Insurance Disruption: Why It Failed For Decades & Why Now Is The Tipping Point

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The year is 2025. Why hasn't there been a major insurance disruptor in the 2000s or earlier, and what makes new insurtechs like Lemonade and Root think they can finally disrupt an industry that has resisted change for decades?

The insurance industry appears to have an age problem. Nobody remarkable has come along in a half-century! Take a look at the top ten property & casualty insurers in the US today:

1. State Farm - Founded in 1922

2. Progressive - Founded in 1937

3. Berkshire Hathaway & Geico - Founded in 1936

4. Allstate - Founded in 1931

5. Liberty Mutual - Founded in 1912

6. Travelers - Founded in 1853

7. USAA - Founded in 1922

8. Chubb - Founded in 1882

9. Farmers - Founded in 1928

10. Zurich Insurance Group - Founded in 1872

The "new kid" on the block, Progressive, is a spry 87 years old! It begs the question: why hasn't a newcomer truly shaken things up, especially during the massive technological shifts of late?

And more importantly, why should today's insurtechs, like Lemonade or Root, be any different?

The Agent Era: Why No "Microsoft of Insurance" in the 20th Century?

You might think that with insurance companies using mainframe computers since the 1960s to crunch data, some tech savvy powerhouse would have emerged in the 70s or 80s to revolutionize the game. Why wasn't there a Microsoft equivalent for insurance, born out of the early computer revolution?

The big glaring reason is distribution.

For the vast majority of the 20th century, the power of insurance companies wasn't just in underwriting or data advantages; it was deeply embedded with independent and captive insurance agents.

These agents, supported by the colossal marketing budgets of established insurers, held a vise grip on customer access.

Much like Coca-Cola's dominance, their moat was as much about this stranglehold over distribution channels as anything else.

The Independent & Captive Agent Squeeze

The two methods of distributing insurance in the 1900s was through independent and captive insurance agents.

For the unfamiliar here’s what each type of agent does:

Captive Agents are employees or contractors who exclusively sell insurance of a particular company. They essentially do outreach and build rapport in a community and sell your insurance products for you.

Independent agents sell insurance of any brand. Individuals simply fill out some forms for an independent agent, and that agent will pull the best quotes from each company so you can get the best deal on insurance.

If you wanted to sell insurance in the 1900s, you either had to fund your own captives (an expensive venture), or convince independent agents to sell your policy.

Funding your own captives would mean an astronomical upfront investments in recruiting, licensing (which varies by state) and exhaustively training potentially hundreds, if not thousands, of agents. If you’re a tech startup insurance company, this is an extremely expensive and risky proposition, and agents would have to choose the risky venture of trying to sell some unknown brand’s insurance rather than become a captive agent of an established brand, which would naturally be easier to sell.

Because funding captives was so herculean, the best option was independent agents. Independent agents already have thousands of offices nationwide, so you don’t have to put up funds.

But, selling through independent agents also had significant problems. Most Independent Agents were deeply reluctant to promote insurers other than the established, standard insurance businesses. Why? Several reasons:

1. Lack of Brand Recognition: New or niche insurers simply didn't have the big-name brand recognition that made selling easy for customers. Volume

2. Commitments: IAs often had volume commitments with the large, established insurers, incentivizing them to prioritize those policies. Limited Bundling

3. Options: Smaller or newer insurers typically lacked the bundling options (like home and auto) that were attractive to customers and profitable for agents.

Consider Progressive's journey. They became the #1 choice, and often the only choice, for independent agents (IAs) when it came to non-standard (risky drivers) auto policies. A spectacular relationship, right? Yet, despite this dominance in non-standard, Progressive could barely get these same IAs to offer any of their standard products.

Progressive had been trying to sell standard insurance policies since the 1950s. The sheer difficulty of this task, even for a company adept at working with IAs in one niche, is highlighted by their own numbers. Despite attempting to grow this line for over 40 years, by 1997, a staggering 85% of its premiums still came from non-standard policies!

This deep-seated inertia is precisely why Progressive pursued direct channel sales growth more aggressively, and earlier, than behemoths like Allstate or State Farm. Legacy standard selling insurance companies and their allied Independent Agents were, frankly, in cahoots. There was virtually no way to effectively scale your insurance product nationwide unless you had a massive budget to market direct-to-consumer or the capital to fund your own captive agent force.

