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The roots of Root Insurance
#UBI #mobile telematics #insurtech
POSTED ON:
Jan 27, 2022
TAGS:
Root Insurance, UBI, connected car, unicorn
Root’s share price drops from $27 to $2, and the company lays off 330 employees.
As the latest news about Root Insurance has stroke the insuretech community, we could not but elaborate about this pioneer of telematics insurance. Today, we’ll share our vision of their story and its role in changing the industry.
As the latest news about Root Insurance has stroke the insuretech community, we could not but elaborate about this pioneer of telematics insurance. Today, we’ll share our vision of their story and its role in changing the industry.
Root Insurance is one of a few unicorn insurtechs that introduced a telematics-based solution for motor insurance. The idea was to create a Pay-How-You-Drive solution using a mobile app for telematics data collection.
The data analytics powered by machine learning should have allowed Root to assess risk more efficiently, achieve a better loss ratio, and offer competitive premium costs to its customers. Nothing new, but Root managed to make it to the top, or a sort of...
In 2016, Root Insurance started its journey in the US, but it looked more like a rocket jump rather than laying a foundation for sustainable growth:
‘With just $4 mln in premiums written in 2017, they reached $106 mln in direct premiums written in 2018 and hit $600 mln in 2021.’
What a blast! And one of the reasons for such tremendous growth was a brilliant job done on funding.
‘In 2018, they secured $150 mln in funding by closing two rounds. In 2020, they set up an official funding record for Ohio with almost 1 bln of investments!’
These huge rounds and tremendous growth skyrocketed the company evaluation to $6.7 bln in 2020 when Root officially IPOed with the shocking share cost of $27.
But there’s always a reverse side of the coin, and Root is not an exception. Despite impressive growth, funding, and disruptive (as they claim) underwriting technology, Root was lagging in crucial insurance metrics:
✅ Direct Loss Ratio, standing at 100+ to 70+ points vs. an average industry metric of 60 points.
✅ Customer retention rate of up to 47%.
Simply put, claims and operations cost Root more, than they earned selling premiums, not to mention huge expenses on attracting new customers. All this resulted in negative annual income, reaching 415 mln by 2022. Following this, the stock cost dropped by 92% and 330 people lost their jobs.
The data analytics powered by machine learning should have allowed Root to assess risk more efficiently, achieve a better loss ratio, and offer competitive premium costs to its customers. Nothing new, but Root managed to make it to the top, or a sort of...
In 2016, Root Insurance started its journey in the US, but it looked more like a rocket jump rather than laying a foundation for sustainable growth:
‘With just $4 mln in premiums written in 2017, they reached $106 mln in direct premiums written in 2018 and hit $600 mln in 2021.’
What a blast! And one of the reasons for such tremendous growth was a brilliant job done on funding.
‘In 2018, they secured $150 mln in funding by closing two rounds. In 2020, they set up an official funding record for Ohio with almost 1 bln of investments!’
These huge rounds and tremendous growth skyrocketed the company evaluation to $6.7 bln in 2020 when Root officially IPOed with the shocking share cost of $27.
But there’s always a reverse side of the coin, and Root is not an exception. Despite impressive growth, funding, and disruptive (as they claim) underwriting technology, Root was lagging in crucial insurance metrics:
✅ Direct Loss Ratio, standing at 100+ to 70+ points vs. an average industry metric of 60 points.
✅ Customer retention rate of up to 47%.
Simply put, claims and operations cost Root more, than they earned selling premiums, not to mention huge expenses on attracting new customers. All this resulted in negative annual income, reaching 415 mln by 2022. Following this, the stock cost dropped by 92% and 330 people lost their jobs.
What is Root Insurance, and why there's so much fuzz around it?
The root of the Root’s troubles
There are four main reasons for the crisis in Root:
✅ High Loss-ratio (well above the industry average and above 100% in some timeframes). It could be the sign of either an underpriced portfolio or underperforming risk assessment (or, most likely, both).
