Insurtech's insult curve
If you’ve ever been a small business owner you’ll understand how much pride of ownership can fuel confidence, will, and drive. If you haven’t, you’ll probably empathize with how that pride can create intolerance for criticism. Getting feedback from people you trust? Sure, that’s helpful. Listening to business advice from experienced professionals? Yes, please. What about losing a customer or a sale to a competitor? That can feel awfully like a personal knock, but it’s a form of feedback and that’s the nature of the game you signed up to play. Lick your wounds, learn what you can and move on.
Let’s take this further. How do small business owners feel when they get turned down for a bank loan? There aren’t many deeper injuries to pride and honor than being told your business isn’t a good credit risk (even if it’s the truth!). To a small business person it feels like, well, an insult. Pistols at dawn!
In other words, “no” sucks.
Enter the small business lending fintechs that offer an alternative and/or supplement to traditional bank financing. These companies promise a rapid infusion of capital when needed, like a quick fix of oxygenated blood. Their brands are built around a painless digital experience. Fast, flexible, friendly.
But aside from the adept top-of-funnel marketing and a sweet UX, their value prop still centers on providing credit to very young and/or very small businesses, which makes underwriting a challenge. Reality check? Applicants hear “no” from these lenders much more than “yes,” perhaps as much as 90+ percent of the time in aggregate. Sane underwriters don’t extend credit to companies they don’t deem worthy, so it’s easy to see why conversion is low. There’s a lot of “no” being heard and a lot of insults being felt by small business customers.
Larger, more established small business-focused software companies, specifically those with horizontal industry orientations, have also stood up small business lending offerings as another spoke in their ecosystem wheels. Underwriting, however, is still underwriting. “No” persists. And what happens when that loyal, multi-product small business, encouraged as it was to apply for funding through aggressive in-product marketing, hears “no”? At best it negatively impacts the ability to sell incremental products to that customer. At worst, it weakens its affinity with a trusted provider, affecting the viability of the entire customer relationship. Over time, it’s brand-destructive.
Do these same dynamics apply to insurance?
No question. Small business ecosystems are partnering with insurtechs to make it simple and convenient for their customers to buy insurance. This makes perfect sense since it’s nearly impossible to even be in business without securing some form of insurance coverage. But just like the capital, getting turned down for an insurance policy is a gut-punch.
Where do the insurtechs fall on the insult curve? The answer is in the difference between the sole-source, full-stack segment of the industry on one end, and the agent-insurtech on the other.
Full-stack providers, like Next Insurance, are vertically integrated insurance companies that both source their customers and underwrite the policies. Each decision to approve or deny a customer’s coverage is the result of a single underwriting entity reviewing and assessing risk. An insight we developed from our mystery shopping of Next (featured in our previous post) is that in many of the scenarios we tested, Next was unable to offer coverage. These denials occurred because the risk profile of the small business did not fit the underwriting appetite of their filed product or reinsurance covenants.
The full-stack, single-source model creates narrow guard rails for a small business and therefore for an ecosystem partner working with them. In a real-life scenario, these customers would have no choice but to continue to shop for and buy insurance from another source. For a small business owner the insult factor is hard to deny. Like the small business lending providers, the insurtech movement offers a tremendous value proposition for small business ecosystems by offering a faster, simplified insurance-buying experience.
If success is predicated on a consistent, predictable satisfaction of need, however, the full-stack model is a liability. By contrast, digital agencies like AP Intego are built around the “choice model” of quoting and delivering coverage. We secure insurance for customers by presenting a risk to a number of insurance carriers who then compete for the policy. We digitally present our customers’ information to multiple partner carriers, and then return the best-resulting insurance quote—coverage and price—to the customer.
If none of our carriers accept the risk, we can tap the excess and surplus (E&S) insurance markets where more complex or higher hazard risks can be placed. In the case of workers’ compensation insurance, we can access the various state funds where riskier businesses can satisfy their legal requirements for coverage. Through this choice model, almost any small business owner can find the insurance it needs. The full-stack insurtechs don’t and can’t do this.
Small business ecosystems looking to partner with an insurtech should avoid making the inevitable insult of failing to deliver on the promise of insurance coverage.