The period from the 1900s through 1999 was, unequivocally, The Agent Era of Insurance. It was an era that erected formidable barriers to entry, dramatically slowing the pace of market share growth for even successful newcomers.

Insurers had to bake in 10% or more of their premiums just to pay agent commissions, all while navigating these complex distribution loyalties. This iron grip, however, has been loosening for the past 25 years, and it's on the verge of breaking altogether.

READ MORE: The Shift in Distribution That Will Define the Next Decade of Winners

The Dot-Com Test: Why The First Big Disruptor, Esurance, Didn’t Succeed

So, if mainframes and innovative underwriting couldn't easily bypass the agent moat, surely the internet did, right?

Enter the dot-com era.

Why isn't a company like Esurance, the digital insurance startup that founded in 1999 alongside giants like Amazon, the biggest name in insurance today?

If Esurance couldn't dominate in the 2000s, are insurtechs doomed to follow?

To answer this, we need to look at the actual advantage the early internet gave Esurance.

Esurance launched with the promise of revolutionizing insurance. Their plan was to sell direct via the internet and PCs, bypassing the costly agent network, much like Geico was already doing through other direct channels.

Esurance was digital-first, built from the ground up for online direct sales.

In 1999, when Esurance was founded, 50% of families owned a computer, and 40% had internet access. The internet was on the rise, and Esurance was primed to capitalize.

Esurance aggressively chased growth by targeting these 40% of households. From 1999 to 2004, 100% of its marketing budget was poured into paid search and portal advertising.

Unfortunately, reality bit hard. As much as the early internet allowed for better segmentation than primitive TV ads, Esurance hit a growth ceiling due to the immature digital ad market. John Swigart, Esurance's CMO at the time, admitted, "We saw we were going to need to expand into off-line channels to keep growing as rapidly."

By 2004, Gary Tolman, then President and CEO, stated Esurance had only $200 million in premiums.

By August 2005, they had roughly 165,000 policyholders. Their parent company, White Mountains Insurance Group Ltd., noted in a 10Q about "intense competition for new customers" leading to higher-than-expected acquisition costs.

Just five years in, Esurance confronted the truth: the online ad capacity to target insurance customers, even for big policies like auto, was simply too small in 2004. It only got them to $200 million in premiums. They had to do what everyone else did: big, dumb, broad-based TV commercials and out-of-home advertising. So much for that unique customer targeting advantage!

To their credit, Esurance did continue to scale and even achieved profitability at times. By 2010, their annual marketing budget was $100 million. While online advertising grew, Esurance still spent the majority on broad-based marketing, not digital. Even their foray into Google mobile ads around 2010 (three years after the iPhone launched!) represented only 3-5% of their direct marketing budget, according to Google.

Then, just as mobile ad spending started its steep upward curve, White Mountain sold Esurance to Allstate right before the digital landscape truly matured.

So why didn't Esurance disrupt? And why is now different for insurtechs like $LMND? Long story short: the internet was too young. People weren't yet living their lives online to the extent they do today, and crucially, the direct digital ad market that could bypass agents and broad-based advertising was far too small. Esurance was simply too early.

The most compelling visual evidence of this "too early" problem lies in the growth of the digital advertising market itself. Take a look below:

You'll notice a relatively modest, almost flat line through Esurance's critical growth years in the early 2000s for US digital ad spend.

Fast forward to today, digital advertising is a multi-hundred-billion-dollar industry. Consumers live on their smartphones, expect seamless digital experiences, and are comfortable making significant purchases online, including insurance.

This is where Lemonade, Root, and other insurtechs can step in. Unlike Esurance, which had to abandon its digital-first marketing strategy due to an immature ecosystem, these businesses are built for the era.

While history offers crucial lessons, it doesn't always repeat. Esurance showed the dream of a digital-first insurer but was constrained by its time. Lemonade and Root operate in a world where that dream has the infrastructure to become a disruptive reality.

ALSO READ: Why Lemonade Could Be the Next Multi-Bagger in Insurance

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