✅ Rapid growth. Being one of the pioneers in mobile telematics, Root bet on customer acquisition and fast expansion across markets. At the same time, the basics, like loss improvement, distribution, and claims adjustment, lagged behind the growth.
✅ Distribution strategy. Being totally focused on direct sales and even denying the power of agents, they increased customer acquisition costs. As the portfolio was growing, it directly increased their expenses.
✅ Technology. Though mobile telematics is the cheapest data source, it provides low-quality data, when compared to tracking devices or OEMs. This could affect their telematics-based underwriting model.
Complement the latter point, we also bet on technology. But we should admit that it’s not the first-order success driver, especially in conservative markets.
✅ High Loss-ratio (well above the industry average and above 100% in some timeframes). It could be the sign of either an underpriced portfolio or underperforming risk assessment (or, most likely, both).
✅ Rapid growth. Being one of the pioneers in mobile telematics, Root bet on customer acquisition and fast expansion across markets. At the same time, the basics, like loss improvement, distribution, and claims adjustment, lagged behind the growth.
✅ Distribution strategy. Being totally focused on direct sales and even denying the power of agents, they increased customer acquisition costs. As the portfolio was growing, it directly increased their expenses.
✅ Technology. Though mobile telematics is the cheapest data source, it provides low-quality data, when compared to tracking devices or OEMs. This could affect their telematics-based underwriting model.
Complement the latter point, we also bet on technology. But we should admit that it’s not the first-order success driver, especially in conservative markets.
The future of Root
Root Insurance is on the edge of a critical change, and it's coming in any case. At Draivn, we tried to predict the possible scenarios for Root, taking into account both the insurance industry and technology trends.
Positive scenario
In our understanding, there are two roads to take:
✅ Root will revise its distribution model and reduce customer acquisition costs by selling through channel partners.
✅ Or they will opt for a hybrid business model – underwriting less risky policies and acting as an MGA for more risky profiles. The MGA approach can also help reduce acquisition costs for other complementary products (e.g., household, personal liability).
In both cases, the company should focus on a more efficient risk assessment and claim management. Yes, it may affect the service cost and shrink their portfolio. But at the same, it will increase the service quality – as opposed to the clients’ quantity – and help to do away with the company’s negative image.
Moderate scenario
In case the positive scenario is not possible, the acquisition may become a good alternative for Root, similar to what’s happened with Metromile. Root, being in a weak position, can be acquired by a bigger fish to strengthen its portfolio. Looks like we already see BlackRock started doing their sanitation job as a part of a new 300 mln loan for Root.
Negative scenario
If Root doesn’t take any actions towards loss ratio, distribution model, and customer retention improvement, huge losses will prevent investors from funding it.
Positive scenario
In our understanding, there are two roads to take:
✅ Root will revise its distribution model and reduce customer acquisition costs by selling through channel partners.
✅ Or they will opt for a hybrid business model – underwriting less risky policies and acting as an MGA for more risky profiles. The MGA approach can also help reduce acquisition costs for other complementary products (e.g., household, personal liability).
In both cases, the company should focus on a more efficient risk assessment and claim management. Yes, it may affect the service cost and shrink their portfolio. But at the same, it will increase the service quality – as opposed to the clients’ quantity – and help to do away with the company’s negative image.
Moderate scenario
In case the positive scenario is not possible, the acquisition may become a good alternative for Root, similar to what’s happened with Metromile. Root, being in a weak position, can be acquired by a bigger fish to strengthen its portfolio. Looks like we already see BlackRock started doing their sanitation job as a part of a new 300 mln loan for Root.
Negative scenario
If Root doesn’t take any actions towards loss ratio, distribution model, and customer retention improvement, huge losses will prevent investors from funding it.
Competition
Telematics has been a helping hand for insurance for quite some time, and both insurtechs and conventional insurers showed examples of adopting this technology.
