Hate insurance agents? New wave of online insurers feels your pain

When his son was born, entrepreneur Adam Erlebacher was so apprehensive about buying life insurance that he put it off for two years. When he finally met with an agent, he felt pressured into buying an expensive policy.

“The guy was making me feel hustled,” he says. “And I have a graduate degree in finance, so I was more prepared for it than most people. I imagined that there were a lot of people who were feeling the same way.”

That was the impetus behind the Brooklyn-based Fabric, the new online life insurance company Erlebacher founded with his friend Steven Surgnier. Neither was new to this type of business: both were part of the team that a few years ago launched the digital banking platform Simple.

Fabric is riding a huge wave of startups—industry experts put the number at somewhere between 400 and 500—hoping to the change the way people buy insurance in the U.S. They move everything online, and in the process, promise to save you time, money, and that trip to an insurance agent’s office.

“The system is really built around the fact that people don’t know what to expect,” says Erlebacher. “When you start talking to an agent, you have to trust them to explain what you’re buying. But they’re incentivized to sell you the product with the biggest commission.”

His company offers a basic policy called Fabric Instant starting at $6 a month for $100,000 in accidental death coverage. For a few dollars you can upgrade to Fabric Premium, a 20-year term life policy that covers accidents and illness. Fabric is currently available in more than three dozen states. The latest is New York, one of the country’s biggest markets.

Investors are impressed by Fabric’s business model. When the company launched in March, it also announced a seed round of funding totaling $2.5 million. The company has grown quickly, tripling its staff and moving into much larger offices at WeWork Dumbo Heights.

Standing out in a crowded field

Insurtech is rapidly becoming a crowded field, especially with all of the traditional companies opening their own online portals. Venture capital firms—and some of the well-established insurance firms—are pumping hundreds of million of dollars into these newcomers. In just the first quarter of 2017, the total was $283 million.

The biggest strength of the new companies, according to Ellen Carney, an analyst specializing in insurance at Forrester Research, is being able to respond quickly to changes in the industry.

“The industry certainly has taken notice,” says Carney. “What they’re thinking is: ‘These guys are cigarette boats and we’re an aircraft carrier. We can’t move fast enough.’”

Carney says the small companies have already helped change the industry, but that doesn’t mean all of them are going to survive. She says the ones that will thrive have the most solid business plans.

One she mentions by name is New York City-based Lemonade, a renters and homeowners insurance startup that has raised more than $60 million, including a $34 million Series B round in December. Lemonade CEO Daniel Schreiber recently announced a “strategic partnership” with insurance giant Allianz.

“Lemonade is clearly making some inroads,” says Carney. “They seem to have thought through their business model more than some of the others.”

Schreiber says his goal was to “create a new kind of insurance company.” Part of that was taking the cumbersome process of applying for insurance and moving it online. He says it takes 90 seconds to get a policy on the AI-based system.

“We never believed you could simply put a nice website on a 100-year-old edifice,” he says. “Beneath the surface you have the same problems.”

Schreiber says one of these problems is trust—people feel that the system is stacked against them.

“Traditional companies make money when they deny your claim,” says the member of New York’s WeWork FiDi. “Every dollar they don’t pay adds to their bottom line.”

Lemonade takes a 20% flat fee when you buy a premium, meaning it doesn’t make money by denying a claim. That means it can rapidly accept, investigate, and pay out claims. It made headlines earlier this year by announcing it settled a claim for a stolen jacket in three seconds. (That news, says Carney, made traditional agents react “like their hair was on fire.”)

Nissim Tapiro, Guy Goldstein and Alon Huri are the cofounders of Next Insurance.

Disrupting a $100 billion industry

Another company in the news is Next Insurance, an online insurer for small businesses that announced a $29 million Series A round on May 3. It’s based in Palo Alto, CA.

“Insurance for small businesses is a $100 billion industry in the U.S.,” says CEO Guy Goldstein. “No one—not Geico or Farmers or Progressive—is really taking advantage of this space. That gives us a huge advantage.”

Instead of offering a one-size-fits-all policy, Goldstein says Next researches the needs of each industry, such as personal trainers, photographers, and contractors. That way they aren’t paying for coverage they don’t need.

And Goldstein also emphasizes the time saved by applying online: the average small business customer gets coverage in about eight minutes.

It’s great that insurtech companies are speedy, says Carney. But they shouldn’t forget that most customers—including the Millennials they are courting—still prefer talking with an agent. When customers research insurance, their top choice is still talking with an agent in person or on the phone.

Another challenge that new companies must contend with is standing out in a crowded field. When she looks at a newcomer in the field, she takes a long hard look at their go-to-market strategy. Many don’t have a clear plan for getting their name in front of consumers.

One thing that could solve both these problems? Working with those dreaded insurance agents.

“I think an interesting opportunity for these new companies is—believe it or not—working with independent insurance agents,” she says. “I see a growing number of agencies being acquired by a younger generation, and they’re looking to do something different. Why not reach out to them?”

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