in Germany, I am going to fail miserably. The game is very different in distribution, and the international success is actually won in distribution, which has the closest relationship with the customer. So our strategy is simple: we get closer to the end-customer by powering the brokers. If we can deliver a better customer experience for our partners, they will deliver a better customer experience for the end-customer. It’s a win-win for everyone.

What are your plans for the U.S.?

The way we typically enter a new market is that we partner with a local broker or distribution organization, and we then start adapting our technology to support that distribution partner. Once we have proven that we can increase the conversion rate, we start launching our own products on the platform. That would be the same approach for the U.S., where we would first partner with a broker. We would roll out our technology, and then we would launch our own insurance carrier on top of the platform. The challenge in the U.S. is 50 states and 50 licenses, but we are used to getting licenses in Europe. We are pretty confident that we can handle that as well. We’re not rushing. We think we’re in this for the long term, and we think we have a superior model to also win the U.S.

Are you in discussions with U.S. brokers already?

Yes, we have had discussions with U.S brokers over the last five years. Broker organizations that have licenses for all 50 states are very interesting partners for us—partners or even acquisition targets—for us to simplify the entry into the U.S. market. These discussions have strengthened our perspective on the U.S. being a huge opportunity for our business.

Do you have a timeline for U.S. expansion?

What we’re going to focus on now is launching the large European markets. Insurance is so big that in every single market where we’re active by itself we could build a multibillion-dollar business. There are a couple of markets that we still want to enter. The U.S. is on the road map. We are not rushing it. We want to do it properly. Once we find the right partner, we are going to go for it.