Speaking about insurtechs, we can not but mention Metromile. Its model is very similar to the one Root employs, except they use a tracking device instead of a mobile app and charge for the miles driven. But similarly to Root, they faced financial issues and had to follow a well-timed acquisition path.
While insurtechs were disrupting the industry, insurance companies were slowly and steadily implementing their telematics-based programs in-house. Being leaders in this field, Allstate and Progressive managed to adopt the technology and make it highly profitable. Now, they scale it to millions of connected cars.
Connected car technology providers and OEMs involved in connected mobility become the players bold enough to enter the telematics insurance market.
We see GM, Tesla, and Toyota penetrating the motor insurance field with their telematics based-products, intending to cut a chunk of this market. Currently, they act more like MGAs, distributing policies among their existing and loyal customers, we won’t be surprised to see them putting their capital at risk soon.
Speaking about insurtechs, we can not but mention Metromile. Its model is very similar to the one Root employs, except they use a tracking device instead of a mobile app and charge for the miles driven. But similarly to Root, they faced financial issues and had to follow a well-timed acquisition path.
While insurtechs were disrupting the industry, insurance companies were slowly and steadily implementing their telematics-based programs in-house. Being leaders in this field, Allstate and Progressive managed to adopt the technology and make it highly profitable. Now, they scale it to millions of connected cars.
Connected car technology providers and OEMs involved in connected mobility become the players bold enough to enter the telematics insurance market.
We see GM, Tesla, and Toyota penetrating the motor insurance field with their telematics based-products, intending to cut a chunk of this market. Currently, they act more like MGAs, distributing policies among their existing and loyal customers, we won’t be surprised to see them putting their capital at risk soon.
✅ We should appreciate Root's bold attempt to revolutionize the conservative car insurance market. They were the first to adopt telematics on such a scale and create new ways of acquiring and serving customers. Though the journey was not so elegant, they inspired a lot of startups and even incumbents to create digital-first models.
✅ While we see tough times for the insurtechs’ (Root, Hyppo, Lemonade) stocks, we should take our time and refresh the basics – unit economy always wins. There’s no point in aggressively scaling your operations untill you achieve sustainable economics.
✅ Telematics is becoming a standard. Back then, insurtechs 1.0 triggered the adoption of this technology. These days, we see its utilization on a large scale, as traditional carriers and OEMs jumped into the deal. The technology was and is working. But its proper adoption reveals new horizons for insurance companies – from fairer pricing to a winning claim management experience.
✅ While there is a holy war on the insurtech B2C scene, commercial insurance is still underserved by telematics and IoT. As for mobility, the borders of personal and commercial risk are blurring. Plus, B2B and B2B2C mobility niches are growing fast.
Considering the above, we bet to see the wave of telematics and IoT adoption in commercial insurance this year already. Take the first-row seats by following Draivn! Or message us if you think we can precipitate the course of events together.
✅ While we see tough times for the insurtechs’ (Root, Hyppo, Lemonade) stocks, we should take our time and refresh the basics – unit economy always wins. There’s no point in aggressively scaling your operations untill you achieve sustainable economics.
✅ Telematics is becoming a standard. Back then, insurtechs 1.0 triggered the adoption of this technology. These days, we see its utilization on a large scale, as traditional carriers and OEMs jumped into the deal. The technology was and is working. But its proper adoption reveals new horizons for insurance companies – from fairer pricing to a winning claim management experience.
✅ While there is a holy war on the insurtech B2C scene, commercial insurance is still underserved by telematics and IoT. As for mobility, the borders of personal and commercial risk are blurring. Plus, B2B and B2B2C mobility niches are growing fast.
Considering the above, we bet to see the wave of telematics and IoT adoption in commercial insurance this year already. Take the first-row seats by following Draivn! Or message us if you think we can precipitate the course of events together.
Summing it up
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